Regulators Decide

Twin rulings give regulators the authority to reject collectively bargained labour costs

Depending on one’s perspective, the Supreme Court of Canada’s companion decisions last month in Atco Gas and Pipelines Ltd. v. Alberta and Ontario v. Ontario Power Generation Inc. send decidedly different messages.

For individual consumers as well as that part of the business community affected by the price of regulated services, the message is upbeat. But for those providing regulated services, like energy companies, telecoms, and railways – as well as the unions associated with these enterprises – the future landscape for setting rates and negotiating collective agreements is now fraught with new uncertainties.

In Atco and OPG, the high court ruled that the Alberta Utilities Commission and the Ontario Energy Board had not been acting unreasonably in refusing to allow the utilities to recover operating  costs related to pensions and wages that had been incurred under previously negotiated collective bargaining agreements. The court also made it clear that the burden of proving prudence or reasonableness for operating costs or usefulness for capital costs lay squarely on the utilities, and that regulators have a very long leash in determining the scope of their statutory powers.

“The Supreme Court’s position was that courts must defer to economic regulators unless their determination is clearly unreasonable,” says Glenn Zacher of Stikeman Elliott LLP, who represented OPG.

By deciding that the regulators had not erred in refusing to allow previously committed compensation costs, then, the Supreme Court effectively sanctioned the use of hindsight in determining whether the costs had been incurred prudently. The upshot is that regulated entities can no longer rest assured that the mere fact that they have expended costs in the usual course of business will result in those costs being automatically recoverable.

“The proposition that the regulators adopted in these cases was that utilities weren’t going to be allowed a  return on investment that wouldn’t yield a return in a competitive marketplace,” says Chris Sanderson in the Toronto office of  Lawson Lundell LLP. “So if a utility or other regulated entity enters into a contract with a union that grants wages or benefits that can’t be recovered in the marketplace, or in facilities that are no longer useful, it’s going to be tough luck for them.”

It could also be tough luck for unions, who might face more entrenched bargaining positions from employers that are suddenly uncertain as to the extent to which their negotiated costs can be recovered.

For the past decade, utilities have been arguing, with some success in the lower courts, that regulators need to use a more restrained model when examining costs that have already been incurred or committed.

According to Zacher, Atco and OPG “put the genie back in the bottle” in terms of the latitude that courts will accord to regulators.

“For the past decade – in the energy space at least – utilities have been challenging that latitude by trying to exploit cases where regulators have used tools like the prudent investment test to constrain review of past or committed costs, typically large capital expenditures that the utilities had to absorb,” he says. “What the Supreme Court did was to close the door on that argument.”

Challenging regulatory decisions of this kind will prove more difficult for yet another reason: in the twin decisions, the court also confirmed for the first time that regulators have the right to appear on appeal to defend their own decision.

“Although whether this is appropriate must be determined on a case-by-case basis, it is now the general rule that regulatory tribunals have to the right defend their decisions where they have been acting a regulatory, policy-making role rather than in an adjudicative fashion,” says Zacher. “The clarification from the high court is important [as] before there were both Federal Court and provincial superior court decisions that were at odds with that proposition.”

However all this may be, Zacher says that Atco and OPG do not effect a profound change in the law, merely settling what he calls “some uncertainty” that existed in the lower courts.

“The impact would have been much more significant if the rulings had gone against the regulators because it would have handcuffed them,” he says.

The decision, then, should also provide some comfort for those concerned about the proposed privatization of public utilities like Hydro One in Ontario.

“These decisions reinforce the importance, integrity and robustness of regulators’ oversight role regardless of whether utilities or other regulated companies are publicly or privately owned,” Zacher says.