ATCO Pensions, Ontario Hydro, Prudency, and Reasonableness: a Case Comment on Ontario (Energy Board) v Ontario Power Generagtion Inc. & ATCO Gas and Pipeines Ltd. v Alberta (Utilities Commission)

I. Introduction

Two cases decided by the Supreme Court on September 25th, 2015 paved the way for utility regulators to address utility costs without fear of formalism. The Court clarified that the standard of review for regulatory decisions dealing with operating costs was reasonableness, and that the law prescribed no specific test that regulators had to use in order to evaluate whether a utility’s costs could be recovered in the revenue requirement or not.

II. Background

1. ATCO Gas and Pipelines Ltd. (“ATCO Utilities”)

Pension plans can be divided into two categories: defined benefit plans and defined contribution plans. In a defined contribution plan, generally speaking, the employee and employer each contribute an amount that equals a pre-set percentage of the employee’s income to a pension plan administrator who invests these amounts over time. By the time the employee retires, the investments, hopefully, can generate a stable income for the rest of the retiree’s life. The exact amount of income will be determined at the time of retirement based on the value of the investments at the time of retirement. In contrast, a defined benefit pension plan, again generally speaking, guarantees the retiree a certain amount of income (usually based on some formula that relates retirement income to the employee’s income and years of service). In order to have enough money to pay out this guaranteed income, the administered investments must be equal to a certain amount at the time of the employee’s retirement. This requires the pension plan administrator to calculate backwards the amount of contributions both the employer and employee must make in order for the total amounts projected out to the employee’s retirement to be sufficient to fund the employee’s retirement. The value of the investments at the time of retirement will depend on the amount of contributions and how well the various financial investment vehicles are performing. Typically, such contributions are invested in a mix of stocks and bonds. When stocks are well-performing, usually there is enough money to fund the retirement obligations the employer has to its employees. A drop in the value of the stocks or bonds in which the pension investments were made will mean that there is now less to pay the pension obligations, and if the value of the investments drop below what can fund the future payments, the pension plan is deemed to be under-funded. At this stage, in order to be in compliance with the various laws regulating the funding and solvency of pension plans, the employer and employee must increase their contributions in order to make the value of the investments return to a level that will fund the retirement obligations.

If the company were unregulated, the employer would have to generate the extra payments from the pension plan by raising prices, lowering costs, or lowering profits. A regulated utility, on the other hand, can ask the regulator to allow it to raise its prices charged to customers in order for it to recover the anticipated rise in costs it will face, namely the increased pension contributions. In other words, the fall in the value of the pension plan portfolio will result in a higher revenue requirement for the upcoming test period (or periods).

Additional to the pension commitments, employers may also guarantee or promise some sort of cost of living allowance (COLA) in order to insulate the pensioners from the impact of inflation. Some employers will match the actual rate of inflation, while others will only match a certain portion of the rise in prices. Obviously, the more the employer wishes to pay in terms of COLA, the more the funding the employer needs either from raised prices, lower costs, or lower profits. In the case of a regulated utility, the higher the revenue requirement will be for the upcoming test period(s).

Hence, the revenue requirement for a regulated utility that is obligated to pay pensions under a defined benefit scheme will be the sum of the employer payments required to keep the pension plan solvent and the payments that are adjusted for the COLA. In the case of the ATCO Gas and Pipelines Ltd. and ATCO Electric Ltd. (“the ATCO Utilities”), their pension plans are administered by Canadian Utilities Ltd. (“CUL”), their parent company. Some of the ATCO Utilities employees were in the defined benefit pension plan, and they had typically received a COLA equal to inflation up to three per cent a year.

From 1996 to 2009, the pension plan was in a surplus, which meant that ATCO Utilities neither had to make any employer contributions nor request such payments in their revenue requirements. Then the financial crisis hit in 2008. This caused the market value of the various pension plans administered by CUL, including the ATCO Utilities’ defined benefit plans to be greatly underfunded. ATCO Utilities was therefore required to resume making employer payments starting in 2010. As such, the ATCO Utilities filed an application with the AUC in 2009 to address the revenue requirements stemming from all its pension obligations. The revenue requirements were for the years 2010, 2011, and 2012. The proposed payments to the pension plans covered the current payouts to pensioners, special payments needed to keep the defined benefit pension plans solvent, as well as payments to reflect a COLA equal to inflation up to three per cent as had been past practice. AUC Decision 2010-189 allowed ATCO Utilities to increase its revenue requirement by the amount needed to fully fund the pension plan and it allowed ATCO Utilities to continue its COLA policy for one more year.2

One of the interveners, the Utilities Consumer Advocate of Alberta (“UCA”) argued that much of the shortfall in the pension plan could be solved by only funding an annual COLA of 50 per cent of the rate of inflation up to 3 per cent. The AUC felt that there had not been enough evidence presented at the 2010 hearing, and decided to revisit the question of the COLA policy in a hearing the following year. In the following year’s decision, AUC Decision 2011-391, the AUC accepted the UCA’s recommendation and ordered that the revenue requirement only include a COLA of 50 per cent of annual inflation up to three per cent.3

ATCO Utilities appealed at the AUC (through what is known as a review and variance process), but the AUC upheld the previous decision. ATCO Utilities then appealed to the Court of Appeal of Alberta, which upheld the AUC’s decisions under a reasonableness standard of review.4 ATCO Utilities ultimately sought and received leave to appeal to the Supreme Court.

2. Ontario Power Generation Inc. (“OPG”)

OPG is Ontario’s largest energy generator employing almost 10,000 people, approximately 90 per cent of whom are unionized. The OEB had, in a prior rate hearing, warned OPG that it needed to get a handle on its labor costs, especially the unionized salaries. It specifically directed OPG to prepare a benchmarking study that would allow the OEB to see where OPG fit in with respect to other major employers and their wage structures. Notwithstanding the admonition, OPG continued to negotiate contracts with its unions that the OEB was to find to be too generous when analyzed under the benchmarking study that OPG prepared. The OEB found that OPG’s salaries were not only higher than what the OEB thought were justified, but that there were also many positions that could be eliminated. Accordingly, the OEB disallowed $145 million of salaries from OPG’s $6.9 billion revenue requirement.

OPG appealed to the Ontario Superior Court of Justice, Divisional Court, which upheld the OEB’s decision,5 which was subsequently reversed by the Court of Appeal for Ontario.6 It held that the OEB had not analyzed the union contracts through the lens of the prudent investment test, which required committed or incurred costs be analyzed with no benefit of hindsight. Specifically the prudent investment test requires that the prudence of costs incurred be analyzed based on only information that was available to the utility at the time the decision was made. The Court of Appeal found that the OEB treated the union contracts as forecasted costs and not committed incurred costs, and that the OEB used the benchmarking study that contained data collected after the contracts were signed. Hence, the Court of Appeal concluded that the OEB did not use the proper test and it wrongfully used hindsight to assess the prudence of the costs. The OEB sought and obtained leave to appeal to the Supreme Court.

Indeed, the OEB case was granted leave first and then the AUC case was also granted leave a few days later to be heard jointly.

III. Common Issues on Appeal

The gravamen of both ATCO Utilities’ and OPG’s argument is that the regulator in both cases should have included in the revenue requirements of both utilities prudently incurred or committed costs. By focusing on the COLA costs and the union contracts as having been pre-committed prior to the hearing, ATCO Utilities, OPG and its unions focused their cases on the distinction between backward looking costs (or committed or already incurred) versus forward or forecasted costs (usually to be incurred in the test period) that have not been yet incurred. The suggestion was that committed costs should be analyzed through the prism of the prudent investment test, a test ATCO Utilities and OPG argued requires the presumption of prudence. Forward looking costs, on the other hand, analyzed through the reasonableness test, which places the onus of proof on the utility.

The AUC and the OEB (as well as the UCA) argued that there is no single methodology to which public utility regulators are bound, but rather what matters is that the regulator must set a just and reasonable rate that allows utilities’ shareholders the opportunity to recover a fair rate of return while giving consumers access to service at reasonable rates.

IV. The Supreme Court’s ruling on the Common Issues7

Although ATCO Utilities argued that the standard of review of the AUC’s decision should have been correctness, none of the other parties including OPG and its unions took that position. Rather, the AUC, UCA, OEB, and all other parties argued or conceded that the standard of review was reasonableness. Needless to say, especially in light of the Supreme Court’s Dunsmuir8 judgment and its progeny, the Supreme Court held that the standard of review for both cases was indeed reasonableness.

The Court then canvassed the applicable legislation to the Alberta case, namely Alberta Electric Utilities Act9 and the Alberta Gas Utilities Act10, as well as an associated regulation, the Roles, Relationships and Responsibilities Regulation11. For the Ontario case, the Court canvassed the Ontario Energy Board Act12 and the Payments Under Section 78.1 of the Act regulation13. In looking at the various acts and regulations, the Court was looking for what exactly the law, as written, was with respect to what the AUC and OEB had to do when deciding on revenue requirements for regulated utilities.

In both provinces, the Court determined that although the word prudent appeared in the legislation or regulation, its appearance did not dictate a particular methodology that the AUC or the OEB were obligated to follow. In Alberta’s acts and regulation, the word prudent or the phrase “prudently incurred” appears quite often, but the Court took a common usage approach to the word, namely that it meant reasonable. Hence, the simple appearance of the word prudent (or prudence) did not necessarily implicate or trigger the usage of the prudent investment test, first made famous by Justice Brandeis in his concurrence in Southwestern Bell Tel. Co. v Public Service Commission of Missouri.14 In Ontario’s act and regulation, ‘prudently’ appears only a few times, and the act and regulation prescribed no particular methodology for how to evaluate prudence. All of this led the Court to conclude that at best prudent was just another word for ‘just and reasonable’. Furthermore, no methodology, such as the prudent investment test or otherwise, could be mandated from the various acts and regulations. Finally, the burden of establishing that the costs incurred were prudent or reasonable was on the utility, and the presumption of prudence was not a legal principle public utilities could rely on.

Turning then to the specific cases before the Court, Justice Rothstein quickly dispensed with ATCO Utilities’ argument that the AUC had improperly used hindsight and improperly taken into account customers when lowering the revenue requirement by lowering the annual COLA that could be awarded. Because the COLA payments were to be paid out in the future and because there was no binding contract between ATCO Utilities and its employees (unlike the OPG situation), the COLA costs were definitely forward looking costs and not committed at all. This meant that when looking at other firm practices at the time of the hearing, hindsight was not being used at all, since the future costs were being compared to current practice.

The Court also dismissed ATCO Utilities claim that lowering the allowed COLA increases meant that (because the revenue requirement would be lowered and hence rates would be lower) the impact on customers was being taken into account when setting ultimate rates payable by customers. The Court made it clear that while “[r]egulators may not justify a disallowance of prudent costs solely because they would lead to higher rates for consumers”, “that does not mean a regulator cannot give any consideration to the magnitude of a particular cost in considering whether the amount of that cost is prudent.”15

The case of OPG and its union contracts was slightly more difficult to analyze than ATCO Utilities. After all, in ATCO Utilities, the Court found that all of the COLA costs were forward looking costs. In contrast, while the negotiated union contracts seemed like committed or incurred costs (something the Court of Appeal for Ontario picked up on), the Court nonetheless decided that the OEB was reasonable in its disallowance of $145 million dollars from OPG’s requested revenue requirements.

The Court found the OEB’s decision reasonable for many reasons. First, it found that not all the costs were truly committed. OPG had some flexibility in eliminating positions and managing staffing levels through attrition. That being said, the Court then assumed that some of the disallowed costs were committed and not forecasted. It then looked at the prudent investment test in order to determine how incurred costs should be analyzed. Looking at past American and Canadian jurisprudence on the subject, the Court concluded that the prudent investment test was but one tool available to regulators to be used when appropriate but not mandated by any practice or legislation.

Then the Court looked at the labor costs, some of which the court conceded could be committed. The Court noted that disallowing incurred operating costs does not create the same disincentives for shareholders as disallowing incurred capital costs. Disallowing capital costs can create disincentives for the utility’s shareholders dissuading future investment in capital and equipment. Disallowing operating costs, on the other hand, creates an incentive for the utility to manage its costs more efficiently. The reader should note that the former is detrimental for customers, while the latter is beneficial. By focusing on past and future costs, instead of worrying about a no-hindsight rule, the Court suggested that utilities can be incentivized to better manage their costs through repeated interaction with its employees and other sources of costs. Indeed, the Court intimated that to create airtight compartments of forecasted and incurred costs whereby incurred costs could never be questioned would create what economists call ‘moral hazard.’ Utilities would seek to have all their costs characterized as incurred if they knew that was what immunized such costs from regulatory scrutiny.

The Court also focused on the fact that the OEB had warned OPG to get its costs down. The decision to disallow was therefore not unreasonable. This logic was also alluded to by the Court (and explicitly by the Alberta Court of Appeal) in the ATCO Utilities case. This, the Court stated, creates the proper incentives for regulated utilities to optimally manage their costs.

V. The Role of Agency Counsel

One of the issues that arose in the OPG case was the proper role of board or commission counsel on appeal. The Court relaxed the strict rule first announced in Northwestern Utilities Ltd. v City of Edmonton,16 effectively prohibiting the administrative agency’s counsel from full participation in the appeal. The Court relaxed the old rule to allow agency administrative counsel to participate more fully in the appeal process, as long as they do not cross the line of advocacy to an after-the-fact defense of the agency’s decision. Adversarial advocacy, the Court held, was fine, but bootstrapping or supplementing the agency’s decision on appeal is not.

VI. Concluding Thoughts

The two judgments will undoubtedly free up regulators from being bound by formal tests, a deviation from which could prove fatal for the regulator. Almost a hundred years ago, Judge Cardozo of the New York Court of Appeals (as he was then) stated that “The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal.”17 The prudent investment test never was (according to the Court) and is not the law of the land when it comes to analyzing incurred costs. Rather, what needs to be analyzed is whether the rates allowed to the utility are just and reasonable. No specific method for this evaluation is prescribed by law, and regulators are free to pursue “methodological pluralism.”18 It also confirms the observation that there is no true public utility law in Canada.19

Characterizing costs as past and incurred as opposed to future and forecasted is not helpful for the regulatory endeavor. Rather, the Court stressed that the overall goal is to have consumers receive proper service at just and reasonable rates while allowing utilities the opportunity to recover a fair rate of return on their investments. Regulatory lawyers should not rely on mechanical tests and characterizations of various costs, but rather should focus on the bigger picture, namely how to achieve just and reasonable rates for all.


  1. Faculty of Law, University of Alberta and acting member of the Alberta Utilities Commission (AUC). The author was a member of the AUC’s panel that issued AUC Decision 2011-391, which is the decision that was appealed in ATCO Gas and Pipelines Ltd v Alberta (Utilities Commission). The comment is from an academic’s perspective, and no comment here should be construed as a commentary on the merits of the original decision.
  2. Re ATCO Utilities (20 April 2010), Decision 2010-189 (Alberta Utilities Commission), online: AUC <>.
  3. Re ATCO Utilities (27 September 2011), Decision 2011-391 (Alberta Utilities Commission), online, AUC: <>.
  4. ATCO Gas and Pipelines Ltd v Alberta (Utilities Commission), 2013 ABCA 310.
  5. Ontario Power Generation Inc v Ontario Energy Board, 2012 ONSC 729.
  6. Power Workers’ Union (Canadian Union of Public Employees, Local 1000) v Ontario (Energy Board), 2013 ONCA 359.
  7. ATCO Gas and Pipelines Ltd v Alberta (Utilities Commission), 2015 SCC 45 [ATCO Utilities].
  8. Dunsmuir v New Brunswick, 2008 SCC 9.
  9. Electric Utlities Act, SA 2003, c E-5.1.
  10. Gas Utilities Act, RSA 2000, c G-5.
  11. Roles, Relationships and Responsabilities Regulation, Alta Reg 169/2003.
  12. Ontario Energy Board Act, 1998, SO 1998, c 15, Sch B.
  13. Payments under Section 78.1 of the Act, O Reg 53/05.
  14. Southwestern Bell Tel Co v Public Service Commission of Missouri, 262 US 276 (1923).
  15. ATCO Utilities, supra note 7 at para 62.
  16. Northwestern Utilities Ltd v Edmonton (City of), [1979] 1 SCR 684.
  17. Wood v Duff-Gordon, 222 N.Y. 88 (1917).
  18. Nigel Bankes, Methodological Pluralism: Canadian Utility Law Does Not Prescribe any Particular Prudent Expenditure or Prudent Investment that a Regulator Must Apply, October 9, 2015, available at
  19. George Vegh, “Is there a Doctrine of Canadian Public Utility Law?” (2007), 86 Can Bar Review 319.

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