Emerging trends and developments for the energy industry
Torys’ Energy Regulatory Group
Torys’ Energy Regulatory practice shares emerging trends and developments for the energy sector in Ontario and Alberta. This update offers insights into recent regulatory proceedings before the Ontario Energy Board (OEB), the Alberta Utilities Commission (AUC) and the Alberta Energy Regulator (AER), as well as legislative and regulatory changes that affect the Ontario and Alberta energy sectors. This issue provides highlights as of December 31, 2021.
OEB regulatory proceedings
Project needs and alternatives require more robust evidence in leave to construct applications
In Hydro One’s leave to construct (LTC) application, EB-2021-0136, the OEB was asked by an intervenor to consider that all future IESO needs assessments filed in support of LTC applications provide additional information, including stakeholder engagement, assumptions, methodologies for any resource adequacy study, and details on alternatives analysis. The OEB did not establish additional information requirements, but did clarify its expectations where an LTC application relies on an IESO needs assessment:
While recognizing the IESO’s expert understanding of, and key role in, the market, and the importance of IESO support as an evidentiary component in LTC applications, the OEB explained that, as part of its determination of the public interest and similar to the acceptance of any expert evidence, “the factual basis for IESO recommendations must be clear and understood by the OEB, and an applicant must be prepared to provide that basis beyond the support provided by the expert status of the IESO”.
The OEB indicated its expectation that, where possible, timely examinations of alternatives to construction of transmission facilities should take place so that alternatives are not dismissed as being unable to be implemented simply because of a lack of time. The OEB noted that the consideration of such alternatives is in keeping with its responsibilities pursuant to section 92 of the OEB Act as well as the IESO’s statutory objectives for supporting a diversification of energy sources under the Electricity Act. In order to carry out those responsibilities and objectives, robust stakeholdering and advance planning with potential capacity providers need to be undertaken as part of initial project steps. Further details can be found here.
Only applicants have a right of reply
Also in the foregoing Hydro One’s LTC application (EB-2021-0136), the OEB considered a request from the IESO (an intervenor) to file a reply submission to address concerns raised by APPrO (another intervenor) regarding the IESO’s needs assessment process. The OEB denied the IESO’s request and explained that only the applicant, Hydro One, was permitted to file reply submissions and that Hydro One was free to consider the submissions or perspectives of any of the parties in any reply submissions that it may choose to file. Further details can be found here.
Rate base test: “Used and Useful” or “Used or Useful”?
In Ontario Power Generation Inc.’s (OPG) recent payment amounts proceeding (EB-2020-0290), the OEB provided guidance on the applicable date for the inclusion of capital costs in a utility’s rate base. The traditional approach has been to include utility assets in rate base on the basis of when those assets become “used and useful.” This approach has at times been modified to “used or useful” by legislation or by regulatory practice recognizing utility exigencies in delivering service. According to the OEB, both the “used and useful” and “used or useful” versions of the rate base test have been referenced, both by the OEB and the courts. In considering the relevant date for recognizing the capital costs associated with OPG’s Heavy Water Storage and Drum Handling Facility Project, the OEB explained that a central tenet of both versions of the test for inclusion in rate base is that the asset in question must be available for use or be fit or available for use to provide service to utility customers. The determination of the usefulness and ability to service utility needs is an essential requirement for an asset being included or remaining in rate base. Further details can be found here.
COVID-19 costs may be recoverable through ACM mechanism
In a recent Energy+ Inc. rate proceeding (EB-2021-0018), the OEB considered whether it was appropriate for Energy+ to recover certain COVID-19 related costs through the Advanced Capital Module (ACM) mechanism. Energy+ incurred significant additional health and safety costs related to a previously approved ACM project as a result of the pandemic, and proposed to recover them through the ACM mechanism. Intervenors and OEB Staff disagreed with the proposal and argued that COVID-19 related costs should be recorded in the COVID-19 deferral account, which was established through an industry-wide consultation process, for potential future disposition. The OEB did not agree with intervenors and OEB Staff. Rather, the OEB approved the proposed recovery of relevant COVID-19 costs through the ACM mechanism. Acknowledging that COVID-19 related capital costs can be recorded in Account 1509 for potential future disposition, the OEB stated that the ACM process also allows a utility to bring forward all qualifying capital costs for recovery if prudently incurred. The OEB concluded that it was appropriate to include COVID-19 costs in assessing the reasonableness and prudence of Energy+’s ACM costs. Further details can be found here.
The rule against retroactive ratemaking
In its 2022 rate application, Kitchener-Wilmot Hydro Inc. (KWHI) (EB-2021-0038) sought to recover uncollected amounts through the disposition of Account 1584 (Retail Transmission Network Charge) due to an IESO metering error. As a result of an incorrect entry into its metering database, the IESO had not charged KWHI Network Service charges since June 2015. The balances in Account 1584, which is used to record the net amount charged by the IESO for Network Service, and the amounts billed to customers for the same service, were previously cleared on a final basis for 2015, 2016, 2018 and 2019 and on an interim basis for 2017. The request to recover the aforementioned amounts raised the issue of whether it violates the rule against retroactive ratemaking.
In October 2019, the OEB laid out its general approach to addressing the issue of retroactive adjustments resulting from accounting or other errors in respect of “pass-through” variance accounts (which include Account 1584). The approach involves consideration of specific factors, such as a) whether the error was within the control of the distributor; b) the frequency with which the distributor has made the same error; c) failure to follow guidance provided by the OEB; and d) the degree to which other distributors are making the similar errors.
In KWHI’s circumstances, the OEB acknowledged that the utility was not in control of the error, it disclosed the error to the OEB on a timely basis and took the necessary steps with the OEB to seek disposition. Relying on its statutory objectives under Section 1(1) of the Ontario Energy Board Act, 1998, the OEB also considered the negative impact on KWHI’s financial position if it is unable to recover amounts from its customers that it has to pay to the IESO. The OEB concluded that the rule against retroactive ratemaking is not “ironclad”, and, in KWHI’s circumstance, it did not constitute impermissible retroactive ratemaking. Further details can be found here.
New Ontario legislative changes and regulatory proposals
Amendments to the Electricity Act, 1998 introduce two-year limitation period
As part of its red tape reduction initiative, and based on a recommendation from the IESO, the Ontario Government amended the Electricity Act, 1998 by establishing a new limitation period in Section 36.1.1. Subject to a number of exceptions, the new limitation period of two years (or such other period as may be prescribed by regulation) applies to certain payments, adjustments and amounts settled by the IESO, and which are prescribed for purposes of this new limitation period. The amendment came into effect on January 1, 2022. According to the Province, this limitation period addresses a gap between the open-ended time period for settlement adjustments to market participants and the limitations faced by local distribution companies (LDCs) in settling such adjustments with electricity consumers. It also provides greater cost certainty to the government, the IESO, market participants, and consumers, and is expected to reduce administrative time/cost for market participants, LDCs, large consumers, and the IESO. However, the amendment also limits a consumer’s ability to recover amounts related to past entitlements where the consumer has failed to discover their entitlement within the limitation period. Notably, the limitation period does not relate to payments arising under IESO contracts or to payments arising under court/arbitration orders, or the OEB’s or IESO’s compliance processes. Furthermore, it is expected that the IESO will make corresponding changes to the Market Rules prior to October 2022.
Enabling more choice and competition in electricity suite metering
The Ministry of Energy has proposed regulatory changes that are intended to make it easier for the boards of condominium corporations, landlords of rental apartment buildings and other building owners/administrators to change the unit/suite metering providers for their multi-unit buildings from their local distribution company (LDC) to a unit sub-metering provider (USMP), or vice-versa. Currently, transitioning from LDC “unit smart metering” to USMP “suite metering” may require the unanimous consent of the LDC’s accountholders in the building. However, transitioning from USMP suite metering to LDC unit smart metering, or from suite metering by one USMP to suite metering by another USMP, would not necessarily require the consent of the utility account holders in the building. The proposed changes are aimed at harmonizing the rules for switching between unit smart metering/suite metering providers regardless of whether the current suite meter provider is an LDC or a USMP.
Electricity infrastructure for broadband deployment
In early December 2021, the Ontario Government introduced O. Reg. 842/21 (Electricity Infrastructure (Part VI.1 of the Act)) under the OEB Act, which came into force on January 1, 2022. This regulation establishes, among other things, requirements for capital planning by electricity distributors in relation to the use of electricity infrastructure for telecommunications facilities, and a new methodology for determining distribution pole attachment charges. Further to the regulation, the OEB requires licenced distributors to consult with telecommunications entities within their service areas when preparing their capital plans (known as Distribution System Plans (DSPs)) for purposes of facilitating the provision of telecommunications services, and to include certain information in their DSPs resulting from such consultations.
The regulation also requires the OEB to establish a generic, province-wide distribution pole attachment charge for 2022 based on the approach set out in a 2018 OEB report on Wireline Pole Attachment Charges, but with two prescribed modifications, which are as follows: a) the OEB must use the “proportional use” methodology described in the report for allocating common costs between different attachers, rather than the “hybrid equal sharing” approach adopted in the report; and b) the OEB must not make any adjustments for inflation for 2021 or 2022. The regulation also requires the OEB to set the charge for 2023 and subsequent years by adjusting the prior year’s charge for inflation in accordance with the inflation adjustment mechanism described in the report.
Amendments to OEB Practice Direction on Confidential Filings
In December 2021, the OEB updated its procedures for considering confidentiality claims and handling personal information in OEB filings. Specifically, the OEB amended its Practice Direction on Confidential Filings and introduced related revisions to its Rules of Practice and Procedure, its Rules of Practice and Procedure for Enforcement Proceedings, and its Standard Declaration and Undertaking Form. The amendments are designed to streamline the process for considering confidentiality claims and reform how redactions for personal information are addressed. Of particular significance is that the OEB introduced specific categories of information that are deemed “presumptively confidential”. Where information to be filed is “presumptively confidential”, there is no need for the OEB to formally rule on the confidentiality of that information. The categories of information identified as presumptively confidential are those that, based on the OEB’s experience, are not typically contentious from a confidentiality perspective.
AUC & AER regulatory proceedings
The utility asset disposition saga
The Alberta Court of Appeal has granted ATCO Electric Ltd. (ATCO) permission to appeal AUC decision 21609-D01-2019. In that decision, the AUC found that ATCO’s assets destroyed in the 2016 Fort McMurray wildfire was an “extraordinary retirement”. This meant that any related costs must be borne by ATCO’s shareholders since ratepayers only pay for unrecovered investment (in this case about $3.1 million) retired as an “ordinary retirement”. Ordinary retirements result from causes reasonably assumed to have been anticipated or contemplated in prior depreciation provisions1.
The Alberta Court of Appeal’s permission to appeal decision can be found here.
AUC looks to return to a formula-based approach to cost of capital
The AUC issued a notice on January 3, 2022 that it was initiating a proceeding to consider the 2023 generic cost of capital (GCOC) for utilities and explore a formula-based approach to cost of capital on a go-forward basis. The AUC has used a formula-based approach to GCOC, but from 2009 to 2020 the GCOC has been set based on fully litigated proceedings every two to three years2. While this ensures that current information is taken into account, it can also be time consuming and costly. As a result, the AUC wished to explore a formula-based approach starting in 2024 as part of its commitments to improving efficiency and effectiveness of its regulatory processes. The AUC’s notice can be found here.
AUC roundtable of regulatory burden reduction
The AUC held a roundtable on March 10, 2022 to build on its progress on regulatory burden reduction. The AUC was specifically looking for feedback of assertive case management, performance metrics, and mediated settlements. The AUC has made changes in each of these areas, and is looking for feedback on the effectiveness of the approaches, and other modifications that could enhance the processes. Further information can be found here.
Broadening the criteria for abbreviated needs approval process
In Alberta, building new transmission infrastructure is a two-step process, although in practice the steps can occur within the same proceeding. First, the ISO will apply to the AUC to establish the need for new transmission infrastructure, and second, the applicable transmission facility owner will apply to construct and operate the transmission infrastructure. Where appropriate, the AUC can omit requirements in the first step with an abbreviated needs identification document. The ISO has created rules to establish practices for an abbreviated needs approval process. The AUC approved the new criteria on February 9, 2022. Notice of all projects under consideration will be posted to the ISO’s website giving stakeholders 14 days to review, and even where the criteria are met, there may be times when projects will not be appropriate for the abbreviated process, like high-profile transmission developments, where AUC oversight is requested, or where stakeholder concerns are unresolved. The decision can be found here.
New requirements for oil and gas liability management
The AER released Directive 88: Licencee Life-Cycle Management and Manual 23: Licencee Life-Cycle Management on December 1, 2021, following a consultation period on a draft of the Directive. The Directive introduces a holistic assessment of a licencee’s capabilities and performance across the energy development life cycle and introduces mandatory closure spend targets for licencees. Further information can be found here.
New Alberta legislative changes and regulatory proposals
(Almost) allowing self-supply and export and energy storage
On November 17, 2021, the Government of Alberta introduced Bill 86: Electricity Statutes Amendment Act, 2021. Bill 86 introduced a number of key changes. One notable proposed change allowing parties to build generation to serve their own needs, and export the surplus to the grid. The AUC had previously held that the generation either had to be used entirely for self-supply, or entirely supplied to the grid, so this was a welcome change for industry. However, the legislation would also make self-supply subject to a tariff to pay for a just and reasonable share of costs associated with the transmission system. The legislation also adds clarity to energy storage, including setting out the circumstances under which distribution and transmission utilities can, and cannot, own energy storage. However, despite passing second reading on November 24, 2021, Bill 86 did not pass third reading before the second session ended. The February 22, 2022 throne speech confirmed that new legislation will be introduced. Further information can be found here.
Proclaiming the Geothermal Resource Development Act
On December 8, 2021, the Government of Alberta proclaimed the Geothermal Resource Development Act establishing the AER as the primary regulator for deep geothermal energy developments in Alberta. The AER is still working to finalize the details of the regulatory framework, including the application process and technical requirements for development of geothermal resources. It plans to publish the final requirements in spring 2022. Further information can be found here and here.
Updates on previously reported Ontario legislative changes
Changing OEB’s Regulated Price Plan rate setting frequency
Enabling the use of electricity infrastructure for Ontario’s broadband expansion
Part VI.1 (Electricity Infrastructure) of the OEB Act was proclaimed into force on January 1, 2022.
Utility asset depreciation in Alberta stems from the 2006 Supreme Court of Canada in Atco Gas and Pipelines Ltd v Alberta (Energy and Utilities Board) aka Stores Block. Further information can be found here.
Because of the economic uncertainty caused by COVID-19, the AUC has not completed a fully litigated proceeding to set rates for 2021 and 2022.
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This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
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