My purpose here is to take a few minutes, after 100 years, to put Alberta’s public utility regulatory agency into some economic, legal, political and historical context.¹

In 1915, the province found itself inundated with complaints from Albertans who wanted electricity, natural gas and telephone services. These were new services that promised to improve everyone’s quality of life and drive the new economy in the 20^th century. Newspaper accounts were full of stories about utility companies refusing to provide service, preferring their friends and charging too much for service or for hooking up customers. There was anger and frustration in the air and no one seemed to have much sympathy for the challenges faced by the companies themselves. Indeed, when the Board of Public Utility Commissioners was created, one newspaper account referred to the noble band of regulators being there to protect the public from the practices of the utility companies.

And Alberta was not alone. These same types of complaints and concerns prompted the creation of the Interstate Commerce Commission in the United States in 1887 and the Board of Railway Commissioners in Canada in 1905 to deal with similar types of complaints about railways – in both cases, their nations’ first national regulatory agencies.

Over time, the reason for regulating came to be understood as this: when a company exercises monopoly control over the supply of an essential public service (such as rail services at that time), it is likely to charge prices that are too high and provide services of inferior quality. Regulation steps in where competition does not, to remedy the market failure.

The model of an independent regulatory agency was an American construct and had first been adopted earlier in some of the New England states for water utilities. This model of an independent agency created by legislators to perform quasi-judicial functions was new for a parliamentary democracy like Canada and its provinces and much of the early debate was focussed on how and whether the agency should exercise responsibilities variously perceived to be judicial, administrative or legislative in nature. Actually the functions were all of those and impossibly intertwined.

In 1915, the Alberta legislature had choices. It could decide to have no legislative response and leave complaints about utilities to the courts and the occasional piece of legislation to be administered by the courts. After all, it wasn’t that there were no laws the courts could use to control the behaviour of the utility companies. There was the common law.

The legislature could have assigned the powers to regulate the utility companies to the responsible Minister. It did not do so – for many reasons including the specialized nature of the subject matter and the high risk of short term political pressures and partisan decisions leading to unstable and risky industries, higher prices and political trouble for the poor Minister who might be chosen for the task.

The legislature could have decided to take over all of the utility companies making them all crown corporations. After all, that is what it had done with telecommunications when it created Alberta Government Telephones and direct government ownership and control was the model employed for these types of industries throughout most of the world, including the parliamentary system in Great Britain and most of the Canadian provinces for electricity.

Eventually, every province in Canada (and some before Alberta) and every state in the United States created independent quasi-judicial regulators and they are still in place today – each with its own history and list of powers and responsibilities. Interestingly, other parts of the world later started to turn their utility industry government departments (electricity, post and telegraph offices, natural gas, railways and others) into government owned corporations many of which, in turn, were privatized and regulated and, even where not privatized, are also regulated by some sort of independent quasi-judicial regulator. That is what Alberta did with its crown corporation AGT in 1915 and it took many years before others in the world started regulating their crown corporations (or state owned) public utility companies by an independent regulator. Crown ownership and control was considered at that time in other Canadian jurisdictions to be a better solution than private ownership and regulation for dealing with these companies and the important role they played in the economy. History has shown, though, that the public demands the openness and transparency of independent regulation of these industries, regardless of whether they are government owned or privately owned.

The debate about government ownership or private ownership is still alive and well in many parts of the world – especially developing countries – but in Alberta that debate was decided for electric utilities in 1948 when Albertans voted in a plebiscite by a majority of 151 votes to reject the creation of a crown corporation for electricity in Alberta.² In the late 1980s, the courts ruled that telecommunications was under exclusive federal jurisdiction,³ and AGT was privatized soon after. Gas distribution has never been crown owned here and is not in most of Canada.

While the decision to create boards like the Board of Public Utility Commissioners in 1915 was not unique to Alberta, the list of powers and responsibilities placed in the hands of the new board covered many areas, including functions that would not normally be included in any definition of a public utility but all of which were important at the time and shared the characteristics necessary for oversight independent from political influence and control. In addition to electricity, natural gas distribution, telephone services and local railways, the Board had to oversee and approve the debentures issued by local authorities to build schools and other infrastructure (the Board’s first order). The Board also had a variety of powers over municipalities — really acting as a resource for municipalities to get established as the province was being settled and growing. The Board was asked to regulate the sale of stocks in new business enterprises to protect the public from buying worthless securities and had early jurisdiction over energy resource conservation. And in 1933, the Board was asked to regulate the price of milk – a function it performed until mid 2008 (not regulated because prices might be too high but, rather, to ensure supply of fresh milk by making sure prices were not too low for producers).

Over time, some powers were moved in and then moved out to other agencies as the functions of government grew and new agencies with new specializations were required. Today the AUC still has some residual regulation over municipal disputes and regulates private water utilities. The Board of Public Utility Commissioners was Alberta’s first independent agency. Many of the other agencies in the province today, including the Securities Commission, the Alberta Energy Regulator, the Municipal Government Board and the Surface Rights Board can trace their origins to the Board of Public Utility Commissioners.

But the core responsibilities to regulate the price, service quality and supply of public utility services have remained with the public utility regulator from the beginning in 1915.

The idea of regulating prices, service quality and supply predates the creation of independent quasi-judicial agencies like ours. The first regulatory statute in recorded history is the Code of Hammurabi – carved into stone around 1750 BC. It regulated many things in people’s lives in ancient Mesopotamia but among the many provisions was the price of hiring a swift ship for transport and the price of a house — rate regulation. The first expression of some of the principles that still inform the regulation of common carriers today (such as absolute liability for losses) is found in the code of Hammurabi – and common carrier regulatory principles form part of the origin of public utility regulatory principles.

The exposition in British law of the basic responsibilities of common carriers dates back to the 1600s when Lord Hale explained why the regulation of innkeepers, wharfingers, ferrymen, turnpike operators and other similar industries was justified.⁴ They had committed their property to public use, used public property to deliver the services and held themselves out as providers of services to the public. No such legal justification is needed today, but when you look at these industries as they existed then, you see the foundation of public utility regulation today.

These industries had monopolies where they operated and the services they provided were essential to the day-to-day lives of people and the ability of the economy to function – in just the same way that modern public utility services are essential to participation in society and are the foundation upon which our economy functions today.

The point here is that even if the Board of Public Utility Commissioners had not been created, there was already a body of law that could have been called upon by the courts to prevent the abuse of monopoly power over essential public services. That body of law placed upon these companies’ duties to charge reasonable rates and to refrain from unjust discrimination or undue preference in the provision of or the pricing of those services. These are the principles at the heart of what the AUC does today and what every other public utility regulator does today.

Interestingly, as all of the North American regulators were being formed in the early 20th century, there were companies arguing that these principles did not apply to them. The significance of governments stepping in to create the public utility regulators in Canada was that the debate was taken out of the hands of the courts.

These industries were monopoly suppliers of essential public services and economic regulation would apply to them as long as competition was not sufficient to protect the public. There was no reason for delaying until a number of courts had offered opinions. The public interest demanded immediate action. And even later, when some courts did have an opportunity to deal with the questions, they relied on the early law of common carriage to find the duties to be imposed on these companies.

Of course, when the enforcement of those duties was put in the hands of independent government agencies, the duties of fair hearing, natural justice, independence, absence of bias, freedom from dictation by others and reliance on relevant facts were imposed on the agencies by the common law, and likely would have been imposed on any government body whether an independent agency or the minister acting alone.⁵ Corporate and individual rights were at stake. In Canada, the importance of these values was driven home most forcefully in 1959 by the Supreme Court in Roncarelli v Duplessis, a case in which Premier Duplessis sought to prevent a citizen from renewing a liquor licence by instructing the Quebec Liquor Commission to deny the application.⁶ The Court said that the Premier had no power to dictate the decision. The legislature had given that power to the board.

So, not only do the principles of public utility regulation stand independent of the creation of the regulatory agencies, the basic principles of administrative law under which governments must operate also predate the creation of the agencies and stand independent of them.

Once the agencies had the powers to regulate rates, they also automatically had imposed upon them the accompanying duty to provide a reasonable opportunity for the companies to recover their costs of service including a fair return on their invested capital. This is referred to as the regulatory bargain. Once again we can turn to the Supreme Court of Canada on this point in a 1929 decision out of Alberta,⁷ but there are many expositions of the regulatory bargain in many courts in Canada and the United States. Entire books have been written on this subject.⁸ Indeed, one can trace the foundations of the regulatory bargain back to the Magna Carta in 1215 – 800 years ago this June.

Happily, the regulation of these utility industries under the regulatory bargain has, for the most part, been successful in delivering high quality utility services in Alberta and throughout North America at just and reasonable, and non-discriminatory rates to underpin the modern economy we have today. And of course we must acknowledge that it was not the regulators actually building the networks – it was the companies and their engineers.

Interestingly, though, the combination of the fundamental duties placed on public utilities and the adoption of cost of service regulation has made these companies like no others in the economy. The law imposes duties beyond simply the best interests of the shareholders and the form of regulation creates incentives to act in ways precisely opposite to the efficiency incentives created by competitive markets. As a result, across North America one can trace the footsteps and fingerprints of generations of political activists and lobbyists seeking some advantage from the legislatures, either for the utility companies or for groups of their customers. In this environment of bizarre incentives and ever more complex and voluminous legislation, regulators and legislators have had to be mindful that the rights and responsibilities of the companies and their customers must be balanced and symmetrical.

Like the application of any other set of concepts, the facts underlying their application change over time as competition from competing technologies arises. First it was the railways, the big essential monopolies of the late 19^th century and into the 20th century. Much of the economic regulation has been removed as trucking, and air services have eliminated their monopolies – but governments will still step in if there are unique circumstances. Later much of the economic regulation of telecommunications companies was removed in response to competition made possible by technological change and the same happened relatively quietly to many postal services. Economic regulation of the price of natural gas has been removed and retail competition has been allowed to arise by eliminating the vertical integration of the utilities. In electricity, there are competitive market forces nibbling at the edges in just the same way as competition began in other industries such as rail, telecommunications and postal services – and in Alberta we have created a regulatory model to rely on market forces to establish the price of electricity while the monopoly infrastructure that carries it to our homes and businesses remains regulated.

In this environment, a new imperative arises. Not only must customers be protected from monopoly suppliers of essential public services, new competitors must be protected from the possibility that the monopoly in portions of the companies might be leveraged into the competitive portions thereby preventing competition from arising. In the meantime, regulators no longer regulate whole utility companies; they regulate accounting subsets of them – the monopoly facilities and services – and seek to prevent captive customers from subsidizing competitive operations of the former monopoly utilities. Alfred E Kahn, the father of airline deregulation and the namesake of our visiting scholar position at the Alberta Utilities Commission, referred to the challenge as “finding the best possible mix of inevitably imperfect regulation and inevitably imperfect competition.”⁹

In every industry where competition has eroded the monopoly supply of an essential public utility service, deregulation of prices has resulted in increased regulation of the interfaces between the networks and systems of competing companies that must cooperate in a technical fashion in order for competition to flourish in the delivery of end user services. Even here we can turn to more ancient writings for guidance. Adam Smith in 1776 in The Wealth of Nations warned that governments should not encourage people of the same trade to gather together lest the conversation turn to some conspiracy against the public or some contrivance to raise prices. Our Canadian regulatory solution to Adam Smith’s admonition has been to make sure the regulator is in the room during any of these discussions dealing with how competing networks can exchange money, information and traffic necessary to make competition work.¹⁰

So this is the future of regulation. Continue to uphold the foundational principles of just and reasonable rates with no unjust discrimination or undue preference until competition removes the monopoly condition or the essential service condition. Monitor or regulate interaction among competitors and prevent the leveraging of monopoly power into adjacent competitive markets. Interestingly, at the AUC we already carry out all of these types of functions today in one form or another in order to protect the public interest. And we even find ourselves today carrying out very judicial functions equivalent to the federal competition tribunal in adjudicating cases of anti-competitive conduct. This is our place today in the long history of economic and public utility regulation.

For all of that we do, our duty is to act honestly, in good faith and in the public interest – not in anyone’s private interest and not even in the best interests of the AUC if those interests collide with the public interest. This is the essence of our public service.

I believe there is no higher calling than public service. And I am inspired every day by the dedication of our Commission members and our staff to pursuing the public interest in all of the work they do. We take great care because so much is at stake. We know we have a duty to protect the public interest. We know that the AUC is simply the vessel in which the principles of economic and public utility regulation passed down through time are housed today in Alberta and that we are the stewards of those principles dedicated to ensuring that the industries that are the foundation of our economy are operated in a way that serves the public interest.

It is an honour for all of us to serve now, on the occasion of the centennial of public utility regulation in Alberta and to celebrate its centennial. So on behalf of the Commission members and all of the staff at today’s AUC, we wish a happy 100th birthday to Alberta’s public utility regulatory agency and we thank you all for being here to celebrate with us.

* This article is an edited version of remarks by the author delivered on April 14, 2015 at Government House in Edmonton, on the occasion of the centennial of the establishment of public utility regulation in Alberta. The original remarks are published on the website of the Commission at <http://www.auc.ab.ca/centennial/Documents/WilliesSpeech.pdf>. The consent of the Commission to the publication of this version is gratefully acknowledged.

**Chair, Alberta Utilities Commission.

1. The Alberta Utilities Commission was originally established by the Public Utilities Act, SA 1915, c 6 as the Board of Public Utility Commissioners.
2. Jared Wesley, Code Politics: Campaigns and Cultures on the Canadian Prairies, (Vancouver: UBC Press, 2011) at 71.
3. Under the federal Works and Undertakings head of power which are excluded from provincial jurisdiction at s 92 (10) of The Constitution Act, 1867. See Alberta Government Telephones v Canada (Canadian Radio-Television and Telecommunications Commission), [1989] 2 SCR 225.
4. Matthew Hale, A Treatise in Three Parts: De Jure Maris; De Portibus Maris; Concerning the Custom of Goods Imported and Exported, reprinted in A Collection of Tracts Relative to the Law of England, 1787 (Francis Hargrave); See landmark US Supreme Court decision Munn v Illinois, 94 US 113 (1877) where the court discusses Sir Hale’s treatise at great length.
5. In Nicholson v Haldimand-Norfolk Regional Board of Commissioners of Police, [1979] 1 SCR 311, the Supreme Court, under the pen of Chief Justice Laskin held that the exercise of all statutory power was subject to the duty of fairness, without having to first classify such power as ‘quasi-judicial’.
6. Roncarelli v Duplessis, [1959] SCR 121.
7. Northwestern Utilities Ltd v Edmonton (City), [1929] SCR 186.
8. See J. Gregory Sidak & Daniel F. Spulber, Deregulation Takings and the Regulatory Contract: The Competitive Transformation of Network Industries in the United States, (Cambridge: Cambridge University Press, 1998).
9. Alfred E. Khan, The Economics of Regulation: Principles and Institutions, (Cambridge, MA: MIT Press, 1988) at xxxvii.
10. See the Canadian Payments Association for banking and the Settlement System Code for electricity payments in Alberta, implemented by the Alberta Utilities Commission.