Executive Summary: Key Legal and Evidentiary Issues

• The Alberta Court of Appeal dismissed an appeal by ATCO Gas and ATCO Electric challenging two Alberta Utilities Commission decisions that reopened their performance-based regulation rate plans.
   
• Elevated returns on equity in 2021 and 2022 triggered the reopener provision, prompting the Commission to examine whether the utilities' cost savings resulted from efficiencies.
   
• Justices found the Commission correctly interpreted the governing legislation in assessing whether unquantified savings stemmed from intended incentives rather than external factors.
   
• Arguments invoking promissory estoppel and legitimate expectations failed because the Commission never made a clear, unambiguous promise exempting the utilities from tracking cost savings.
   
• No breach of procedural fairness occurred despite limits placed on new evidence in the second phase of the Commission's review.
   
• Ordering a refund of $36 million from ATCO Gas and $35 million from ATCO Electric did not violate the rule against retroactive ratemaking given the parties' awareness that rates were subject to change.
   

Facts of the case

ATCO Gas and Pipelines Ltd. and ATCO Electric Ltd. distribute natural gas and electricity in Alberta under rates approved by the Alberta Utilities Commission. Since 2013, those rates have been set through performance-based regulation, under which the Commission establishes a utility's "going-in rates" based on projected costs, with subsequent annual rates calculated formulaically to reflect inflation and expected productivity improvements. The second performance-based regulation term ran from 2018 through 2022, with an approved return on equity of 8.5% for each appellant.

In 2021 and 2022, both appellants earned more than 300 basis points above their approved returns: ATCO Electric earned 12.85% in 2021 and 14.52% in 2022, while ATCO Gas earned 11.81% in 2021 and 14.39% in 2022. These elevated returns triggered the "reopener" provision built into the rate plans. Following an oral hearing, the Commission decided to reopen the plans, finding that much of the increased return stemmed from "factors other than efficiencies," including decisions not to pursue certain capital projects and COVID-related supply chain disruptions. After a second, written-only hearing with limited additional evidence, the Commission ordered the appellants to issue refunds to customers, calculated by reducing 2022 returns to 11.5% and then applying a further 10% reduction. The appellants were granted permission to appeal both the reopener decision and the remedy decision, arguing the Commission erred in law on six grounds, including its legal test, its evidentiary approach, procedural fairness, and the propriety of a retroactive refund.

Policy and legislative provisions at issue

The core rate-making principle under both the Gas Utilities Act, RSA 2000, c G-5, and the Electric Utilities Act, SA 2003, c E-5.1, is that a utility's rates must be "just and reasonable." Section 45(1)(a) of the Gas Utilities Act permits rates "intended to result in cost savings or other benefits to be allocated between the owner of the gas utility and its customers," while section 120(2)(d) of the Electric Utilities Act permits tariffs including "incentives for efficiencies that result in cost savings or other benefits that can be shared in an equitable manner between the owner of the electric utility and customers." Section 121(3) of the Electric Utilities Act further provides that a tariff providing incentives for efficiency is not unjust or unreasonable simply because it provides those incentives.

The reopener provision itself derived from the AUC's 2018-2022 Performance-Based Regulation Plans decision (the Second Term Decision), which incorporated the reopener mechanism first established in the Rate Regulation Initiative decision governing the first performance-based regulation term (the First Term Decision). That mechanism directed the Commission to treat a single-year deviation of 500 basis points, or a two-consecutive-year deviation of 300 basis points, as warranting consideration of reopening a plan. The First Term Decision had also directed that the financial impact of any reopener-triggering event be captured in a separate account pending a Commission ruling, signalling to utilities from the outset that returns exceeding the threshold could later be adjusted.

Reasoning and analysis

The Court held the Commission correctly interpreted the governing legislation. Material separation between a utility's revenues and its costs is permissible under performance-based regulation, but only where that separation flows from the intended incentive structure of the rate plan rather than from external events or unrelated business decisions. The Commission was therefore entitled to ask whether the appellants' excess returns were the product of genuine efficiencies, without imposing an unauthorized new legal test.

The Court also rejected the argument that a finding of no design flaw was inconsistent with a finding of unjust rates: a material, unexplained gap between revenues and costs and expenses can independently establish that rates are no longer just and reasonable, regardless of whether the plan's design was sound. On the fairness issue, the Court found the appellants could not identify any "clear and unambiguous" promise or representation by the Commission that they would be excused from tracking or quantifying the source of their cost savings; statements relied upon from earlier proceedings addressed discrete, narrower issues and did not amount to a general exemption. Deference was owed to the Commission's factual findings, including its conclusion that it was not credible for sophisticated utilities to have failed to document the source of hundreds of millions of dollars in savings.

On retroactive ratemaking, the Court held the "knowledge exception" applied because the reopener provision had existed from the outset of performance-based regulation and had previously been invoked against the appellants, meaning they were aware their rates were subject to change. The Court further found no error in the Commission's characterization of the operational problem as related to unexplained revenue retention rather than spending levels, and no error in preferring a refund remedy over the appellants' proposed alternatives. Finally, the Court found no breach of procedural fairness in the Commission's decision to limit the second phase of the proceeding largely to evidence already filed, noting the appellants had been permitted to file the additional evidence they specifically requested and had not identified any relevant evidence they were denied the opportunity to submit.

Ruling and overall outcome

The Court of Appeal dismissed the appeal in full, upholding both the Alberta Utilities Commission's Phase One Decision to reopen the appellants' performance-based regulation plans and its Phase Two Decision ordering refunds. The Commission's remedy — a refund of $36 million from ATCO Gas and $35 million from ATCO Electric — was found to be a reasonable response to rates that were not just and reasonable, and the successful parties on appeal were the respondents, the Alberta Utilities Commission and the Office of the Utilities Consumer Advocate.