INTRODUCTION

The issue of the locational treatment of transmission line losses has a long history in Alberta. Indeed, when Alberta’s electric system was deregulated in 1995, a key principle for the new, open access transmission system, was that generators would pay charges or receive credits based on the location of supply to ensure maximum efficiency of the system.

In the more than two decades since market opening, the issue of line loss calculation methodology has been the subject of ongoing (and seemingly never-ending) debate before policy makers, the Alberta Utilities Commission (AUC) (and its predecessors) and the courts.

The transmission of electricity results in a portion of energy being lost as heat. These losses are dependent on a number of variables, including the distance over which power is transmitted. Losses mean that in order to meet demand, more electricity has to be generated than consumed.

The regulatory framework in Alberta requires that the costs of lost energy associated with transmitting electricity be recovered from generators as opposed to transmission companies or the final consumers. In order to accomplish this, system-wide losses are measured during a chosen period.

The Alberta Electric System Operator (AESO) then takes these system-wide losses and determines what portion of the cost of total system-wide losses should be attributed and charged to each generating unit. By doing this, generating units are able to take into account the line losses assigned to them by the AESO when offering their electric energy into the power pool and making their decisions on where to locate their generating plant.

Due to the complexities, variables and interdependencies between all generators and loads on the system, it is impossible to observe or measure how much of any individual generator’s output is lost in the process of transmitting electricity. As a result, the AESO developed a methodology to calculate the change in total system losses resulting from changes in each generating unit’s output. A line loss factor for each generating unit and the methodology used to determine those factors are enshrined in an AESO rule.

At the risk of over simplifying the long debate over the AESO methodology, the crux of the issue was whether locational impacts of generator’s actions were properly reflected in the charges or credits paid for losses.

A DECISION OF THE COURT OF APPEAL OF ALBERTA

Justice Brian O’Ferrall’s recent decision in Capital Power v Alberta Utilities Commission¹ concludes at least one aspect of the methodology debate.

Briefly by way of background, in January of 2015 the AUC made a decision, as part of a series of decisions, which the AESO’s 2005 line loss rule did not comply with Alberta legislation.

The issue came to the Commission as a result of a complaint by Milner Power Inc. in August 2005 with the Commission’s predecessor, the Alberta Energy and Utilities Board (EUB).

The EUB had summarily dismissed Milner’s complaint and indicated the AESO was free to implement the 2005 line loss rule effective January 1, 2006, which it did. Milner appealed that decision to the Alberta Court of Appeal and in July of 2010, the court agreed with Milner and sent the complaint back to the Commission to adjudicate the merits.

The hearing was divided into two phases. First, the Commission considered whether the 2005 line loss rule complied with the governing legislation, including the Electric Utilities Act² and Transmission Regulation³. Second, if the Commission found for Milner in Phase 1, what remedy could be awarded.

In 2012, the Commission determined that the 2005 line loss rule was non-compliant with the governing legislation. That decision was reviewed by the Commission and in 2014, the findings of the 2012 decision were confirmed.

The Commission then proceeded to the Phase 2 remedy proceeding and divided that hearing into 3 modules. For purposes of this brief, only module A will be discussed.

Module A addressed, among other things, whether the complaint could apply continuously from January 1, 2006 to the time of the Module A decision and whether the Commission had jurisdiction to change or replace an AESO Rule that was in effect and to order financial compensation from the period January 1, 2006 to the time of the module A decision.

In January of 2015 the Commission found that the Milner complaint continued uninterrupted from January 1, 2006 to the time of the decision. It also found that the line loss charges and credits were collected under the ISO tariff, which was found to be a negative disallowance scheme, and were therefore, interim. Lastly, the Commission determined that it is not impermissible retroactive ratemaking for the Commission to grant a tariff-based remedy to correct for the unlawful line loss charges and credits included in the tariff from January 1, 2006 to the time of the decision.

The impact of the decision was far reaching and material. In combination with other decisions, all market participants between 2006 and the time of the decision are impacted. Given the passage of time since 2006, many participants have left and entered the market resulting in a complicated settlement process to collect and refund differences. Lastly, the sums at issue are material with losses estimated over the period at $1.6B.

The decision was appealed. Under section 29 of the Albert Utilities Commission Act⁴, a decision of the Commission may be appealed on a question of law or jurisdiction by way of a permission to appeal motion before a single justice of the Court of Appeal of Alberta. If the permission to appeal application is successful, the merits of the appeal are then heard by a three member panel of the Court of Appeal.

Justice O’Ferrall heard the motion on May 31, 2018 and dismissed it in an unusually lengthy 22 pages permission decision on December 20, 2018. He upheld the Commission’s characterization of the line loss rule, as a negative disallowance scheme and subject to permissible retroactive rate making, finding that the law on impermissible retroactive ratemaking was clear and that the Commission’s decision turned on the application of the law to the facts of the case. He stated that permission to appeal should be granted only if the application of the law to the facts was unreasonable.

There was a great deal of discussion on the nature of retroactive ratemaking, the exceptions to the prohibition against such ratemaking and the authority of the Commission to make a retroactive adjustment. The Court concluded that “…no court or public utilities board will ever be able to define precisely the circumstances in which retroactive ratemaking is permissible. Nor is it desirable that they should do so. And, presumably, it has been deemed even less desirable to enact a blanket prohibition.”⁵

Perhaps more interestingly, Justice O’Ferrall made a number of comments about the test for a permission to appeal motion, the standard of review and crucial deference and the importance of the tribunal’s role, not the court’s, in determining the public interest.

An applicant for permission to appeal must establish that there is a serious, arguable point before permission is granted. The tests to determine this threshold have been set out in numerous Alberta Court of Appeal decisions:

• whether the point on appeal is of significance to the practice;
• whether the point raised is of significance to the action itself;
• whether the appeal is prima facie meritorious or, on the other hand, is frivolous;
• whether the appeal will unduly hinder the progress of the action; and
• the standard of appellate review that would be applied if leave were granted.

Justice O’Ferrall questioned whether these were tests or simply considerations or factors to take into account given the nature of the decision and the legal or jurisdictional issues raised.⁶ He reasoned that:

 A “question” connotes the raising of doubt. So a question of law or jurisdiction would be the raising of doubt about a proposition of law or the taking of jurisdiction. A “question” connotes a problem of some practical importance requiring a solution. So unless there is a question or problem of practical importance requiring an answer, permission to appeal ought not to be granted because there is no basis for an appeal. Unless there exists a question of law or jurisdiction which has not already been authoritatively answered, no appeal lies.⁷

The matter of whether the appeal is prima facie meritorious requires an assessment of the degree of crucial deference that would be applied. The likelihood of deference increases as the merits of the appeal decline.

Justice O’Ferrall accepted that the Commission’s decision to retroactively re-allocate credits and charges raised a jurisdictional question going to the Commission’s authority to order the adjustments. Although, he stated that the existence of a jurisdictional question did not automatically mean that the Commission’s decision raised a question or doubt about its jurisdiction.⁸

He emphatically supported the principle that courts should show deference to expert tribunals, who make legal decisions within their special expertise, including jurisdictional determinations such as the retroactive adjustment of rates. He went as far as to say that a deferential standard must be applied to even the “true jurisdictional issues” on this permission to appeal application.⁹

He rejected the contention that only the courts are the source of authoritative public utility law, pointing out that the law related to the prohibition against retroactive rate making, was largely developed through public utility regulation, and public utility board jurisprudence. He wrote:

Where do the applicants think the common law prohibition against retroactive ratemaking came from? It came from roughly 100 years of public utility regulation and public utility board jurisprudence in this province and elsewhere in North America. Admittedly the courts have contributed to the development of the prohibition, invoking concepts such as the presumption against retroactive application of legislation. But it is important to understand that the underlying rationales for the prohibition were not derived solely from the common law, or statute law for that matter. The prohibition against retroactive ratemaking was derived from general principles of fairness, reliance, certainty and finality, which the common law recognized, but which existed independent of the common law. These are values which gained currency, not because of the law, but because they made sense in a fair and orderly society. Courts have no monopoly or special expertise when it comes to the application of principles of fairness. And that is what the Commission did in this case: it applied principles of fairness to a function (i.e., ratemaking) in respect of which is has a special expertise.¹⁰

Justice O’Ferrall further commented that commissions are not inferior tribunals governed or supervised by the courts. The court’s function is to assist the Commission and those it regulates when they need the court to answer questions. In this context, the court’s role, he stated, is to correct obvious errors of law and serve as a check on the Commission’s exercise of its powers but it is not to regulate utilities.¹¹

Justice O’Ferrall gave deference to the Commission’s decision on its jurisdiction to adjust line loss allocations retroactively because the Commission’s essential function and expertise was ratemaking. He cited the Supreme Court decision¹² in support of this view and that a standard of reasonableness is presumptively applied to the Commission’s interpretation of its home statutes.

Justice O’Ferrall found that the Commission’s assessment of the interests at play and whether compliance with the line loss rule produced a fair result and met the objectives of relevant legislation were not the kind of assessments that the Court was capable of making. He described the Commission’s analysis of permissible retroactive rate making based on the negative disallowance scheme in place as “certainly defensible logic”, although its correctness could be debated. He was not prepared on a permission to appeal application to hold that there was a serious question as to the correctness of the Commission’s decision.¹³

He went further in justifying the court’s deference on a jurisdictional question by elevating the overriding importance of the public interest component of Commission decisions over questions of law and jurisdiction. He held that the Commission was best able to determine the public interest. He stated that:

In deciding whether permission to appeal ought to be granted, one must begin with an understanding that there is much more to the impugned Commission decision than questions of law or jurisdiction. The Commission’s first and foremost mandate is to make decisions which are in the public interest. It must make policy choices it considers necessary to achieve the objectives of utility regulation. The Commission has a much better understanding of what those objectives are, but they would presumably include objectives such as setting just, reasonable and lawful utility rates for utility services, balancing the interests of ratepayers and the owners of the utilities, encouraging efficiencies in the provision of utility services, encouraging a competitive market to the extent possible and ensuring that transmission line loss costs are shared appropriately by energy generators in accordance with legislated directive as to how those costs should be shared. Questions of law or jurisdiction, while important, are incidental to the achievement of the Commission’s public interest objectives.¹⁴

CONCLUSION

Although the Court was dealing with a permission to appeal application, decisions which are often brief with spare reasoning, this particular decision stands out for its thorough analysis of the retroactive ratemaking principles raised by Commission’s decision, the paramount importance of the public interest component of tribunal decisions and the decision’s strong support of curial deference to expert tribunals on legal and jurisdictional questions.

1. 2018 ABCA 437.
2.  SC 2003, c E-5.1.
3.  Alta Reg 86/2007.
4.  SC 2007, c A-37.2, s 29.
5.  Supra note 1 at 64.
6.  Ibid at 30-38.
7.  Ibid at 32.
8.  Ibid at 40.
9.  Ibid at 48.
10.  Ibid at 45.
11.  Ibid at 46.
12.  ATCO Gas and Pipelines Ltd v Alberta (Utilities Commission), 2015 SCC 45.
13.  Supra note 1 at 54.
14.  Ibid at 52.