Arbitrations Involving Regulated Utilities

Arbitration is the common dispute resolution procedure in the energy industry. The reasons differ depending on whether it is the upstream sector or the downstream sector. Most of the writing about energy arbitration relates to the upstream sector, which is where the exploration and development takes place. This sector is dominated by governments that control the rights to the assets in the ground, and the multinational oil companies that extract the oil and move it to market. This is the world of investor-state arbitration.

The attention the segment receives is not surprising. Investor-state arbitrations are the product of the rapid growth of treaties designed to protect the interests of investors– multi- lateral treaties such as the Energy Charter Treaty and the NAFTA agreement, but also a wide array of bilateral treaties between specific countries.

The investor-state cases are where the big dollars are – and the publicity. Many of the investor-state cases are public; few of the commercial cases are. The high watermark is the recent Yukos decision:1 a claim of US$114 billion, an award of US$60 billion, and costs of US$70 million, a 10-day hearing on jurisdiction, a 21-day hearing on the merits with over 4,000 pages of written submissions, 8,800 exhibits and 2,700 pages of transcript. Many of these cases take 10 years to complete. They receive a lot of press and attention.

However, for every one of the investor-state cases there are 10 significant commercial arbitrations in the downstream energy sector. Here, the center of gravity is not London, Stockholm or Paris, it is Houston or Calgary. Over 90 energy companies have head offices in Calgary – Houston has three times that number. These are commercial arbitrations between companies.

In the investor state world, arbitrations offer a neutral court and the ability to enforce the award in 140 countries under the New York Convention.2 In domestic energy arbitrations, enforcement or neutrality is not the issue. Instead parties seek the greater efficiency of arbitration, confidentiality, control of the schedule and an expert panel. But domestic arbitrations have an additional challenge not found in international arbitrations. Often one of the parties is regulated. And that regulator has an independent jurisdiction.

This is a world that concerns the generation of electricity that moves constantly across state, provincial and international boundaries. The same is true of gas. Each generator needs a transmitter to transmit that electricity to various markets, and within those markets, other companies distribute the energy to the end-user. Those three classes of parties – generators, transmitters and distributors – are all public utilities. Public utilities are regulated by the government, usually by an independent regulatory commission. Within North America, that Commission can be provincial, state or federal.

These public utilities can be privately owned or owned by a government. Regardless of ownership, they are all regulated. That regulation includes the rates they charge customers, the quality of service, and investment in new assets.

The utility business also involves thousands of contracts with third parties for the construction and operation of generating facilities, pipeline and transmission assets, and the sale of electricity and gas. Many of those contracts have arbitration provisions. Often disputes involving regulated utilities present special problems for arbitrators. There can be conflicts in jurisdiction and parallel proceedings.

Divided Jurisdiction

In the United States and Canada, the courts grant deference to arbitrators. Similarly, in both countries, courts grant deference to regulators, particularly regulators involved in regulating complex industries with substantial national importance. This deference includes interpretation of the regulators home statute.
That leaves potential conflicts between regulators and arbitrators. Many regulated public utilities have arbitration clauses in contracts. Assume that a regulated utility that has a contract with a large commercial customer has an arbitration clause with respect to price, and assume that there is a dispute with respect to that price. Would that be resolved before the arbitration panel or before the regulator? If it is before an arbitration panel, will the principles of public utility law apply?

The regulator’s jurisdiction

A tribunal only has the powers stated in its governing statute or those which arise by ‘necessary implication’ from the wording of the statute, its structure and its purpose. The Ontario Energy Board’s jurisdiction to fix ‘just and reasonable’ rates is found in section 36(2) of the Ontario Energy Board Act, 1998:

The Board may make orders approving or fixing just and reasonable rates for the sale of gas by gas transmitters, gas distributors and storage companies, and for the transmission, distribution and storage of gas.

This is standard language in all public utility legislation. It is generally accepted that an energy regulator’s jurisdiction is very broad. In Union Gas Ltd v Township of Dawn, the Ontario Divisional Court in 1977 stated:

This statute make it crystal clear that all matters relating to or incidental to the production, distribution, transmission or storage of natural gas, including the setting of rates, location of lines and appurtenances, expropriation of necessary lands and easements, , are under the exclusive jurisdiction of the Ontario Energy Board and are not subject to legislative authority by municipal courts under the Planning Act.

These are all matters that are to be considered in light of the general public interest and not local or parochial interests. The words ‘in the public interest’ which appear, for example, in s 40 (8), s 41 (3) and s 43 (3), which I have quoted, would seem to leave no room for doubt that it is broad public interest which must be served.3

The same Court in 2005 issued two important decisions. The Court stated in the NRG case:

The Board’s mandate to fix just and reasonable rates under section 36 (3) of the Ontario Energy Board Act, 1998 is unconditioned by directed criteria and is broad; the Board is expressly allowed to adopt any method it considers appropriate.4

In the Enbridge case the Court stated that the Board in fixing just and reasonable rates can consider matters of ‘broad public policy’:

the expertise of the tribunal in regulatory matters is unquestioned. This is a highly specialized and technical area of expertise. It is also recognized that the legislation involves economic regulation of energy resources, including setting prices for energy which are fair to the distributors and suppliers, while at the same time are a reasonable cost for the consumer to pay. This will frequently engage the balancing of competing interests, as well as consideration of broad public policy.5

The arbitrator’s jurisdiction

Arbitrators take their jurisdiction from the agreement between the parties. Absent some legislation there is no inherent jurisdiction in the tribunal. Depending on the scope of the arbitration agreement, the arbitrator is able to decide matters of tort, contract or equity, and has any commercial remedy available at law and equity or available to a court including the power to declare any provision of contract unconstitutional.
Under generally accepted principles, arbitrators have the power to rule on their own jurisdiction. This is sometimes referred to as a gateway issue or the competence-competence principle. A tribunal has the jurisdiction to determine its own jurisdiction.6 This is acknowledged by the statute governing most arbitrations as well as the arbitration rules used by number of institutions. In the Ontario Arbitration Act7 it is section 17. In the Alberta Arbitration Act it is also section 17.8
Not everything is subject to arbitration. Matters where there is a substantial public interest component may be excluded. The strongest examples would be criminal statutes or possibly fraud. Other areas such as competition law, intellectual property and securities law were originally held outside the ambit, but those restrictions have been largely overcome.

Primary jurisdiction

In dealing with arbitrators, the Federal Energy Regulatory Commission has developed the concepts of primary jurisdiction and exclusive jurisdiction. Unless the Commission is in a situation where it should exercise primary or exclusive jurisdiction, it will defer to an arbitrator.

This question arose in the Commission’s 2007 decision regarding California Water Resources.9 There, the California Department of Water Resources (California Water) was involved in a contract dispute with Sempra Generation relating to Sempra’s failure to perform under a long-term energy purchase agreement. California Water claimed over US$100 million in false charges.

The matter went to arbitration. Sempra moved to set aside the claim on the ground that it was barred by federal preemption principles and the Filed Rate Doctrine.

The arbitration panel granted the Sempra motion to dismiss, concluding that the Commission had exclusive jurisdiction over the California Water claim. The panel concluded there was a conflict between California’s claim and the tariff approved by the Commission. The panel referred to the Filed Rate Doctrine that holds that private agreements between utility customers cannot change the terms or conditions of approved tariffs. California Water responded that there was no conflict between its claims and the tariff.

In rendering its decision, the Commission stated first, at paragraph 32:

As an initial matter, we emphasize that in this order we do not make a finding as to the validity of CDWR’s interpretation of the Agreement, i.e., that Sempra may not knowingly schedule energy deliveries to CDWR at congested points. Both parties have agreed to binding arbitration to resolve their disputes regarding the Agreement and we believe this is appropriate. CDWR states that it does not, by the instant petition, seek to reverse or overturn the Panel’s decision, nor is it the Commission’s intent to purport to do so in this order.

The Commission further stated, at paragraphs 38 and 40:

CDWR argues that the Commission asserts exclusive jurisdiction notwithstanding a binding arbitration in only two situations: (1) to ensure that the rates are just and reasonable; and (2) to ensure that rates are not unduly discriminatory. It argues that the dispute is over Sempra’s compliance with the terms of the Agreement and that it is not seeking to change the Agreement or change the rate under the Agreement and that it is not attacking any CAISO Tariff provisions. Thus, it argues, no exclusive Commission jurisdiction preempts the contract interpretation from proceeding in a non-Commission forum, i.e., the agreed-upon arbitration proceeding

Having made the declaration above that CDWR’s interpretation of the Agreement is not in conflict with the CAISO Tariff or Amendment No., we now address the jurisdictional questions posed by CDWR’s petition. The Commission’s exclusive jurisdiction covers matters that are clearly and solely within the Commission’s statutory grant of authority. The parties’ contractual dispute is not about the proper rate for service by Sempra to CDWR. Rather, it is about what, if any, adjustment is contemplated by the parties under their Agreement regarding CDWR’s obligation for deliveries under the alleged circumstances. Such relief does not implicate the setting of a new just and reasonable rate under the Agreement or the CAISO Tariff. Thus, the parties’ contractual dispute does not fall within the Commission’s exclusive jurisdiction.

The Commission stated that it would not exercise primary jurisdiction over the dispute between California Water and Sempra Generation. Sempra argued that even if the Commission does find exclusive jurisdiction, it should exercise primary jurisdiction because California Water raised issues involving the Commission’s expertise relating to congestion management. The Commission disagreed, stating at paragraphs 44 and 45:

The dispute between CDWR and Sempra presents a question of contract interpretation, which we determined above is not within the Commission’s exclusive jurisdiction. The decision whether to exercise the Commission’s concurrent jurisdiction is within the Commission’s discretion. As the Commission has discussed in prior orders, in deciding whether to entertain such a case, the Commission usually considers the following three factors: (a) whether the Commission possesses some special expertise that makes the case peculiarly appropriate for Commission decision; (b) whether there is a need for uniformity of interpretation of the type of question raised by the dispute; and (c) whether the case is important in relation to the regulatory responsibilities of the Commission. As discussed below, based on these three factors, we would not expect to assert primary jurisdiction over such a dispute.

The facts in dispute are unique to the parties. The resolution of this dispute is not important to the regulatory responsibilities of this Commission. The Commission has no special expertise in interpreting the Agreement or in divining how CDWR and Sempra intended to address dec’d generation. The ascertainment of parties’ intent when they execute a contract is a matter of case-by-case adjudication that does not involve the considerations of uniformity or technical expertise that, in other circumstances, might call for the assertion of this Commission’s jurisdiction. Further, the Commission’s consistent policy has been to encourage arbitration when appropriate.10
This decision is a well-reasoned and clear description of the principles American regulators consider in determining whether they should take jurisdiction from an arbitration panel or whether they should step aside.
It turns out things are not much different in Canada. In Storm Capital,11 a decision of the Ontario Superior Court of Justice, two companies had submitted an investment dispute to an arbitration panel. The matter dealt with the calculation of a finder’s fee. The agreement provided that the finder should be registered with the Ontario Securities Commission (OSC).

The arbitrator found that Storm Capital was entitled to compensation. The opposing party brought an application to set aside the arbitration award claiming that the arbitrator made unreasonable errors of law and had decided matters beyond the scope of the arbitration agreement. The contract required that Storm Capital representative should be registered under the Ontario Securities Act. The arbitrator decided that issue. The applicant claimed the arbitrator lacked jurisdiction to rule on that issue because it was a matter of securities law under exclusive jurisdiction of the OSC.

The court stated in paragraph 57 and 58:

A privately-appointed arbitrator has no inherent jurisdiction. His or her jurisdiction comes only from the parties’ agreement: see Piazza Family Trust, at para. 63. “The parties to an arbitration agreement have virtually unfettered autonomy in identifying the disputes that may be the subject of the arbitration proceeding”: Desputeaux v. Éditions Chouette (1987) Inc., 2003 2003 SCC 17 (CanLII), SCC 17, [2003] 1 S.C.R. 178, at para. 22. An arbitrator has the authority to decide not just the disputes that the parties submit to it, but also those matters that are closely or intrinsically related to the disputes: Desputeaux, at para 35.

Public policy in Ontario favours respect for the parties’ decision to arbitrate. The Arbitration Act, 1991 is “designed … to encourage parties to resort to arbitration as a method of resolving their disputes in commercial and other matters, and to require them to hold to that course once they have agreed to do so”: Ontario Hydro v. Denison Mines Ltd., [1992] O.J. No. 2948 (Gen. Div.), cited with approval in Inforica Inc. v. CGI Information Systems & Management Consultants Inc., 2009 ONCA 642 (CanLII), 97 O.R. (3d) 161, at para. 14. As a result, the Act restricts the power of a court to interfere with the arbitration process or result: see e.g. Arbitration Act, 1991, ss. 6 (limiting the power of the court to intervene), 50(3) (requiring enforcement of an arbitration award unless a specific exception is met).

The Court further stated at paragraph 61 that if the Legislature wishes to preclude an issue from being subject to arbitration it must expressly state this intention. It is not enough that the subject matter on which the arbitration is sought is subject to regulation or concerns the public order. The Court relied on the decision of the Supreme Court of Canada in Desputeaux12 for the principle that courts must be careful not to broadly construe areas as exempt from arbitration simply because they concern public order, as this would undermine the legislative policy of encouraging arbitration. The Ontario Court further noted that no provision in the Ontario Securities Act or any other statute was referred to that expressly precludes arbitration on matters of securities law.

The Court in Storm Capital also refused to follow the Ontario Divisional Court’s decision in Manning13 that the OSC has exclusive jurisdiction in some matters. That case involved the authority to remove an individual’s exemption under the Securities Act. The Court in Storm Capital distinguished the Manning case because Storm Capital did not involve any exercise of the Commission’s enforcement power. The Storm Capital arbitration involved a private dispute and was not binding on any third party including the Commission. Accordingly, the Court refused to set aside the arbitration.

The decision is a careful outline of the principles the Canadian courts will follow where there is an apparent conflict between the jurisdiction of an arbitration panel and the jurisdiction of the regulatory commission. The decision does not use the same terminology as the American cases, but it does come close to it in terms of principles. For example, the decision recognises that there are certain areas where the regulator would have primary jurisdiction, such as the case where an individual was subject to disbarment by the Commission.

On the other hand, in cases of purely private contractual matters, the arbitration panel is not infringing on a commission’s jurisdiction. Moreover, the Storm Capital decision makes it clear that if a regulator’s jurisdiction is to be preferred to an arbitrator’s jurisdiction, there must be explicit legislative authority for that exclusive jurisdiction. This is an important point.

Deference to Regulators

The concept of deference to regulators is well understood. For years, courts in Canada14 and in the United States15 have ruled that antitrust and competition laws should not be enforced in regulated industries where that regulation is being carried out by lawful government authority. In part the rationale was constitutional, but it also reflected the courts’ policy of deferring to expert tribunals:

The bottom line here, then, is that the Commission holds the interpretative upper hand: under reasonableness review, we defer to any reasonable interpretation adopted by an administrative decision maker, even if other reasonable interpretations may exist. Because the legislature charged the administrative decision maker rather than the courts with “administer[ing] and apply[ing]” its home statute (Pezim, at p. 596), it is the decision maker, first and foremost, that has the discretion to resolve a statutory uncertainty by adopting any interpretation that the statutory language can reasonably bear. Judicial deference in such instances is itself a principle of modern statutory interpretation.

Accordingly, the appellant’s burden here is not only to show that her competing interpretation is reasonable, but also that the Commission’s interpretation is unreasonable. And that she has not done. Here, the Commission, with the benefit of its expertise, chose the interpretation it did. And because that interpretation has not been shown to be an unreasonable one, there is no basis for us to interfere on judicial review — even in the face of a competing reasonable interpretation.

In 2013, the Supreme Court of Canada, in a case involving the British Columbia Securities Commission,16highlighted the deference that courts should grant to expert tribunals. The principle that antitrust authorities in North America will defer to regulators is a long-standing one but the most recent decision in Trinko is stark. There, the US Supreme Court said it doubted whether the Court had ever recognised the essential facilities doctrine in antitrust law, but in any case it should not be applicable where a regulatory body could mandate and control the terms and conditions of market entrance.

That case involved a public utility, Verizon Communications. While the case concerned deference to a sector specific regulator, a similar principle may well apply to a sector specific adjudicator. In North America, all electricity public utilities are subject to a sector specific adjudicator. That regulator licenses every generator, transmitter and distributor of electricity. In short, the regulator mandates and controls the terms and conditions of market entrance.

The concept of deference to administrative tribunals really began with the 1984 decision of the United States Supreme Court in Chevron.17 The year following the Mclean decision, the Alberta Court of Appeal made a similar point with respect to the Alberta Securities Commission18:

The Commission is an expert tribunal, charged with the administration of the Act. The standard of review of its decisions is presumptively reasonableness, particularly where the question relates to the interpretation of its enabling (or “home”) statute. Its findings of fact, findings of mixed fact and law, and credibility findings are also entitled to deference, and will not be overruled on appeal unless they demonstrate palpable and overriding error:Alberta (Securities Commission) v Workum, 2010 ABCA 405 (CanLII) at paras. 26-7, 41 Alta LR (5th) 48, 493 AR 1; Ironside v Alberta (Securities Commission), 2009 ABCA 134 (CanLII) at paras. 26-8, 11 Alta LR (5th) 27, 454 AR 285; Smith v Alliance Pipeline Ltd., 2011 SCC 7 (CanLII) at para. 26, [2011] 1 SCR 160. However deference to fact findings is not the same thing as immunity from review: H.L. v Canada (Attorney General), 2005 SCC 25 (CanLII) at paras. 73, 75, [2005] 1 SCR 401; R. v Regan, 2002 SCC 12 (CanLII) at para. 118, [2002] 1 SCR 297; Wilde v Archean Energy Ltd., 2007 ABCA 385 (CanLII) at para. 102, 82 Alta LR (4th) 203, 422 AR 41; General Motors of Canada Ltd. v Johnson, 2013 ONCA 502 (CanLII) at para. 51,116 OR (3d) 457.

Deference to Arbitrators

The concept of deference to arbitrators can be traced back to the 1983 decision of the United States Supreme Court in Mercury Construction,19 where the court stated simply that “any doubts concerning the scope of arbitration should be resolved in favour of arbitration.” This was echoed by Canada’s highest court in 2007 in Dell Computers.20 In Ontario Hydro,21 a Canadian energy arbitration case, the Ontario Superior Court stated:

The Act encourages parties to resort to arbitration and requires them to hold to the course once they have agreed to so and entrenches the primacy of arbitration over judicial proceedings by directing the court generally to not intervene.

In an American energy arbitration case, Bangor Gas,22 the United States Court of Appeals for the First Circuit stated:

We review the district court’s decision de novo, but our review of the arbitration award itself is “extremely narrow and exceedingly deferential.” Bull HN Info. Sys., Inc. v. Hutson, 229 F.3d 321, 330 (1st Cir. 2000) (quoting Wheelabrator Envirotech Operating Servs. Inc. v. Mass. Laborers Dist. Council Local 1144, 88 F.3d 40, 43 (1st Cir. 1996)). The FAA “embodies a national policy favoring arbitration,” Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006), and provides only a narrow set of statutory grounds for a federal court to vacate an award:
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 9 U.S.C. § 10(a).
In addition, this court in the past recognized a common law ground for vacating arbitration awards that are in “manifest disregard of the law,” McCarthy v. Citigroup Global Mkts. Inc., 463 F.3d 87, 91 (1st Cir. 2006) (quoting Wonderland Greyhound Park, -10- Inc. v. Autotote Sys., Inc., 274 F.3d 34, 35 (1st Cir. 2001), while limiting this notion primarily to cases where the award conflicts with the plain language of the contract or where “the arbitrator recognized the applicable law, but ignored it.” Gupta v. Cisco Sys., Inc., 274 F.3d 1, 3 (1st Cir. 2001). The manifest-disregard doctrine has been thrown into doubt by Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), where the Supreme Court “h[e]ld that [9 U.S.C. § 10] . . . provide[s] the FAA’s exclusive grounds for expedited vacatur.” Id. at 584 (emphasis added). This has caused a circuit split,3 with this court saying (albeit in dicta) that “manifest disregard of the law is not a valid ground for vacating or modifying an arbitral award in cases brought under the Federal Arbitration Act,” Ramos-Santiago v. United Parcel Serv., 524 F.3d 120, 124 n.3 (1st Cir. 2008).
Even if the manifest-disregard doctrine were assumed to survive and were applied in this case, the award neither conflicts Compare Wachovia Secs., LLC v. Brand, 671 F.3d 472, 480 (4th 3 Cir. 2012) (recognizing continuing validity of manifest disregard doctrine), Johnson v. Wells Fargo Home Mortgage, Inc., 635 F.3d 401, 415 n.11 (9th Cir. 2011) (same), Stolt-Nielsen SA v. AnimalFeeds Int’l Corp., 548 F.3d 85, 94 (2d Cir. 2008), rev’d on other grounds, 130 S. Ct. 1758 (2010) (same), and Coffee Beanery, Ltd. v. WW, L.L.C., 300 Fed. App’x 415, 418 (6th Cir. 2008) (unpublished opinion) (same), with Frazier v. CitiFinancial Corp., 604 F.3d 1313, 1324 (11th Cir. 2010) (rejecting manifest disregard doctrine as invalid), Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d 349, 350 (5th Cir. 2009) (same), and Crawford Grp., Inc. v. Holekamp, 543 F.3d 971, 976 (8th Cir. 2008) (same). -11- with the plain language of the Agreement nor did the arbitrators recognize the applicable law but ignore it. The panel resolved what is at best an argument about how a contract of questionable meaning should be read and harmonized with a FERC doctrine on leasing capacity. Under settled precedent, an FAA award cannot be overturned based on mere disagreement by the court with the panel on a debatable issue, Advest, Inc. v. McCarthy, 914 F.2d 6, 9 (1st Cir. 1990); and in this instance the panel’s decision is in our view entirely reasonable.

In an Alberta energy arbitration, the Alberta Court of Appeal stated as follows:

As a matter of law and policy, the role of the courts in relation to arbitration has been one of non-intervention. The objective of arbitration legislation and the jurisprudence interpreting it is to promote adherence to agreements, efficiency and fairness and to lend credibility to an important dispute resolution process. Courts are instructed to be mindful of this overarching purpose in any exercise of discretion.23

Parallel proceedings

The FERC decision in California Water discussed above makes it clear that regulators will defer to arbitrators unless the matter falls with the Commission’s exclusive jurisdiction. In the Alberta Utilities Commission decision in Central Alberta Rural Electrification24 discussed in the next section, the Commission exercised jurisdiction notwithstanding the fact that an arbitration decision had been issued. However, there the Commission concluded that the arbitrator had not addressed the impact of the legislation but only the terms of the contract. In the previous section we outlined the jurisdiction of both arbitrators and regulators.

Both have substantial jurisdiction and considerable flexibility. There are cases that proceed at the same time before both arbitrators and regulators dealing with substantially the same issues. In some cases one proceeding will commence first and the second panel will have to consider res judicata and sometimes deal with anti-suit or anti-arbitration injunctions.

As indicated earlier, courts have over the years developed a body of law that clearly establishes as a matter public policy that they will defer to arbitrators wherever that is possible. And to a slightly lesser degree, courts over the past 10 years have developed a policy of deferring to regulators with expertise in technical matters.

The two decisions examined below indicate that regulators have also developed a policy of deferring to arbitrators wherever possible.

Different procedures

The potential for parallel proceedings will be influenced by the differences in the procedures used by arbitrators compared to regulators. In many respects, the two tribunals operate in a similar fashion. Neither tribunal is bound by the rules of evidence. The main difference is that the regulatory tribunal receives its jurisdiction from legislation while the arbitral tribunal receives its jurisdiction from a contract.

The remedies both tribunals can offer are similar; the main difference is that an arbitral tribunal cannot award fines. Another major difference is the ability of third parties to intervene. In arbitrations these are primarily amicus briefs, which we have seen in a number of NAFTA tribunals.25 These are largely limited to written submissions. Receipt of oral submissions and access to documents is not permitted. In regulatory hearings, it’s a much different situation. Third parties can successfully intervene if they can establish they are directly affected.26 In rare cases, the scope of intervention may be limited,27 but generally all parties are treated the same.

A related difference is the scope of disclosure. It is very wide in case of regulatory hearings and limited in the case of arbitrations. Also, arbitrations are by their nature private and confidential. Regulatory hearings on the other hand are public and usually initiated by public notices in newspapers and online.28 A regulator also has ability to consolidate different proceedings, something that is not available to arbitrators. The difference in procedure signals a difference in purpose. One process is designed to settle private disputes. The other public disputes.

The different process can create an incentive for parties in arbitrations to move their dispute to the regulator if they do not get the result they like in the arbitration. That leads to the question in the next section: are regulators bound by res judicata?

Res judicata

It is now accepted that arbitration awards have res judicata effect. The same is true of regulatory decisions.29 In the United States, arbitral awards have res judicata effect including collateral estoppel.30 The binding effect of arbitral awards is provided for in a number of institutional rules including Article 28 (6) of the ICC rules, Article 26.9 of the LCIA Rules and Article 32 (2) of the UNCITRAL Rules as well as Article III of the New York Convention.31
An arbitrator who renders an award in violation of res judicata may run the risk of the award being set aside because the arbitrator exceeded its mandate having become functus upon rendering the first award, or because its reasons contradict those of the first award.

This possibility was considered in the 2012 decision of the Alberta Utilities Commission in Central Alberta Rural Electrification,32 where two parties claimed the right to serve electricity customers in the same geographical territory. The two parties had a contract which contained an arbitration clause and began an arbitration pursuant to that agreement. The arbitration was heard and the tribunal released its decision finding in favour of one of the parties. The losing party then brought a court application for leave to appeal the arbitration award.

The other party commenced an application before the Utilities Commission asking the Commission to rule on the matter. By the time the Commission came to release its decision, the Court had heard the motion for leave to appeal but had not released any decision. In the circumstances, the Alberta Commission considered whether res judicata or issue estoppel prevented the Commission releasing its decision.

The Commission noted that the Supreme Court of Canada in Danyluk held that res judicata may apply to administrative matters. The Commission went on to analyse the pre- conditions to the operation of issue estoppel, namely: that the same issue is to be decided; that the decision which creates estoppel was final; and that the parties in the two proceeding are the same parties. The Commission noted that the decision of whether to apply issue estoppel is always a matter of discretion, stating at paragraph 33:

The rules governing issue estoppel should not be mechanically applied. The underlying purpose is to balance the public interest in the finality of litigation with the public interest in ensuring that justice is done on the facts of a particular case. (There are corresponding private interests.) The first step is to determine whether the moving party (in this case the respondent) has established the preconditions to the operation of issue estoppel set out by Dickson J. in Angle, supra. If successful, the court must still determine whether, as a matter of discretion, issue estoppel ought to be applied: British Columbia (Minister of Forests) v. Bugbusters Pest Management Inc. (1998), 1998 CanLII 6467 (BC CA), 50 B.C.L.R. (3d) 1 (C.A.), at para. 32;Schweneke v. Ontario (2000), 2000 CanLII 5655 (ON CA), 47 O.R. (3d) 97 (C.A.), at paras. 38-39; Braithwaite v. Nova Scotia Public Service Long Term Disability Plan Trust Fund (1999), 1999 CanLII 4553 (NS CA), 176 N.S.R. (2d) 173 (C.A.), at para. 56.

The Alberta Commission concluded that the first two preconditions had not been satisfied. It was clear from the motion to appeal that the arbitrators, in determining the matter, did not focus on the legislative scheme. Rather, the Commission concluded that the arbitrators had focused entirely on the interpretation of the agreement. Accordingly, the Commission ruled that the issue before the Commission had not been determined by the arbitrators and that res judicata did not apply.

The Commission noted that the appeal was still at an early stage with no merits decided and one party had stressed the urgency of receiving a decision from the Commission.

Finally, the Commission referenced the British Columbia decision in McKinley33 as authority for the proposition that different outcomes are not fatal.


The regulator has additional tools not available to arbitrators. A regulator is not bound by an arbitration decision and will often apply different test – a public interest test. For example, in determining costs, a regulator will consider the impact on ratepayers. An arbitration, on the other hand, would likely only consider the impact on the parties.

The best example of this principle is two recent decisions – one from Ontario34 and one from Alberta35 – where the regulator refused to accept as a cost for rate-making purposes the decision of an independent arbitrator.
In Power Workers, the Ontario Energy Board denied Ontario Power Corporation recovery of C$145 million of labour costs. Those costs were driven by a collective agreement the utility had entered into with the union two years earlier. In reaching that agreement, the parties had involved an independent arbitrator.

The union and the utility argued that the Board was required to presume the compensation costs were prudent. The Board disagreed and found it could rely on benchmarking studies comparing the OPG labour costs with the costs at other utilities. The benchmarking studies had been ordered by the Board in an earlier rate case. As a result of this analysis, the Board disallowed C$145 million in labour costs.

The Board recognised the constraints on OPG but nonetheless held that ratepayers were only required to bear reasonable costs. An appeal to the Ontario Divisional Court upheld the C$145 reduction, stating that the Board must have the freedom to reconsider current compensation arrangements in order to protect the public interest. That decision was overturned by the Ontario Court of Appeal, which held that the costs were committed costs fixed by collective agreements and the Board had violated a fundamental principle of the prudence test: namely, whether an investment or expenditure decision is prudent must be based on the facts available at the time. The Board cannot use hindsight.

The case in Alberta is similar to the Power Workers case. In the Alberta case, the utility had asked the Utilities Commission to approve a special charge to the ratepayers which would cover an unfunded pension liability of C$157 million. Those costs included a cost-of-living allowance that was set in advance each year by an independent administrator. The allowance was set at 100 per cent of the consumer price index. As in Power Workers, the Alberta utility argued that this was a committed cost set by an independent authority and was therefore a prudent expenditure by the utility. The Alberta Commission disagreed and reduced the cost-of-living allowance to 50 per cent of the consumer price index.

In disallowing part of the expense, the Commission relied on evidence that an escalator equal to 100 per cent of CPI was high by industry standards. The utility appealed to the Alberta Court of Appeal, which upheld the Commission’s decision.

The ATCO decision and the Power Workers decision were both appealed to the Supreme Court of Canada.36 They were heard jointly in 2015 and the Court upheld the regulator.

There is one ground of non-enforcement that is important in this area: there is a body of public utility law that governs much of what regulated utilities do. It can be argued that arbitrators should apply that law. If arbitrators do not apply that law, is it ‘manifest disregard’ for the law? That is a concept more common in the United States than in Canada.

The 2008 decision of the US Supreme Court in Hall Street Associates37 suggests that the doctrine of manifest disregard is no longer relevant even in the United States. The question of whether Courts will review an arbitrator’s award because the arbitrator failed to analyse the proper law has risen in competition law cases. At one time, courts were prepared to engage in the exercise; however, more recent cases such as Baxter International38 and Union Pacific Resources39 suggest that that is unlikely unless there is an obvious error or an arbitrary or capricious decision. In Canada, the recent decision of the Supreme Court of Canada in Sattva Capital40 drastically limits the appeals of arbitral awards in general.

However the concern remains. There may be a special category of cases such as arbitrations involving regulated utilities that require special attention by courts. The general rule may not apply in all cases. The situation is not unlike that which faced the Federal Power Commission in Gulf States41. That case involved a utility’s financing. The intervenors claimed that the financing would have an anti-competitive effect and the Commission should apply the antitrust laws. The Commission refused, saying that those laws were irrelevant.

The US Supreme Court reversed the Commission’s decision, stating that the Commission could not deem those laws irrelevant because the Commission had broad authority to consider anti-competitive conduct if that touched on the public interest. That case concerned a regulator but there is no reason that the same principle would not apply to an arbitrator faced with a similar situation.

Similarly, the European Court of Justice in Eco Swiss42 ruled that a national court must grant an application for annulment if it finds that an award is contrary to European competition law. This case is interpreted as meaning that arbitral tribunal is obligated to apply competition law and non-application can be regarded as a breach of public policy and grounds for non-enforcement. A similar approach was followed by the English courts in ET Plus SA v Welter.43 Arbitrations involving regulated public utilities arguably fall into this category. Even if the courts won’t intervene the regulators may.


The basic question this article raises is whether disputes involving a regulated utility should be subject to arbitration, and if so, to what degree? Is there a dividing line?

Over the past 10 years, courts throughout North America have consistently ruled that they should defer to both regulators and arbitrators. The rationale in both cases was increased efficiency. Courts recognise that legislatures have established regulators with special expertise to adjudicate on a narrow select range of matters. The highest courts in Canada and the United States have consistently stated that wherever possible the court should defer to these regulators, not just on matters of fact, but also on the interpretation of their home statute.
At the same time, courts in Canada and the United States have established that as a matter of public policy courts should wherever possible defer to arbitrators.

The challenge we face in the choice between energy regulators and arbitrators in energy disputes is that we have two specialised adjudicators both with a high level of expertise. In the energy world, the rationale for arbitration is different from in the downstream sector.

We have an interesting dilemma. We have two adjudicators: both have a high level of expertise, but we cannot say that one should defer to the other because of expertise, nor can we really say that one is more efficient than the other. Arbitration and regulation involve different procedures. Regulation is a more lengthy procedure but is tailored to meet the requirements of energy regulation in terms of obtaining a public interest viewpoint from different parties. That is not the case in arbitration. Arbitrations are essentially private disputes using a more streamlined process with little ability for third parties to intervene.

Everyone recognises that parallel proceedings are not in the public interest – they simply add to delay and produce conflicting decisions. To a degree, we have faced this question before. Over the past decade, courts have struggled with the question of whether arbitration should be permitted in competition law, securities law and intellectual property. The competition law issue was resolved by the US Supreme Court in the Mitsubishi case.44 Subsequent courts applied the principle to securities and intellectual property.

These are all specialised areas of law with a substantial public interest component. Initially it was the public interest component that led the courts to take the view that these matters should not be subject to arbitration. That position has been set aside throughout North America.

It would be easy to say that if arbitration is possible in competition law then why not in energy regulation. There is, however, an important difference between the two legislative schemes. Competition law is a law of general application. It applies to all companies in the marketplace. Competition law was designed to eliminate monopoly power, whether that results from mergers, price-fixing or other practices.

Regulated companies are different. They are monopolies. They are exempt from competition law. But there is a trade-off: they become subject to special legislation and a special regulator. Of all the regulated segments in the economy today, energy has the most extensive regulation. Utilities are not just regulated, they are licenced by the regulator to operate.

There are very few subject matters that arbitrators are prohibited from dealing with – criminal law might be one. But there are areas where arbitrators should step carefully. In the United States, the federal energy regulator has taken the position that it has exclusive jurisdiction in certain areas and primary jurisdiction in others. There is a related question: where the jurisdiction is not exclusive, is the arbitrator under a special obligation to consider a particular body of law? In this case it would be public utility law.

However the recent Supreme Court of Canada decision in Power Workers suggests that law may not be binding on regulators let alone arbitrators. This question is more complicated in energy than in competition law. In energy regulation, it is clear that there are certain matters that should not be subject to arbitration.

American courts and regulators talk about the exclusive or primary jurisdiction of energy regulators. In American energy regulation this relates to the concept of the filed-rate doctrine, which we examined earlier in California Water. The doctrine simply means that if a Commission has approved a rate, then the utility cannot create another rate by private agreement. That is, a utility cannot contract out of regulation. In California Water, the Commission stepped aside in favour of the arbitrator because the Commission concluded that the matter before them was a private contract dispute that did not involve an approved tariff. But had there been a tariff, the result would have been different. The matter would have come within the exclusive jurisdiction of the regulator.

Every energy regulator in North America has, as a basic statutory mandate, the responsibility to set just and reasonable rates. These are government agencies carrying out a legislative mandate. Once that is done, private parties in arbitrations cannot set them aside. This principle applies even if a regulated public utility is not one of the parties to the arbitration.

On this question, the Canadian cases reach a slightly different result. In Storm Capital, the Ontario decision considered above, the court stated that the regulator would have exclusive jurisdiction only if the legislation specifically provided for that. The Supreme Court of Canada took this position in Desputeaux, where the defendant argued that the Copyright Act gave the court exclusive power to decide copyright issues. The Court rejected that argument on the ground that there were no specific statutory words to that effect.

The Alberta Commission in the Rural Electrification case held that the regulator could decide the matter notwithstanding the existence of an arbitration decision. The rationale was that the issue before the regulator was the interpretation of the regulatory statute. That issue was not before the arbitrator.

This really is just a reformulation of the American primary jurisdiction or exclusive jurisdiction rule. A regulatory statute is different from other statutes because a regulator has been specifically authorised by the legislature to enforce that particular statute. That is also the situation in competition law. But there is a difference: energy regulators have specific jurisdiction over specific companies. In most cases, the regulators license those companies to operate and their continuing operations are subject to the regulators oversight. In most cases the regulators will also establish by franchise agreement the exclusive territory that the monopoly can operate in. That is not the situation in competition law.

What, then, are the areas that fall under the exclusive jurisdiction of an energy regulator? The short answer might be that it would be those areas where the regulator has issued a specific order. That would involve the rates or the prices the utility can charge.

The dividing line is never clear and it requires case-by-case analysis.

One example is access to essential facilities. This is a basic principle of public utility law and a clear obligation of a regulated utility. But it is also a general principle of competition law. The issue often arises in merger cases in competition proceedings. In fact, in settling those cases by consent orders, the competition authorities have often provided for arbitration in the settlement agreement where there is a dispute as to whether access is being properly granted. The American antitrust authorities did this in the El Paso Energy45 and DTE Energy46 merger cases. The Canadian authorities did it in the Air Canada47 and the United Grain Growers48 merger. There is no reason why those disputes would not be within an arbitrator’s jurisdiction.

One area where arbitrators are likely offside concerns disputes with respect to franchise agreements. These are often awarded by municipalities and approved by the regulator. Usually they have a 20-year term, but regulators can and have reduced the term where they felt the utility was not performing in terms of service quality. An arbitrator would have no authority to modify a franchise agreement given that it is subject to a specific order of the regulator unless the regulator had authorised arbitration as part of the approved agreement.

The second question is: if arbitrators exercise jurisdiction, do they have an obligation to apply the principles of public utility or regulatory law? And what happens if they do not apply those principles?

The short answer is that if arbitrators are going to deal with disputes involving regulated utilities, they have to apply the law that applies to those utilities. Those utilities have obligations established under legislation and court decisions interpreting that legislation. They are required to meet those standards.

Those standards will impact the manner in which the arbitrator deals with the parties. For example, under public utility law, regulated utilities have a duty to serve and an obligation not to discriminate between customers and competitors. Public utilities also have special rights. In most jurisdictions, regulated public utilities are not subject to the laws of negligence except to the extent of gross negligence.

The gross negligence provision is particularly interesting. While this was initially a common law rule, today most utilities have it in their governing statute or regulations. In Kristian v Comcast,49 the US Court of Appeals held that the provisions in an arbitration decision that prevent the exercise of statutory rights under federal or state law are invalid.

Earlier in this article, we noted that even where courts elect to not review arbitration decisions involving regulated public utilities, the regulators may. If a public utility doesn’t like an arbitration award, the first authority they will run to is not the courts but the energy regulator that controls most of their actions. This is particularly the case in two circumstances. First, if the dispute involves the interpretation of a regulatory statute or regulatory principle. And second, if the arbitrators have failed to consider those laws and jurisprudence.

This is what happened in Central Alberta Rural Electrification. There, the arbitration award had been issued. One of the parties went to the regulator. The regulator decided the issue, stating that the regulator was not bound by res judicata because the arbitrator had not considered the regulatory statute which was the issue before the regulator. Next, an application was made to the court for leave to appeal the arbitration award. The court refused to grant leave because it recognised that the regulator had intervened and deference should be accorded. It was pretty clear that the Canadian court was deferring to the regulator and essentially adopted an American primary jurisdiction rule.
There is no reason why the arbitrator could not have dealt with the regulatory legislation. The arbitrator did not and the regulator moved in. The interesting question is whether regulators will insist that they have exclusive jurisdiction.

It is likely that regulators will defer to arbitrators on public policy grounds. It will, however, be a more cautious deference than courts grant, particularly if their home statute is at issue. And if it is, and the arbitrators have not considered the legislation or have considered it wrongly, the regulator will likely exercise primary jurisdiction.
In the end, this simply means that where arbitrators move into areas of public law, particularly regulatory law, and one of the parties before them is a regulated utility, then they should be aware of the special laws that apply to the industry and publicly regulated utilities in particular. It also means that this type of arbitration is more reviewable than most. If not by the court then certainly by the regulator. And if a court has to pick between an arbitrator and a regulator in these cases, the regulator will likely get the nod.

There is no bright line in this world. But if the subject is an area in which the regulator has a record of exercising jurisdiction and in particular has issued orders directed at the utility in question, a red light should flash.


* Gordon E. Kaiser, FCIArb, Jams Resolution Center, Toronto and Washington DC, Energy Arbitration Chambers, Calgary and Houston. He is a former vice Chair of the Ontario Energy Board; and an Adjunct Professor at the Osgoode Hall Law School, the Co-Chair of the Canadian Energy Law Forum and a Managing Editor of this publication (The Energy Regulation Quarterly).

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  2. Chiron Corporation v Ortho Diagnostic Systems Inc, 207F. 3d 1126 (9th Cir 2000); John Hancock Mutual Life Insurance v Belco Petroleum Corp, 88F.3D 129 (2nd Cir 1996) [New York Convention].
  3. Union Gas Ltd v Township of Dawn, (1977) 15 OR (2nd) 722, OJ No 2223 at paras 28-29.
  4. Natural Resource Gas Ltd v Ontario Energy Board, [2005] OJ No 1520 (Div Ct) at para 13.
  5. Enbridge Gas Distribution Inc v Ontario Energy Board, 75 OR (3d) 72, 26 Admin LR (4th) 233, [2005] OJ No 756 (QL) at para 24.
  6. Ontario Medical Association v Willis Canada, 2013 ONCA 745; BG Group PLC v Republic of Argentina, 572 US (2014); Dell Computer Corp v Union des consommateurs, [2007] 2 SCR 801, 2007 SCC 34.
  7. Arbitration Act, 1991, SO 1991, c 17.
  8. Arbitration Act, RSA 2000, c K-43; see Superior Energy Inc v Alberta, 2013 ABQB 728.
  9. Re California Department of Water Resources, 121 FERC 61,191, EL07-103-000 (19 November 2007) [California Water].
  10. See Indiana Michigan Power Co and Ohio Power Co, 84 FERC 61,184 (1993).
  11. Advanced Explorations Inc v Storm Capital Association, 2014 ONSC 3918.
  12. Desputeaux v Éditions Chouette (1987) Inc, [2003] 1 SCR 178, 2003 SCC 17.
  13. Manning v Ontario (Securities Commission), [1996] 94 OAC 15 (Div Ct).
  14. Canada (Attorney General) v Law Society of BC, [1982] 2 SCR 307.
  15. Verizon Communications Inc v Law Offices of Curtis v Trinko LLP, 540 US 398 [Trinko]; Credit Suisse Securities (USA) LLC v Billing, 551 US 264, 426 F 3d 130.
  16. Mclean v British Columbia Securities Commission, 2013 SCC 67, [2013] 3 SCR 895.
  17. Chevron v Natural Resource Def Council, 467 US 837.
  18. Walton v Alberta (Securities Commission), 2014 ABCA 273 at para 17.
  19. Moses H Cone Memorial Hospital v Mercury Construction, 460 US 1 (1983) at 24.
  20. Dell Computer Corp v Union des consommateurs, 2007 SCC 34, [2007] 2 SCR 801.
  21. Ontario Hydro v Dennison Mines Ltd, (1992 OJ 2848).
  22. Bangor Gas Company LLC v HQ Energy Services Inc, No 12-1386 (1st Cir 2012).
  23. EPCOR Power LP v Petrobank Energy and Resources Ltd, 2010 ABCA 378 at para 16.
  24. Re Central Alberta Rural Electrification, Decision 2012-181, 4 July 2012 (Alberta Utilities Commission) [Central Alberta Rural Electrification].
  25. Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania, ICSID Case No ARB/05/22.
  26. Kelly v Alberta Energy Resources Conservation Board, 2009 ABCA 349; Power Workers Union v Ontario Energy Board, (2009) OJ No 2997 [Power Workers].
  27. Re Toronto Hydro Electric System, EB-2009-0308 (27 January 2010) (Ontario Energy Board).
  28. Re Hydro One Networks, EB 2009 – 0096 (19 January 2010) (OntarioEnergy Board).
  29. Danyluk v Ainsworth Technologies Inc, 2001 SCC 44, [2001], 2 SCR 460.
  30. Chiron Corporation v Ortho Diagnostic Systems Inc, 207F. 3d 1126 (9th Cir 2000); John Hancock Mutual Life Insurance v Belco Petroleum Corp, 88F.3D 129 (2nd Cir 1996).
  31. New York Convention, supra note 2.
  32. Central Alberta Rural Electrification, supra note 24.
  33. McKinley v British Columbia Tel, 2001 SCC 161, [2001] 2 SCR 161.
  34. Power Workers, supra note 26.
  35. ATCO Gas Ltd v Alberta (Utilities Commission), 2013 ABCA 310.
  36. ATCO Gas and Pipelines Ltd v Alberta (Utilities Commission), 2015 SCC 45.
  37. Hall Street Associates LLC v Mattel Inc, 552 US 576 (2008).
  38. Baxter International v Abbot Laboratories, 315 F. 3d 829 (7th Cir 2002).
  39. American Central Eastern Texas Gas v Union Pacific Resources Group, 93 Fed Appx 1 (5th Cir 2004).
  40. Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53, [2014] 2SCR 633.
  41. Gulf States Utilities Co v FPC, 411 US 774 (1973).
  42. Eco Swiss China Time Limited v Benetton International NV, ECR 1 3055.
  43. ET Plus SA v Welter, [2005] EWHC 2115 (Comm), [2006] Loyd’s Rep 251 9E.
  44. Mitsubishi Motors Corp v Soler Chrysler-Plymouth, Inc, 473 US 614 (1985).
  45. Re El Paso Energy Corp, No C-39-15, 2000 FTC Lexis 7 (FTC, 6 Jan 2000) (decision and order).
  46. Re DTE Energy Co, [2001] 131 FTC 962 (decision and order).
  47. Canada (Director of Investigations and Research) v Air Canad, [1989] 27 CPR (d) 476 (Competition Tribunal).
  48. Canada (Commissioner of Competition) v United Grain Growers Limited, Competition Tribunal, CT-2002/01, Consent Order (17 October 2002).
  49. Kristian v Comcast Corp, 446 F.3d 25 (1st Cir 2006).

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