On June 9, 2020, the Manitoba Court of Appeal unanimously allowed an appeal from the decision of the Public Utilities Board of Manitoba (“PUB”) in which the Board had ordered Manitoba Hydro to create a new customer class for ratepayers living on First Nations reserves. The on-reserve customer class had received a lower rate increase as compared to other Manitoba Hydro customers. The Court of Appeal concluded that, through this distinction, the PUB had exceeded its jurisdiction by creating a special customer class based on geographic region (Manitoba (Hydro-Electric Board) v. Manitoba (Public Utilities Board) et al., 2020 MBCA 60) (PDF).
The decision, while turning on the statutory language in the Manitoba legislation, is consistent with utility ratemaking principles that limit the ability of a utility regulator to set rates that intentionally cross-subsidize among groups of customers. It also highlights the limits on a statutory body’s ability to implement social policy absent a specific legislative mandate.
Manitoba Hydro has a monopoly over the provision of power in the Province of Manitoba. The Manitoba Hydro Act (“Hydro Act”) grants Manitoba Hydro the ability to set the rates it charges customers for providing utility services. The PUB has the authority to review Manitoba Hydro’s rates on the basis of whether they are just and reasonable in accordance with its governing statute The Public Utilities Board Act.
As part of its 2017/18 and 2018/19 General Rate Application, Manitoba Hydro had applied to the PUB for a 7.9 per cent general rate increase for all residential customers. The PUB had denied the proposed increase, instead mandating a 3.6 per cent average revenue increase. The majority of PUB had also ordered Manitoba Hydro to create a First Nations On-Reserve Residential customer class (the “On-Reserve Class”) with a zero percent increase for the 2018-2019 test year.
Manitoba Hydro appealed the PUB’s directive creating the On-Reserve Class. The Consumers’ Association of Canada and the Assembly of Manitoba Chiefs intervened at the Court of Appeal in support of the directive issued by PUB.
The Court of Appeal’s Decision
The primary issue on appeal was whether the PUB had exceeded its jurisdiction in directing Manitoba Hydro to create the On-Reserve Class. The Court of Appeal concluded that it had and set aside the directive.
The Court of Appeal held that establishing customer classifications is an inherent part of setting utility rates. However, while the PUB has the authority to create such classifications, it must do so within the statutory limits provided by the Hydro Act.
The Court found PUB’s directive to create the On-Reserve-Class breached s. 39(2.2)(b) of the Hydro Act, which prohibits the classification of customers solely on the basis of the region of the province in which they are located or on the population density of the area in which they are located. By creating and implementing “social policy”, the PUB had exceeded its jurisdiction and, in doing so, encroached “into areas that are better left to federal and provincial governments” (at para. 12).
The Court also identified two further problems with the directive as a means of addressing poverty-related concerns:
(1) The directive was unclear whether it applied to persons living on a reserve who were not of First Nations descent; and
(2) Treaty members who did not live on reserve were not eligible for the lower rate even if they lived in similar circumstances.
Therefore, it was not “just and reasonable for disadvantaged individuals on reserve to pay a lower price than other similarly disadvantaged individuals located on reserve or elsewhere in the province” (at para. 55).
The Court acknowledged that bill affordability is an issue of "social policy" that may form a legitimate part of the PUB’s considerations in a rate application. It also indicated that the PUB had not erred in considering principles of reconciliation (as defined in The Path to Reconciliation Act). However, the Court held that the Board had nonetheless exceeded the scope of its authority in directing the creation of the On-Reserve Class. As stated at para. 85:
Nevertheless, the ability to consider factors such as social policy and bill affordability in approving and fixing rates for service does not equate to the authority to direct the creation of customer classifications implementing broader social policy aimed at poverty reduction and which have the effect of redistributing Manitoba Hydro’s funds and revenues to alleviate such conditions.
The Court of Appeal makes clear that the decision-making of a public utility board, including matters involving social policy, must be made within the confines of the statutory framework in which the board operates. While the Court acknowledges some opportunity for the PUB to consider social policy, consistent with its rate-approval function, statutory decision-makers of this kind are by their nature constrained in their ability to address such issues.
This decision is consistent with long-standing regulatory principles in that it is generally impermissible, absent specific legislative authority, to establish rate classes that intentionally cross-subsidize a particular group of customers at the expense of other customers. Broadly speaking, rate design starts from the premise that costs should be recovered from those customers causing the utility to incur the costs. In other words, customer groups that are similarly situated from the perspective of driving utility costs should generally be treated in a similar manner, subject to widely-cited considerations such as feasibility, ease of understanding, rate stability and efficiency.
In this particular context, this decision highlights the separate roles of administrative bodies and legislatures in addressing poverty reduction and other important social policy matters, which often disproportionately affect Indigenous communities.