Disputes Involving Regulated Utilities

The oil and gas industry can be divided into two main segments: upstream and downstream. Most of the writing about energy arbitration relates to the upstream, as that is where the exploration and development takes place. This sector is dominated by governments that control the rights to the assets in the ground, and the multinational oil companies that extract the oil and move it to market. This is the world of investor-state arbitration.

The attention the segment receives is not surprising. Investor-state arbitrations are the product of the rapid growth of treaties designed to protect the interests of investors – multi­lateral treaties such as the Energy Charter Treaty and approved by the North American Free Trade Agreement (NAFTA) – but also a wide array of bilateral treaties between specific countries.

However, for every one of the investor-state cases, there are 10 significant commercial arbitrations in the downstream energy sector. Here, the centre of gravity is not London, Stockholm or Paris, but Houston or Calgary. More than 90 energy companies have head offices in Calgary – and Houston has three times that number.

These are arbitrations between companies – commercial arbitrations but not necessarily domestic arbitrations. They are often cross-border, involving US or Canadian companies and foreign suppliers of technology.

This is a world that concerns the generation of electricity that moves constantly across state, provincial and international boundaries. These generation facilities exist throughout the world. Each generator needs a transmitter to transmit that electricity to various markets, and within those markets, other companies distribute the electricity to the end user. Those three classes of parties – generators, transmitters and distributors – are all public utilities. Public utilities are regulated by the government, usually by an independent regulatory commission. Within North America, that commission can be provincial, state or federal.

These public utilities can be privately owned or government-owned. All are regulated, regardless of ownership. That regulation includes the rates charged to customers, the quality of service and investment in new assets. In addition there are regulatory rules preventing market manipulation.^[2]

The utility business also involves thousands of contracts with third parties for the construction and operation of generating facilities, pipeline and transmission assets, as well as the sale of electricity and gas. Many of those contracts have arbitration provisions. Often disputes involving regulated utilities present special problems for arbitrators. There can be conflicts in jurisdiction and parallel proceedings.

In the United States and Canada, the courts grant deference to arbitrators. Similarly, in both countries, courts grant deference to regulators, particularly regulators involved in regulating complex industries with substantial national importance. This deference includes interpretation of the regulators’ home statute. That leaves potential conflicts between regulators and arbitrators. Many regulated public utilities have arbitration clauses in contracts.

The interesting question, and the subject of this chapter, is whether disputes involving regulated utilities present special problems for arbitrators. They do. There can be conflicts in jurisdiction and parallel proceedings.

The regulatory principles

In North America, there is a long history of regulation of public utilities. It began with railways, although it can be traced to common law restrictions defining canal operators as common carriers. In 1917, the Supreme Court of the United States first described one of the fundamental obligations of a public utility – the duty to serve – as follows:

Corporations which devote their property use may not pick and choose, serving only the portions of the territory covered by their franchises which it is presently profitable for them to serve and restricting the development of the remaining portions by leaving their inhabitants in discomfort without the service which they alone can render.^[3]

Certain rights and obligations soon became fundamental. They include the duty to serve, the requirement to set rates that are just and reasonable and a requirement not to discriminate unjustly between customers. In the beginning, the courts set the rules, but this quickly fell under the jurisdiction of independent regulators appointed by the government. They included state regulators in the United States, provincial regulators in Canada and federal regulators in both countries.

Not surprisingly, the statutes and the judicial decisions interpreting those statutes are remarkably similar throughout North America. The decisions started in the railway industry, moved to telegraph and telecommunications and then ultimately to energy. The basic principles of energy regulation in terms of the fundamental obligations and rights of a public utility are set out below.

With changing technology and the growing economic importance of this sector, energy regulators have been given broad power by governments with wide-ranging policy objectives. These include promotion of conservation, energy efficiency and renewable energy.

The traditional obligations of a public utility flow from a combination of case law and statutory provisions. A public utility must:

• set prices that are just and reasonable;^[4]
• not discriminate unjustly between customers;^[5]
• not set rates retroactively;^[6]
• not refuse to serve a customer;^[7]
• offer safe and reliable service;^[8]
• offer access to essential facilities;^[9] and
• not contract for rates different from the tariff rate.^[10]

A public utility has certain rights. Specifically a public utility is entitled to:

• a fair rate of return;^[11]
• recover costs that are prudently incurred;^[12]
• a fair rate of return on assets that are used and useful;^[13]
• be free from competition in a service area; and
• limited liability for negligence.^[14]

Energy market manipulation

Traditional energy regulation involves the regulation of rates and conditions of service. The rates are regulated because these are monopoly services and consumers are not protected by competition. However, over time a number of energy markets have become more competitive and the prospect of market manipulation led governments to develop market rules that prohibit anticompetitive practice. This jurisdiction has been exercised since 2006 by the Federal Energy Regulatory Commission (FERC) in the United States under Order 670.^[15] In the European Union, it has been exercised under REMIT (the EU Regulation on energy market integrity and transparency)^[16] since 2011. In Canada, the jurisdiction is exercised by Alberta and Ontario, the only two provinces that have competitive markets.

This is an increasingly important dimension of energy regulation and can affect arbitrations under contracts between private parties engaged in these markets. Arbitrators will not enforce contracts that are illegal or contrary to public policy.

In the United States, FERC has aggressively policed attempts to manipulate wholesale energy markets for some time. This followed the restructuring of natural gas and electricity markets in the 1980s when FERC began authorising the sale of electricity and natural gas at market-based rates instead of cost-based rates. This brought many new participants into US energy markets and contributed to what was known as the California Energy Crisis in 2001, led by the firm, Enron.

After this crisis, FERC promulgated six market behaviour rules that prohibited actions that were without legitimate business purpose and that were intended to manipulate market prices. In 2005, Congress enacted the Energy Policy Act, which established the current anti-manipulation authority. The Act made it unlawful for any entity to use manipulation or deception in connection with the purchase or sale of electricity or natural gas.

The Act gave FERC the express authority to prescribe rules and regulations necessary to protect the public interest and ratepayers. The legislation provided civil penalties of up to US$1 million a day. This was an increase from the previous civil penalty authority of US$10,000 per day. The legislation also confirmed the earlier authority for disgorgement of unjust profits. At the same time, the maximum criminal fine was raised to US$1 million.

On 19 January 2006, FERC issued Order 670, which prohibited market manipulation. This established the new Rule 1c.2, now referred to as FERC’s Anti-Manipulation Rule. This Rule made it unlawful for any entity, directly or indirectly, in connection with any FERC jurisdictional transaction:

1. To use or employ any device, scheme, or artifice to defraud,
2. To make any untrue statement of a material fact, or to omit to state a material fact necessary in order to make the statement made, in light of the circumstances under which they were made, not misleading, or
3. To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity.^[17]

Rule 1c.2 closely tracks the US Securities and Exchange Commission (the SEC) Rule 10b-5, which prohibits securities fraud.

Between 2010 and 2014, the SEC opened 35 investigations into market manipulation. In 2013, the SEC obtained more than US$300 million in civil penalties and almost US$150 million in disgorgement.

Significant penalties were handed down, starting in 2009 with the US$7.5 million fine in Amaranth Advisors^[18] and US$30 million in Energy Transfer Partners.^[19] These were followed by a penalty of US$245 million in Constellation Energy^[20] in 2012, while 2013 saw Deutsche Energy pay US$1.7 million^[21] and JPMorgan issued with a record US$410 million fine.^[22] In 2014, Louis Dreyfus Energy^[23] paid a civil penalty of US$4.1 million and disgorged US$3.3 million in profits, while Twin Cities paid US$2.5 million that year.^[24]

In 2016, FERC opened 17 new investigations and obtained monetary penalties and disgorgement of unjust profits totalling approximately US$18 million. With the pending litigation in US federal district courts and before the SEC, FERC’s Office of Enforcement is seeking to recover more than US$567 million in civil penalties and disgorge more than US$45 million in allegedly unjust profits.

FERC’s Office of Enforcement also issued two white papers: one summarising recent FERC and federal court case law regarding development of the SEC’s anti­manipulation doctrine and identifying factors staff will investigate for indicia of fraudulent conduct; and another explaining internal best practices for jurisdictional entities to prevent and detect market manipulation and other violations.^[25] The US Commodity Futures Trading Commission (CFTC) also continued to aggressively exercise its enforcement authority in 2016, bringing 68 enforcement actions, resulting in more than US$1.2 billion in monetary sanctions. A significant portion of the CFTC’s enforcement actions continue to involve the energy sector.

In Canada, the only competitive wholesale electricity markets exist in Ontario and Alberta. Both provincial governments have established agencies to guard against price manipulation. In Alberta, a separate agency, the Market Surveillance Administrator, was established to conduct investigations. Applications for enforcement and decisions on penalties are made by the Alberta Utilities Commission.

In Ontario, initial investigations are conducted by the Market Surveillance Panel, a panel of the Ontario Energy Board. The resulting reports are published. The actual enforcement is carried out by a division of the Ontario Independent Electricity System Operator (IESO). The IESO establishes the penalty, if necessary, following an arbitration process. The market participant has the option of appealing that decision to the Ontario Energy Board.

FERC’s Order 670 approach was followed in Ontario in May 2014 when the IESO enacted the General Conduct Rule to deal with similar conduct. The General Conduct Rule was similar to a rule Alberta had enacted in 2009 (AR – 159-2009).

On 27 July 2015, the Alberta Commission handed down its first decision,^[26] which found that TransAlta, a regulated utility, had intentionally removed its generating plants from service for maintenance purposes in a manner that would increase the price in the market. This was a landmark decision. In 200 pages, the Commission sets out in detail the test for establishing market manipulation in Canada.

More recently, the Ontario Market Surveillance Panel released a report finding that Resolute, a pulp and paper company, was manipulating markets to obtain unwarranted payments in the form of constrained off and constrained on payments.^[27] The report recommended that the IESO take all necessary steps to recover the C$26 million payment. In August 2016, the parties settled on the basis of a voluntary repayment of C$10.6 million.

The increased enforcement of market rules in Canada has not yet reached the level experienced in the United States. However, the trend in North American energy regulation is clear. The regulation of conduct in the competitive segments market may soon overshadow the regulation of utility rates in monopoly markets. This shift in regulatory focus has implications for arbitrators.

To the extent that arbitrations involve disputes in these new competitive markets, the enforcement of awards may become more difficult under the public policy defence.

We have seen the influence of serious quasi-criminal activity on arbitrations before. This has occurred in enforcement activities under anti-bribery statutes, particularly by the SEC in the United States and the Royal Canadian Mounted Police in Canada.^[28] Both countries have aggressive legislation with serious criminal and civil penalties: in the United States, there have been convictions against more than 30 energy companies; in Canada, two energy companies have been convicted.^[29] In a number of arbitrations, parties have raised bribery as a bar to the enforcement of awards.^[30] In fact, bribery has been raised in some 50 cases but has been successful in only four.

Divided jurisdiction

In the United States and Canada, the courts grant deference to arbitrators. Similarly, courts in both countries grant deference to regulators, particularly those involved in regulating complex industries with substantial national importance. This deference includes interpretation of the regulators’ home statute.

That leaves potential conflicts between regulators and arbitrators. Many regulated public utilities have arbitration clauses in contracts. Assume that a regulated utility has a contract with a large commercial customer that has an arbitration clause with respect to price. And assume there is a dispute with respect to that price. Would that be resolved before the arbitration panel or before the regulator? If it is before an arbitration panel, will the principles of public utility law apply?

In most cases, an energy regulator will have the jurisdiction to make sure that the price set by the regulated utility is just and reasonable. There are very few cases across North America where that is not the case. What happens if one party issues a notice of arbitration?

The regulator’s jurisdiction

A tribunal only has the powers stated in its governing statute or those that arise by ‘necessary implication’ from the wording of the statute, its structure and its purpose.^[31] The Ontario Board’s jurisdiction to fix ‘just and reasonable’ rates is found in Section 36(2) of the Ontario Energy Board Act, 1998:

The Board may make orders approving or fixing just and reasonable rates for the sale of gas by gas transmitters, gas distributors and storage companies, and for the transmission, distribution and storage of gas.

This is standard language in all public utility legislation.

It is generally accepted that an energy regulator’s jurisdiction is very broad. In Union Gas Ltd v. Township of Dawn, the Ontario Divisional Court in 1977 stated:

this statute makes it crystal clear that all matters relating to or incidental to the production, distribution, transmission or storage of natural gas, including the setting of rates, location of lines and appurtenances, expropriation of necessary lands and easements, are under the exclusive jurisdiction of the Ontario Energy Board and are not subject to legislative authority by municipal courts under the Planning Act.
These are all matters that are to be considered in light of the general public interest and not local or parochial interests. The words ‘in the public interest’ which appear, for example, in s. 40(8), s. 41(3) and s. 43(3), which I have quoted, would seem to leave no room for doubt that it is broad public interest that must be served.^[32]

The same Court issued two important decisions in 2005. In the NRG case, the Court stated:

The Board’s mandate to fix just and reasonable rates under section 36(3) of the Ontario Energy Board Act, 1998 is unconditioned by directed criteria and is broad; the Board is expressly allowed to adopt any method it considers appropriate.^[33]

The ruling in the Enbridge case decided that the Ontario Energy Board, in fixing just and reasonable rates, can consider matters of ‘broad public policy’:

the expertise of the tribunal in regulatory matters is unquestioned. This is a highly specialized and technical area of expertise. It is also recognized that the legislation involves economic regulation of energy resources, including setting prices for energy which are fair to the distributors and the suppliers, while at the same time are a reasonable cost for the consumer to pay. This will frequently engage the balancing of competing interests, as well as consideration of broad public policy.^[34]

The arbitrator’s jurisdiction

Arbitrators take their jurisdiction from the agreement between the parties. Absent some legislation, there is no inherent jurisdiction in the tribunal.

Depending on the scope of the arbitration agreement, the arbitrator is able to decide matters of tort, contract or equity, and has any commercial remedy available at law and equity or available to a court, including the power to declare any provision of contract unconstitutional.

Under generally accepted principles, arbitrators have the power to rule on their own jurisdiction. This is sometimes referred to as a gateway issue or the competence-competence principle. A tribunal has the jurisdiction to determine its own jurisdiction.^[35] This is acknowledged by the statute governing most arbitrations as well as the arbitration rules used by a number of institutions. In the Ontario Arbitration Act, it is provided in Section 17; in the Alberta Arbitration Act, it is provided in Section 17.^[36]

Not everything is subject to arbitration. Matters where there is a substantial public interest component may be excluded. The strongest examples would be criminal statutes or possibly fraud. Other areas such as competition law, intellectual property and securities law were originally held to be outside the ambit, but those restrictions have been largely overcome.

This all comes into play not just in deciding arbitrability at the start, but also in enforcing an award at the end. This principle, which flows from the New York Convention, is contained in virtually every domestic statute. The principle is that courts will not enforce arbitration awards where the enforcement is contrary to public policy. The next question is: is public utility law public policy?

Primary jurisdiction

In dealing with arbitrators, FERC has developed the concept of primary jurisdiction and exclusive jurisdiction. Unless the SEC is in a situation where it should exercise primary or exclusive jurisdiction, it will defer to an arbitrator.

This question arose in the SEC’s 2007 decision regarding California Water Resources.^[37] The California Department of Water Resources (California Water) was involved in a contract dispute with Sempra Generation relating to Sempra’s failure to perform under a long-term energy purchase agreement. California Water claimed over US$100 million in false charges.

The matter went to arbitration. Sempra moved to set aside the claim on the ground that it was barred by federal pre-emption principles and the filed-rate doctrine.

The arbitration panel granted the Sempra motion to dismiss, concluding that the SEC had exclusive jurisdiction over the California Water claim. The panel concluded there was a conflict between California’s claim and the tariff approved by the SEC. The panel referred to the filed-rate doctrine that holds that private agreements between utility customers cannot change the terms or conditions of approved tariffs. California Water responded that there was no conflict between its claims and the tariff.

In rendering its decision, the SEC stated first, at paragraph 32:

As an initial matter, we emphasize that in this order we do not make a finding as to the validity of CDWR’s interpretation of the Agreement, i.e., that Sempra may not knowingly schedule energy deliveries to CDWR at congested points. Both parties have agreed to binding arbitration to resolve their dispute regarding the Agreement and we believe this is appropriate. CDWR states that it does not, by the instant petition, seek to reverse or overturn the Panel’s decision, nor is it the Commission’s intent to purport to do so in this order.

The Commission further stated, at paragraphs 38 and 40:

CDWR argues that the Commission asserts exclusive jurisdiction notwithstanding a binding arbitration in only two situations: (1) to ensure the rates are just and reasonable; and (2) to ensure the rates are not unduly discriminatory. It argues that the dispute is over Sempra’s compliance with the terms of the Agreement. And that it is not seeking to change the Agreement or change the rate under the Agreement and that it is not attacking any CAISO Tariff provisions. Thus, it argues, no exclusive Commission jurisdiction pre-empts the contract interpretation from proceeding in a non-Commission forum, i.e., the agreed-upon arbitration proceeding.

Having made the declaration above that the CDWR’s interpretation of the Agreement is not in conflict with the CAISO Tariff or Amendment No. 50, we now address the jurisdictional question posed by CDWR’s petition. The Commission’s exclusive jurisdiction covers matters that are clearly and solely within the Commission’s statutory grant of authority. The parties’ contractual dispute is not about the proper rate for service by Sempra to CDWR. Rather, it is about what, if any, adjustment is contemplated by the parties under the agreement regarding CDWR’s obligation for deliveries under the alleged circumstances. Such relief does not implicate the setting of a new, just, and reasonable rate under the Agreement or the CAISO Tariff. Thus, the parties’ contractual dispute does not fall within the Commission’s exclusive jurisdiction.

The Commission stated that it would not exercise primary jurisdiction over the dispute between California Water and Sempra Generation. Sempra argued that even if the SEC were to find exclusive jurisdiction, it should exercise primary jurisdiction because California Water raised issues involving the SEC’s expertise relating to congestion management. The SEC disagreed, stating at paragraphs 44 and 45:

The dispute between CDWR and Sempra presents a question of contract interpretation, which we determined above is not within the Commission’s exclusive jurisdiction. The decision whether to exercise the Commission’s concurrent jurisdiction is within the Commission’s discretion. As the Commission has discussed in prior orders, in deciding whether or not to entertain such a case, the commission usually considers the following three factors: (a) whether the commission possesses some special expertise that makes the case particularly appropriate for Commission decision; (b) whether there is a need for uniformity of interpretation of the type of question raised by the dispute; and (c) whether the case is important in relation to the regulatory responsibilities of the Commission. As discussed below, based on these three factors, we would not expect to assert primary jurisdiction over such a dispute.

The facts in dispute are unique to parties. The resolution of this dispute is not important to the regulatory responsibilities of the Commission. The Commission has not special expertise in interpreting the Agreement or in divining how CDWP and Sempra intends to address dec’d generation. The ascertainment of parties’ intent when they execute a contract is a matter of case-by-case adjudication that does not involve the considerations of uniformity or technical expertise that, in other circumstances, might call for the assertion of this Commission’s jurisdiction. Further, the Commission’s consistent policy has been to encourage arbitration when appropriate.^[38]

This decision is a well-reasoned and clear description of the principles that US regulators consider in determining whether they should take jurisdiction from an arbitration panel or step aside.

It turns out things are not much different in Canada. In Storm Capital,^[39] a decision of the Ontario Superior Court of Justice, two companies had submitted an investment dispute to an arbitration panel. The matter dealt with the calculation of a finder’s fee. The agreement provided that the finder should be registered with the Ontario Securities Commission (OSC).

The arbitrator found that Storm Capital was entitled to compensation. The opposing party brought an application to set aside the arbitration award, claiming that the arbitrator made unreasonable errors of law and had decided matters beyond the scope of the arbitration agreement. The contract required that Storm Capital representative should be registered under the Ontario Securities Act. The arbitrator decided that issue. The applicant claimed the arbitrator lacked jurisdiction to rule on that issue because it was a matter of securities law under exclusive jurisdiction of the OSC.

The Court stated in its ruling:

A privately appointed arbitrator has no inherent jurisdiction. His or her jurisdiction comes only from the parties’ agreement. ‘The parties to an arbitration agreement have virtually unfettered autonomy in identifying the disputes that may be the subject of the arbitration proceeding.’ An arbitrator has the authority to decide not just the disputes that the parties submit to it, but also those matters that are closely or intrinsically related to the disputes.

Public policy in Ontario favours respect for the parties’ decision to arbitrate. The Arbitration Act, 1991 is ‘designed . . . to encourage parties to resort to arbitration as a method of resolving their disputes in commercial and other matters, and to require them to hold to that course once they have agreed to do so’. As a result, the Act restricts the power of a court to interfere with the arbitration process or result.^[40]

The Court further stated at paragraph 61 that if the legislature wishes to preclude an issue from being subject to arbitration, it must expressly state this intention. It is not enough that the subject matter on which the arbitration is sought is subject to regulation or concerns the public order. The Court relied on the decision of the Supreme Court of Canada in Desputeaux^[41] for the principle that courts must be careful not to broadly construe areas as exempt from arbitration simply because they concern public order, as this would undermine the legislative policy of encouraging arbitration. The Ontario Court further noted that no provision in the Ontario Securities Act or any other statute was referred to that expressly precludes arbitration on matters of securities law.

The Court in Storm Capital also refused to follow the Ontario Divisional Court’s decision in Manning^[42] that the OSC has exclusive jurisdiction in some matters. That case involved the authority to remove an individual’s exemption under the Securities Act. The Court in Storm Capital distinguished the Manning case because Storm Capital did not involve any exercise of the Commission’s enforcement power. The Storm Capital arbitration involved a private dispute and was not binding on any third party, including the SEC. Accordingly, the Court refused to set aside the arbitration.

The decision is a careful outline of the principles the Canadian courts will follow when there is an apparent conflict between the jurisdiction of an arbitration panel and the jurisdiction of the regulatory commission. The decision does not use the same terminology as the US cases, but it does come close to it in terms of principles. For example, the decision recognises that there are certain areas where the regulator would have primary jurisdiction, such as the case where an individual was subject to disbarment by the SEC.

On the other hand, in cases of purely private contractual matters, the arbitration panel is not infringing a commission’s jurisdiction. Moreover, the Storm Capital decision makes it clear that if a regulator’s jurisdiction is to be preferred to an arbitrator’s jurisdiction, there must be explicit legislative authority for that exclusive jurisdiction. This is an important point.

Deference to regulators

The concept of deference to regulators is well understood. For years, courts in Canada^[43] and the United States^[44] have ruled that antitrust and competition laws should not be enforced in regulated industries where that regulation is being carried out by lawful government authority. In part the rationale was constitutional, but it also reflected the courts’ policy of deferring to expert tribunals. More recently this approach has come under attack by courts in both Canada^[45] and the United States.^[46]

In 2013, the Supreme Court of Canada, in a case involving the British Columbia Securities Commission, highlighted the deference that courts should grant to expert tribunals:

The bottom line here, then, is that the Commission holds the interpretative upper hand: under reasonableness review, we defer to any reasonable interpretation adopted by an administrative decision maker, even if other reasonable interpretations may exist. Because the legislature charged the administrative decision maker rather than the courts with ‘administer[ing] and apply[ing]’ its home statute, it is the decision maker, first and foremost, that has the discretion to resolve a statutory uncertainty by adopting any interpretation that the statutory language can reasonably bear. Judicial deference in such instances is itself a principle of modern statutory interpretation.

Accordingly, the appellant’s burden here is not only to show that her interpretation is reasonable, but also that the Commission’s interpretation is unreasonable. And that she has not done. Here, the Commission, with the benefit of its expertise, chose the interpretation it did. And because that interpretation has not been shown to be an unreasonable one, there is no basis for us to interfere on judicial review – even in the face of a competing reasonable interpretation.^[47]

The following year, the Alberta Court of Appeal made a similar point with respect to the Alberta Securities Commission:

The Commission is an expert tribunal, charged with the administration of the Act. The standard of review of its decisions is presumptively reasonableness, particularly where the question relates to the interpretation of its enabling (or ‘home’) statute. Its findings of fact, findings of mixed fact and law, and credibility findings are also entitled to deference, and will not be overruled on appeal unless they demonstrate palpable and overriding error.^[48]

The principle that antitrust authorities in North America will defer to regulators is a long-standing one, but the most recent decision in Trinko is stark. The US Supreme Court said it doubted whether it had ever recognised the essential facilities doctrine in antitrust law, but in any case it should not be applicable where a regulatory body could mandate and control the terms and conditions of market entrance.

That case involved a public utility, Verizon Communications. While the case concerned deference to a sector-specific regulator, a similar principle may well apply to a sector-specific adjudicator. In North America, all electricity public utilities are subject to a sector-specific regulator. That regulator licenses every generator, transmitter and distributor of electricity. In short, the regulator mandates and controls the terms and conditions of market entrance.

The situation is similar in Europe but more complicated. There, utilities face not only domestic regulation but international regulation under the European Union. To complicate matters, there are also sector-specific treaties such as the Energy Charter Treaty. In the European Union, the issues are usually competition law issues involving mergers and third-party access. There are three major decisions.^[49] Deference is generally granted to the sector-specific regulator.

In the United States, the concept of deference to administrative tribunals and regulators really began with the 1984 decision of the United States Supreme Court in Chevron.^[50] That case established the principle that when courts review actions by regulatory agencies, they must allow those agencies to determine the meaning of ambiguous terms in their governing statutes as long as they are reasonable. For more than 30 years, Chevron has been instrumental in a number of energy cases^[51] in granting deference to the statutory interpretations by energy regulators. This lasted until May 2018, when the Supreme Court issued its decision in Epic Systems Corporation.^[52]

What Epic Systems did was essentially to restrict the deference that the courts grant to regulators to the interpretation of their ‘home’ statute, a concept that has been relied on by Canadian courts. Before Epic Systems, the circuit courts in the United States were split on the interpretation of arbitration agreements that contained provisions that restrict an employee’s right to pursue class or collective actions under Section 7 of the National Labor Relations Act (NLRA). Certain courts held that class actions were permissible while others held that employers could require individual action.

This was resolved in the Epic Systems decision when the Supreme Court upheld the enforceability of arbitration agreements that contain class action or collective waivers. The majority of the court in an opinion authored by Justice Neil Gorsuch held that the right to pursue class or collective relief is not protected activity under Section 7 of the NLRA.

The Chevron deference concept according to Gorsuch J is premised on delegation of interpretive policymaking authority to the agency. Accordingly, the National Labour Relations Board may be entitled to deference in interpreting a statute it administers, such as the NLRA, but could not claim a similar deference with respect to a statute it does not administer, such as the Federal Arbitration Act. Gorsuch J also ruled that, under Chevron, the task of reconciling potentially conflicting statutes was a matter for the courts not the agency.

Courts in the United States and Canada are increasingly showing less deference to energy regulators. In the United States, this was evident in the Chevron decision.^[53] In Canada, it was the recent Supreme Court of Canada decision in Vavilov.

Two decisions of the Supreme Court of Canada in December 2019 have significantly changed the manner in which Canadian courts will review decisions by regulatory agencies.^[54] On the front line are federal and provincial energy regulators. As indicated, it has long been the case that courts have granted considerable deference to regulators when the issues concern interpretation of their home statutes. The Supreme Court of Canada heard Vavilov^[55] and Bell Canada^[56] together when the parties were seeking leave to appeal earlier decisions.

The Court invited the parties to review the standard in Dunsmuir,^[57] which had become the national standard for the judicial review of administrative action since 2008. Prior to Dunsmuir, there were three standards of review: correctness, reasonableness and patent unreasonableness. The Dunsmuir court reduced this to two standards: reasonableness and correctness.

Reasonableness was a deferential review where the court granted deference to specialist tribunals. Correctness was different; there would be no deference.^[58] From the outset the reviewing court would ask whether the decision was right, given the facts and the law. In short it would state (and substitute if necessary) its own view on the matter. The Dunsmuir court identified the circumstances in which correctness should apply, namely constitutional questions, questions of true jurisdiction, questions of law of general application to the legal system, and questions regarding jurisdiction between competing regulatory agencies.

Vavilov concerned a revocation of Canadian citizenship that turned on an interpretation of the Citizenship Act.^[59] Bell Canada (also known as the Super Bowl case) involved the decision by the Canadian Radio-Television Communications Commission, the national telecommunications regulator, to exempt the broadcast of the Super Bowl game from an order requiring the simultaneous substitution of American commercials from the Canadian feed of the American broadcast.^[60]

The court’s decision in Bell Canada dealt strictly with those cases that came to the courts by way of statutory appeal as opposed to a common law or statutory application for judicial review. That is not unusual in energy regulation. Energy regulation in Alberta, Ontario and Nova Scotia provides that right,^[61] as does federal regulation.^[62] In some cases leave is required and in some cases it is not.^[63] Both Vavilov and Bell Canada stated clearly that instead of the deference standard of reasonableness, the non-deference of correctness would apply going forward.^[64]

The underlying principle established in Vavilov and Bell Canada was that in the case of a statutory appeal, the court should use the same test as it would in the case of an appeal from a lower court.^[65] Put differently, unless the legislature had specified an exception, the courts hearing such appeals were to apply the Houston^[66] principles. The Houston rules are simple enough; there are two principles. When the appeal from a lower court is based on a question of law, the test is correctness. That includes matters of statutory interpretation or the jurisdiction or authority of the regulatory agency. If it is a question of fact, the appellate standard of review for those questions is palpable and overriding error. There is no question that in the 12 years since the Dunsmuir decision, courts have shown increasingly more deference to regulatory agencies. That movement has now stopped.

The standard is now to be correctness on pure questions of law.^[67] On questions of fact and law, the standard of review would be that of palpable and overriding error.^[68] This was a big change. Prior to those decisions, energy regulators on pure questions of law enjoyed a strong presumption of reasonableness review when interpreting their home statute.

Outside this narrow circumstance, the court reaffirmed that in most cases the standard of review was reasonableness, subject to well-known exceptions such as where the legislature had indicated a different standard, constitutional questions, questions of law important to the legal system, and jurisdictional disputes between regulatory agencies.

While these decisions created a general presumption of reasonableness review for most decisions, where the issue is one of law, mixed law or fact, the decisions became a textbook of the decision-making principles that justified this strong commitment to deference. The court re-emphasised the necessity of providing reasons but cautioned that the burden of establishing unreasonableness rests with the challenger.^[69] The Dunsmuir principles were reinforced. Not only were reasons important, they required justification, transparency and intelligibility. Decisions must be justified, not just justifiable.

The court went on to identify two fundamental flaws that are to be avoided. A decision must have internally coherent reasons and will not be considered reasonable of the decision reached does not follow from the analysis undertaken.^[70] The second fundamental flaw relates to the requirement that the decision must be justified in light of the legal and factual constraints that bear on it. Finally, decisions must avoid persistently discordant or contradictory legal interpretations and departures from long-standing practices or established internal authority without satisfactory explanations for the departure. Without a credible explanation of its failure to follow precedence, a decision will be considered unreasonable. Canadian energy regulators have long believed that they were not bound by precedent or stare decisis. That remains the case, but this decision is the first decision by the Supreme Court of Canada that raises a red flag on that point.

In summary, to a degree these important decisions reinforce and preserve the deferential review in the case of statutory interpretation, which come to the courts by way of judicial review as opposed to a statutory appeal. Where this will all end up is hard to say. In 2020, both the Manitoba and Ontario courts have applied Vavivlov to limit the jurisdiction of their energy regulators.^[71]

Deference to legislators

Deference is an important concept. In Canada and the United States, courts routinely grant deference to both arbitrators^[72] and regulators.^[73] In investor-state arbitrations, arbitrators grant deference to governments, particularly when those governments are carrying out a regulatory function where the public interest is the dominant test.

In Mesa Power,^[74] the tribunal pointed to the deference that NAFTA Chapter 11 tribunals usually grant to governments when it comes to assessing how governments regulate and manage their affairs. The tribunal stated:

In reviewing this alleged breach, the Tribunal must bear in mind the deference which NAFTA Chapter 11 tribunals owe a state when it comes to assessing how to regulate and manage its affairs. This deference notably applies to the decision to enter into investment agreements. As noted by the S.D. Myers tribunal, ‘[w]hen interpreting and applying the “minimum standard”, a Chapter Eleven tribunal does not have an open-ended mandate to second-guess government decision-making.’ The tribunal in Bilcon, a case which the Claimant has cited with approval, also held that ‘[t]he imprudent exercise of discretion or even outright mistakes do not, as a rule, lead to a breach of the international minimum standard.’

In addition to the references in SD Myers and Bilcon pointed out by the Mesa Power tribunal, we can add the tribunal’s comments in Thunderbird that the state ‘has a wide discretion with respect to how it carries out such policies by regulation and administrative conduct’.^[75]

There are two subcategories of the deference principle when it comes to inter­national arbitration. First, tribunals have taken the position that they should defer to scientific findings that states make on a non-discriminatory and non-arbitrary basis in accordance with due process. The conflict between the rights of investors and states often arises in the context of environmental issues. A number of those cases have been referred to in this chapter. Environmental cases invariably turn on scientific evidence.

In Chemtura, the tribunal noted that it is ‘not within the scope of its task to second-guess the correctness of the science-based decision-making of highly specialised national regulatory agencies’.^[76] This is identical to the principle that US and Canadian courts apply when they defer to government regulators.^[77]

The second subcategory of the deference principle is a long-standing international law principle called ‘police powers’. The principle is that certain state action is beyond compensation for expropriation under international law because states enjoy wide latitude to regulate within the realm of their police powers.

Police powers are often defined to include municipal planning, safety, health and environ­mental issues, as well as areas involving serious fines and penalties. In Chemtura, the tribunal held that Canada’s regulations phasing out the use of lindane constituted a valid exercise of Canada’s police powers and did not constitute expropriation.^[78] In summary, the deference principle routinely used by NAFTA arbitrators is not unique. It parallels the deference courts use in deferring to regulators. Deference is particularly appropriate where the regulatory agency is a specialist one with particular expertise in dealing with complex evidence of a scientific nature.

The right to regulate

Much of the analysis in international arbitrations centres on the rights of the investor, the definitions of legitimate expectations and indirect expropriation. But what about the state’s right to regulate? The state must have a right to regulate; it certainly has responsibilities to regulate. The difference is that the scope of this right is greater in the case of domestic investors than for foreign investors protected by investment treaties.

One thing is clear: states cannot discriminate against foreign investors. They must be treated the same as domestic investors. That means the law must be general in application and there must be a level playing field. Once legislation targets specific parties, there is a problem. That problem exists even in the case of domestic investors. It is also widely recognised that the new regulations and legislation cannot be arbitrary or developed without due process. That principle applies to domestic investors as well.

There is nothing wrong with states giving additional protections to foreign investors as compared to domestic investors. That goes to the heart of investor-state treaties. The purpose of the treaty is to attract investment.

It is generally recognised that states enjoy police powers to provide essential services necessary to protect the public interest. These would include matters relating to security, the environment and public health. Few would object to states exercising this jurisdiction provided the states act in good faith, and do not discriminate or expropriate private property without fair compensation. The NAFTA decisions in Methanex^[79] and Chemtura^[80] seem to support this proposition. In Chemtura, a US manufacturer of lindane, an agricultural insecticide moderately hazardous to human health and the environment, claimed a breach of NAFTA by Canada’s prohibition of its sale. The tribunal rejected the claim, stating:

Irrespective of the existence of a contractual deprivation, the Tribunal considers in any event that the measures challenged by the Claimant constituted a valid exercise of the Respondent’s police powers. As discussed in detail in connection with Article 1105 of NAFTA, the PMRA [Pest Management Regulatory Agency] took measures within its mandate, in a non-discriminatory manner, motivated by the increasing awareness of the dangers presented by lindane for human health and the environment. A measure adopted under such circumstances is a valid exercise of the State’s police powers and, as a result, does not constitute an expropriation.^[81]

A state runs into problems under NAFTA when a specific promise is made to a specific investor, the investor relies on the promised undertakings as a condition of making the investment, and then the state rescinds the promise. However, to qualify for this rule, the promise must usually be made to a specific investor. Legislation is always changing. Very few pieces of legislation have sunset clauses that declare when they end, and no legislation or set of regulations lasts forever. Laws necessarily change with changing circumstances. These concepts are not unique to NAFTA. Set out below are a number of decisions under different treaties that set out these same principles.

In Continental Casualty,^[82] the tribunal stated:

It would be unconscionable for a country to promise not to change its legislation as time and needs change, or even more to tie its hands by such a kind of stipulation in case of crisis of any type or origin arose. Such an implication as to stability in the BIT’s Preamble would be contrary to an effective interpretation of the Treaty; reliance on such an implication by a foreign investor would be misplaced and, indeed, unreasonable.

Similarly in EDF v. Romania,^[83] the tribunal held:

The idea that legitimate expectations, and therefore FET [fair and equitable treatment], imply the stability of the legal and business framework, may not be correct if stated in an overly broad and unqualified formulation. The FET might mean the virtual freezing of the legal regulation of economic activities, in contrast with the State’s normal regulatory power and the evolutionary character of economic life. Except where specific promises or representation are made by the State to the investor, the latter may not rely on a bilateral investment treaty as a kind of insurance policy against the risk of any changes in the host State’s legal and economic framework. Such expectation would be neither legitimate nor reasonable.

In Total v. Argentina,^[84] the tribunal stated:

In the absence of some ‘promise’ by the host State or a specific provision in the bilateral investment treaty itself, the legal regime in force in the host country at the time of making the investment is not automatically subject to a ‘guarantee’ of stability merely because the host country entered into a bilateral investment treaty with the country of the foreign investor.

And in El Paso v. Argentina,^[85] the tribunal reminded us:

Under a FET clause, a foreign investor can expect that the rules will not be changed without justification of an economic, social or other nature. Conversely, it is unthinkable that a State could make a general commitment to all foreign investors never to change its legislation whatever the circumstances and it would be unreasonable for an investor to rely on such a freeze.

The problem is that, ultimately, these things may come down to what is fair or reasonable. There is no clear distinction but arbitrators will look for red flags; for example, giving under­takings that investors rely on and later rescinding them, obvious breaches of due process or situations where states claim that the new regulatory policies are for one purpose, such as the need for more scientific research, when that is not the real purpose. That situation has emerged in the renewable energy cases discussed in the concluding section of this chapter.

The decisions

The conflict between the financial interests of foreign investors and government energy policy has become very evident in Spain and Canada. Spain has faced almost 50 arbitrations claiming damages resulting from the Spanish government’s decision to reduce the incentives it originally created to promote investment in wind and solar energy generation.^[86]

In Canada, the conflicts related to a wider range of energy policy initiatives by provincial governments and their energy regulators.

In Mobil Investments,^[87] two American companies questioned a decision of the Newfoundland and Labrador Offshore Petroleum Board. Mobil first went to the Canadian courts.^[88] When that failed, they brought a NAFTA claim, which succeeded, and received a C$132 million award. It turned out that Canada decided to continue to enforce the research and development expenditures after the decision had been issued. Mobile came back for a second bite at the apple, seeking damages for a later period, which also proved to be successful when the parties entered into a consent award of C$35 million.

In Mesa Power,^[89] a well-known American investor, T Boone Pickens, claimed that the Ontario Power Authority had discriminated against his company in awarding 20-year power purchase agreements for wind energy.

In Windstream Energy,^[90] American investors challenged the Ontario government’s decision to cancel all offshore wind projects. That resulted in a NAFTA award of C$26 million. In Mercer International,^[91] a US company filed a C$250 million NAFTA claim against Canada based on the decision by the British Columbia Utilities Commission to change the electricity rates charged to industrial customers operating sawmills. The investors went to the Commission first. When that failed,^[92] they went to NAFTA where they were again unsuccessful.

In Lone Pine Resources,^[93] a US-based exploration company launched a claim against the province of Quebec’s decision to suspend fracking under the St Lawrence River. That case is still before the tribunal.

Another case still before a tribunal is Westmoreland Mining.^[94 A US company brought a C$470 million claim related to the Alberta government’s decision to eliminate the generation of electricity by coal. The Alberta government had already enacted legislation to end all electricity generation using coal by 2030. The Alberta government agreed to pay three companies generating electricity in that fashion C$97 million a year for 14 years, bringing the total compensation to C$1.36 billion. All of the generators also owned a coal mine next to their generation station. Westmoreland owned a coal mine supplying the electricity generators but did not operate a generation facility. Westmoreland received no payment under the programme. The Alberta government’s rationale was that none of the payments to the three generators related to the value of their coal mines.

The most recent energy arbitration against Canada under NAFTA is Tennant Energy.^[95] This is a follow-on case to Mesa Power and relies on much of the evidence in that case. Tennant Energy, based in Napa, California, filed a claim in June 2017 against Canada for C$116 million relating to a breach of Article 1105 of NAFTA. As in Mesa Power, the claim related to the actions of the Province of Ontario in awarding feed-in tariff contracts under the Green Energy Act.^[[96]] Tennant argued that the government failed to release information that would put all parties on a level playing field and manipulated access to the electricity transmission grid. The damages sought had a unique twist. Of the C$116 million claimed, C$35 million related to ‘moral damages’ resulting from unconscionable conduct, including the destruction of documents. This case is also still before a tribunal.

Parallel proceedings

The FERC decision in California Water makes it clear that regulators will defer to arbitrators unless the matter falls within the FERC’s exclusive jurisdiction. In the Alberta Utilities Commission decision in Central Alberta Rural Electrification discussed in the next section, the Commission exercised jurisdiction, notwithstanding the fact that an arbitration decision had been issued. However, there the Commission concluded that the arbitrator had not addressed the impact of the legislation but only the terms of the contract.

In the previous section, we outlined the jurisdiction of both arbitrators and regulators. Both have substantial jurisdiction and considerable flexibility. There are cases that proceed at the same time before arbitrators and regulators, with both dealing with substantially the same issues.

In some cases, one proceeding will commence first and the second panel will have to consider res judicata and sometimes deal with anti-suit or anti-arbitration injunctions.

As indicated earlier, courts have over the years developed a body of law that clearly establishes as a matter of public policy that they will defer to arbitrators wherever that is possible. And to a slightly lesser degree, courts have developed a policy during the past 10 years of deferring to regulators with expertise in technical matters.

The two decisions examined below indicate that regulators have also developed a policy of deferring to arbitrators wherever possible.

Different procedures

The potential for parallel proceedings will be influenced by the differences in the procedures used by arbitrators compared to regulators. In many respects, the two tribunals operate in a similar fashion. Neither tribunal is bound by the rules of evidence. The main difference is that the regulatory tribunal receives its jurisdiction from legislation while the arbitral tribunal receives its jurisdiction from a contract.

The remedies both tribunals can offer are similar; the main difference is that an arbitral tribunal cannot award fines. Another major difference is the ability of third parties to intervene. In arbitrations, these are primarily amicus briefs, which we have seen in a number of NAFTA tribunals.^[97] These are largely limited to written submissions. Receipt of oral submissions and access to documents is not permitted. In regulatory hearings, the situation is very different. Third parties can successfully intervene if they can establish they are directly affected.^[98] In rare cases, the scope of intervention may be limited,^[99] but generally all parties are treated the same.

A related difference is the scope of disclosure. It is very wide in the case of regulatory hearings and limited in the case of arbitrations. Also, arbitrations are by their nature private and confidential. On the other hand, regulatory hearings are public and usually initiated by public notices in newspapers.^[100] A regulator also has the ability to consolidate different proceedings, something that is not available to arbitrators.

All these factors may create an incentive for parties in arbitrations to move their dispute to the regulator if they do not get the result they like in the arbitration. That leads to the question in the next section, as to whether regulators are bound by res judicata.

Res judicata

It is now accepted that arbitration awards have res judicata effect. The same is true of regulatory decisions.^[101] In the United States, arbitral awards have res judicata effect, including collateral estoppel.^[102] The binding effect of arbitral awards is provided for in a number of institutional rules, including Article 28(6) of the International Chamber of Commerce Rules, Article 26.9 of the London Court of International Arbitration Rules and Article 32(2) of the UNCITRAL Rules, as well as Article III of the New York Convention.

An arbitrator who renders an award in violation of res judicata may run the risk of the award being set aside because the arbitrator exceeded the mandate, having become functus officio upon rendering the first award, or because the reasons contradict those of the first award.

This possibility was considered in the 2012 decision of the Alberta Utilities Commission in Central Alberta Rural Electrification,^[103] in which two parties claimed the right to serve electricity customers in the same geographical territory. The two parties had a contract that contained an arbitration clause and began an arbitration pursuant to that agreement. The arbitration was heard and the tribunal released its decision, finding in favour of one of the parties. The losing party then brought a court application for leave to appeal the arbitration award.

The other party commenced an application before the Utilities Commission, asking it to rule on the matter. By the time the Commission came to release its decision, the court had heard the motion for leave to appeal but had not released any decision.

In the circumstances, the Alberta Commission considered whether res judicata or issue estoppel prevented it from releasing its decision.

The Commission noted that the Supreme Court of Canada in Danyluk^[104] held that res judicata may apply to administrative matters. The Commission went on to analyse the preconditions to the operation of issue estoppel, namely that the same issue is to be decided; that the decision that created estoppel was final; and that the parties in the two proceedings are the same parties. The Commission noted that the decision of whether to apply issue estoppel is always a matter of discretion, citing the Supreme Court in Danyluk:

The rules governing issue estoppel should not be mechanically applied. The underlying purpose is to balance the public interest in the finality of litigation with the public interest in ensuring that justice is done on the facts of a particular case. (There are corresponding private interests.) The first step is to determine whether the moving party (in this case the respondent) has established the preconditions to the operation of issue estoppel set out by Dickson J. in Angle. . . . If successful, the court must still determine whether, as a matter of discretion, issue estoppel ought to be applied.^[105]

The Alberta Commission concluded that the first two preconditions had not been satisfied. It was clear that the arbitrators, in determining the matter, did not focus on legislative scheme. Rather, the Commission concluded that the arbitrators had focused entirely on the interpretation of the agreement. Accordingly, the Commission ruled that the issue before it had not been determined by the arbitrators and that res judicata did not apply.

Res judicata in arbitrations was addressed by the Alberta courts in both Transa Generation Partnership v. Capital Power^[106] and Enmax Energy Corporation v. Transalta.^[107]

In Transalta, the Chief Justice of Alberta faced a situation where two parties, Transalta and Capital Power, had participated in an arbitration under a power purchase agreement. Under that agreement Transalta purchased power from Capital Power under a 20-year agreement during which the generator was entitled to recover its operating and capital costs.

To allow for inflation, certain government statistical indices were used to update the values for the purpose of calculating the payment amounts. That arbitration involved a dispute regarding the application of the indices and the arbitration panel made a specific ruling.

A few years later, the same parties faced another dispute under the same agreement. However, the second dispute related to a different price index. Trans Alta took the position that the earlier 2011 award was binding on the parties because of the doctrine of res judicata and issue estoppel, and accordingly Capital Power was barred from taking positions that were inconsistent with the determinations made in the prior arbitration.

The Chief Justice made three rulings:

• as a matter of law, res judicata and issue estoppel apply to arbitration awards between the same parties under the same power purchase agreement;
• both Transalta and Capital Power are estopped or barred by res judicata from taking positions in the current arbitration that are inconsistent with the determinations made in the previous arbitration; and
• the 2011 award is binding on the parties in the current arbitration to the extent that the requisite elements of res judicata and issue estoppel are found to exist by the arbitral panel.

The court also ruled that having found that, the doctrine of res judicata applied to arbitrations, the question of whether res judicata existed in the facts of the second arbitration should be determined by the arbitration panel appointed in that hearing. As it happened, the parties agreed to the same three arbitrators that had heard the first arbitration. Those arbitrators in the second arbitration agreed that res judicata applied but found that the facts in the second arbitration were different and accordingly res judicata did not apply in the second arbitration.

The application of the res judicata doctrine in a NAFTA case was decided for the first time in Apotex Holdings.^[108] Apotex Holdings was a Canadian company that produced generic drugs in Canada while Apotex Inc was a Delaware company that distributed drugs in the United States produced by Apotex Holdings.

For the purpose of selling drugs in the United States, Apotex obtained ‘quasi-import licences’ called abbreviated new drug applications (ANDAs), which were approved by the Food and Drug Administration (FDA) in the United States. There were two versions, however: tentatively approved ANDAs and finally approved ANDAs. The first version had been considered in an earlier Apotex arbitration. There the tribunal ruled that the tentatively approved ANDAs were not investments for the purpose of NAFTA, and Apotex therefore did not have a valid NAFTA claim.

The FDA had issued import alerts relating to concerns about the quality of drugs produced at two Apotex manufacturing plants in Canada. As a result, there were no sales of Apotex drugs in the United States for two years.

Apotex filed a claim under NAFTA, alleging that the import alerts issued by the FDA infringed certain protections guaranteed to Apotex under NAFTA by way of the most-favoured nation provisions of Article 1103.

The United States objected to the application on the ground that Apotex’s finally approved ANDAs were not within the definition of investment as set out in Article 1139 of NAFTA. This position was based on a previous arbitration decision in which the tribunal found that tentatively approved ANDAs were not investments for the purpose of NAFTA Chapter 11 claims.

The tribunal found that the doctrine of res judicata did applym referring to Grynberg v. Grenada^[109] and other authorities. However, arbitrator J William Rowley, appointed by the claimants, dissented on the basis that there is a difference between the two arbitrations. Although the parties were the same, the first Apotex award did not decide, and did not need to decide, whether Apotex’s finally approved ANDAs were to be characterised as property for the purpose of Article 1139 of NAFTA.

Arbitrator Rowley concluded that a finally approved ANDA could properly be characterised as an investment and was different from a tentatively approved ANDA. A more recent Rowley decision in Mobile Oil^[110] held that res judicata did not prevent a claimant from bringing a second application for further damages.

Disallowance

Energy regulators have additional tools. A regulator is not bound by an arbitration decision and will often apply a different test – a public interest test. For example, in determining costs, a regulator will consider the effect on ratepayers. An arbitration, on the other hand, would probably only consider the effect on the parties.

The best examples of this principle are two decisions – one from Ontario^[111] and one from Alberta^[112] – in which the regulator refused to accept the decision of an independent arbitrator as a cost for rate-making purposes.

In Power Workers, the Ontario Energy Board denied Ontario Power Generation (OPG) recovery of C$145 million of labour costs. Those costs were driven by a collective agreement the utility had entered into with the union two years earlier. In reaching that agreement, the parties had involved an independent arbitrator.

The union and the utility argued that the Ontario Energy Board was required to presume the compensation costs were prudent. The Board disagreed and found it could rely on benchmarking studies comparing the OPG labour costs with the costs at other utilities. The benchmarking studies had been ordered by the Board in an earlier rate case. As a result of this analysis, the Board disallowed C$145 million of labour costs.

The Ontario Energy Board recognised the constraints on OPG but nonetheless held that ratepayers were only required to bear reasonable costs. An appeal to the Ontario Divisional Court upheld the C$145 million reduction, stating that the Board must have the freedom to reconsider current compensation arrangements to protect the public interest. That decision was overturned by the Ontario Court of Appeal, which held that the costs were committed costs fixed by collective agreements and that the Board had violated a fundamental principle of the prudence test, namely whether an investment or expenditure decision is prudent must be based on the facts available at the time. The Board cannot use hindsight.

The ATCO case in Alberta is similar to the Power Workers case. In the former, ATCO had asked the Utilities Commission to approve a special charge to ratepayers that would cover an unfunded pension liability of C$157 million. Those costs included a cost-of-living allowance that was set in advance each year by an independent administrator. The allowance was set at 100 percent of the consumer price index. As in Power Workers, ATCO argued that this was a committed cost set by an independent authority and, therefore, was a prudent expenditure by the utility. The Alberta Commission disagreed and reduced the cost-of-living allowance to 50 per cent of the consumer price index (CPI).

In disallowing part of the expense, the Commission relied on evidence that an escalator equal to 100 per cent of the CPI was high by industry standards. ATCO appealed to the Alberta Court of Appeal, which upheld the Commission’s decision.

The ATCO decision and the Power Workers decision were both appealed to the Supreme Court of Canada. They were heard jointly in 2015 and the Court upheld the regulator.

There is one ground of non-enforcement that is important in this area: there is a body of public utility law that governs much of what regulated utilities do. It can be argued that arbitrators should apply that law. If arbitrators do not apply that law, is it ‘manifest disregard’ for the law? That is a concept more common in the United States than in Canada.

The 2008 decision of the US Supreme Court in Hall Street Associates^[113] suggests that the doctrine of manifest disregard is no longer relevant, even in the United States. The question of whether courts will review an arbitrator’s award because the arbitrator failed to analyse the proper law has risen in competition law cases. At one time, courts were prepared to engage in the exercise; however, other cases, such as Baxter International^[114] and Union Pacific Resources,^[115] suggest that is unlikely unless there is an obvious error or an arbitrary or capricious decision. In Canada, the decision of the Supreme Court of Canada in Sattva Capital^[116] drastically limits the appeals of arbitral awards in general.

However, the concern remains. There may be a special category of cases, such as arbitrations involving regulated utilities that require special attention by courts. The general rule may not apply in all cases.

The situation is not unlike that which faced the Federal Power Commission in Gulf States,^[117] which involved a utility financing. The intervenors claimed that the financing would have an anticompetitive effect and the Commission should apply the antitrust laws. The Commission refused, saying that those laws were irrelevant.

The US Supreme Court reversed, stating that the Federal Power Commission could not deem those laws irrelevant because the Commission had broad authority to consider anticompetitive conduct if that touched on the public interest. That case concerned a regulator, but there is no reason why the same principle would not apply to an arbitrator faced with a similar situation.

Similarly, the European Court of Justice in Eco Swiss^[118] ruled that a national court must grant an application for annulment if it finds that an award is contrary to European competition law. This case is interpreted as meaning that arbitral tribunal is obliged to apply competition law, and that non-application can be regarded as a breach of public policy and grounds for non-enforcement. A similar approach was followed by the English courts in ET Plus SA v. Welter.^[119] Arbitrations involving regulated public utilities arguably fall into this category. Even if the courts will not intervene, the regulators may.

New developments

There has always been a battle between courts and arbitrators. This exists around the world. In Canada, there have been 20 applications to courts since 2016 asking for a stay in favour of international commercial arbitration. In each of these cases, the litigation process was stayed in favour of the arbitration process in compliance with Article 8 of the UNCITRAL Model Law. There has been a similar battle between energy regulators, energy arbitrators, and the courts

There is general agreement that jurisdictional disputes between different decision makers is both costly and confusing. The good news is that steps are being taken to reduce the problem. The steps come in two forms.

First, energy regulators are creatures of statute and legislatures can change those statutes. In the past 10 years, there has been a growing movement to grant energy regulators exclusive jurisdiction by statute. The strength of this movement varies by jurisdiction. In Canada, this movement has been fairly strong. In Ontario, almost half of the energy regulators now have exclusive jurisdiction through their home statute. Most of the case law relates to the Ontario Energy Board (OEB), and is set out below.

Exhaustion of local remedies

There has been similar movement on the arbitration side. There is no general rule comparable to Article 8 of UNCITRAL. There has, however, been movement on the part of new arbitration treaties.

NAFTA, which is now being retired after 24 years, has long required claimants to waive the right to bring the arbitration claim before an alternative legal forum. NAFTA’s replacement, the USMCA, has a more aggressive carve-out. Claimants must exhaust their remedies in the local court system before bringing the arbitration claim (Article 5 Appendix 14-D). Claimants can only submit a claim for arbitration after obtaining a final decision from a court of last resort in the respondent’s country or three months after initiating local proceedings (Paragraph 51B, Annex 14D) .

It remains the case that there are very few BITS or treaties with investment provisions that require the exhaustion of local remedies, but they are growing. In addition to the newly enacted USMCA provisions, there is the 1976 Germany–Israel BIT, the 1981 Romania–Sri Lanka BIT and the 2007 Albania–Lithuania BIT.

One of the first cases to deal with the waiver issue under NAFTA was the Detroit International Bridge case in 2010.^[120 There, the complainant, the Detroit International Bridge Company (DIBC), enjoyed a monopoly of sorts in the bridge traffic crossing the Detroit River between Detroit and Windsor.

The DIBC objected to the Canadian government’s plan to build a second bridge across the river in competition with the DIBC and filed a NAFTA claim for US$3.5 billion.

In April 2015, the NAFTA tribunal issued an order on jurisdiction dismissing the DIBC’s claim against Canada. The majority determined that the ongoing lawsuit by the DIBC in the US District Court for the District of Columbia, regarding the same matter as that alleged in the NAFTA claim, meant that the DIBC had failed to comply with the waiver requirement in Article 1121 of NAFTA, depriving the tribunal of jurisdiction over the entire dispute. The tribunal dismissed the claim and ordered the DIBC to pay Canada US$2 million in costs.

Exclusive jurisdiction

In recent years, legislatures in various jurisdictions have amended regulatory statutes to grant energy regulators exclusive jurisdiction with respect to their regulatory activities. The OEB is a leading example but close to half of the 21 energy regulators in Canada now have some form of statutory exclusivity. The Ontario experience is worth examining.

The Ontario Energy Board Act, Section 19 sets out the basic provisions concerning exclusive jurisdiction:

1. The Board has in all matters within its jurisdiction authority to hear and determine all questions of law and of fact.
2. The Board has exclusive jurisdiction in all cases and in respect of all matters in which jurisdiction is conferred on it by this or any other Act.

At Section 112.3, the OEB Act states:

If the Board is satisfied that a person has contravened or is likely to contravene an enforceable provision, the Board may make an order requiring the person to comply with the enforceable provision and to take such action as the Board may specify to,
(a) remedy a contravention that has occurred; or
(b) prevent a contravention or further contravention of the enforceable provision.

In Garland v. Consumers’ Gas Company Ltd,¹²¹ the Ontario Court of Appeal expressly accepted that, given the exclusive nature of the OEB’s jurisdiction as confirmed by Section 19(6) of the Act, ‘there can be no issue of concurrent jurisdiction in the courts and the Board’. This position was confirmed in Snopko v. Union Gas,^[122] where the court held that the OEB maintained exclusive jurisdiction even though there were properly pleaded, common law claims of breach of contract, negligence, unjust enrichment and nuisance that were otherwise within the jurisdiction of the court. As the court noted, ‘if the substance of the claim falls within the ambit of s. 38 the Board has jurisdiction, whatever legal label the claimant chooses to describe it.’

Canadian courts have consistently held that where the subject matter involves a complex regulatory scheme and there is a body created by statute for, amongst other matters, the adjudication of disputes involving the interpretation of the provisions of that scheme, the courts should defer to the administrative body.

In Mahar v. Rogers Cablesystems Ltd, the court outlined three situations where the courts are reluctant to permit jurisdiction to be divided between the regulatory body or tribunal and the courts:

• where there is a regulatory framework with the legislature choosing a specific public body to supervise that regulatory framework;
• when the courts have granted the administrative body at issue a curial deference with respect to their decisions; and
• where Parliament or the legislature has created a statutory regime, which includes both rights and a procedure for their resolution.^123]

Courts have also made orders staying common law proceedings for breach of contract that were otherwise properly before them, pending an application to the OEB by the parties for the determination of a discreet issue raised by those proceedings that required the OEB’s interpretation of an ‘enforceable provision’ of the Ontario Energy Board Act.^[124]

Conclusion

The main question this chapter raises is whether disputes involving a regulated utility should be subject to arbitration and, if so, to what degree? Is there a dividing line?

During at least the past 10 years, courts throughout North America have consistently ruled that they should defer to both regulators and arbitrators. The rationale in both instances was increased efficiency.

Courts recognise that legislatures have established regulators with special expertise to adjudicate on a narrow range of matters. The highest courts in Canada and the United States have consistently stated that, wherever possible, a court should defer to these regulators, not just on matters of fact, but also on the interpretation of their home statute.

At the same time, courts in Canada and the United States have established that, as a matter of public policy, courts should defer to arbitrators wherever possible.

The challenge we face in energy disputes in the choice between energy regulators and arbitrators is that we have two specialised adjudicators, both with a high level of expertise. In the energy world, the rationale for arbitration is different from in the downstream sector.

In international arbitrations, parties are driven to arbitration because they are looking for a neutral court and the ability to enforce an order worldwide; in the downstream market, that is not the case. These are largely domestic cases. Parties are not concerned about the lack of a neutral court or the inability to enforce an award. What they do hope to gain from arbitration is an expertise that they would not get from the court. Most arbitration panels consist of very seasoned energy counsel and former regulators.

We have an interesting dilemma. We have two adjudicators: both have a high level of expertise, but we cannot say that one should defer to the other because of expertise, nor can we really say that one is more efficient than the other.

Arbitration and regulation involve different procedures. Regulation is more lengthy but is tailored to meet the requirements of energy regulation in terms of obtaining a public interest viewpoint from different parties. That is not the case in arbitration. Arbitrations are essentially private disputes using a more streamlined process, with little ability for third parties to intervene.

Nevertheless, everyone recognises that parallel proceedings are not in the public interest – they simply increase delay and produce conflicting decisions.

We have faced this matter before. For years, courts have struggled with the question of whether arbitration should be permitted in competition law, securities law and intellectual property. The competition law issue was resolved by the US Supreme Court in Mitsubishi. Subsequent courts have applied the principle to securities and intellectual property.

These are all specialist areas of law with a substantial public interest component. Initially it was the public interest component that led the courts to take the view that these matters should not be subject to arbitration. That position has been set aside throughout North America.

It would be easy to say that if arbitration is possible in competition law, then why not in energy regulation. However, there is an important difference between the two legislative schemes.

Competition law is a law of general application. It applies to all companies in the market­place, and was designed to eliminate monopoly power, whether that results from mergers, price-fixing or other practices.

Regulated companies are different. They are monopolies, but they are exempt from competition law. Yet there is a trade-off: they become subject to special legislation and a special regulator. Of all the regulated segments in the economy today, energy has the most extensive regulation. It is a very important sector; there are a lot of players and it involves a lot of regulators.

There are very few subject matters that arbitrators are prohibited from dealing with – criminal law might be one. But there are areas where arbitrators should step carefully. In the United States, the federal energy regulator has taken the position that it has exclusive jurisdiction in certain areas and primary jurisdiction in others. There is a related question: where the jurisdiction is not exclusive, is the arbitrator under a special obligation to consider a particular body of law? In this case, it would be public utility law.

This question is more complicated in energy than in competition law. In energy regulation, it is clear that there are certain matters that should not be subject to arbitration.

US courts and regulators talk about the exclusive or primary jurisdiction of energy regulators. In US energy regulation, this relates to the concept of the filed-rate doctrine, which we examined earlier in California Water. The doctrine simply means that if a commission has approved a rate, then the utility cannot create another rate by private agreement. That is, a utility cannot contract out of regulation. In California Water, the SEC stepped aside in favour of the arbitrator, having concluded that the matter before the SEC was a private contract dispute that did not involve an approved tariff. But had there been a tariff, the result would have been different. The matter would have come within the exclusive jurisdiction of the regulator.

Every energy regulator in North America has, as a basic statutory mandate, the responsibility to set just and reasonable rates. These are government agencies carrying out a legislative mandate. Once that is done, private parties in arbitrations cannot set them aside. This principle applies even if a regulated public utility is not one of the parties to the arbitration.

On this question, the Canadian cases reach a slightly different result. In Storm Capital, the Ontario decision considered above, the court stated that the regulator would have exclusive jurisdiction only if the legislation specifically provided for that. The Supreme Court of Canada took this position in Desputeaux, in which the defendant argued that the Copyright Act gave the Court exclusive power to decide copyright issues. The Court rejected that argument on the ground that there were no specific statutory words to that effect. The Alberta Commission in Rural Electrification held that the regulator could decide the matter notwithstanding the existence of an arbitration decision. The rationale was that the issue before the regulator was the interpretation of the regulatory statute. That issue was not before the arbitrator.

This really is just a reformulation of the US primary jurisdiction or exclusive jurisdiction rule. A regulatory statute is different from other statutes because a regulator has been specifically authorised by the legislature to enforce that particular statute. That is also the situation in competition law. But there is a difference: energy regulators have specific jurisdiction over specific companies. In most cases, the regulators license those companies to operate and their continuing operations are subject to the regulators’ oversight. In most cases the regulators will also establish, by franchise agreement, the exclusive territory in which the monopoly can operate. That is not the situation in competition law.

What, then, are the areas that fall under the exclusive jurisdiction of an energy regulator? The short answer might be that it would be those areas for which the regulator has issued a specific order. That would involve the rates or the prices the utility can charge.

The dividing line is never clear and it requires case-by-case analysis. One example is access to essential facilities. This is a basic principle of public utility law and a clear obligation of a regulated utility. But it is also a general principle of competition law. The issue often arises in merger cases in competition proceedings. In fact, in settling those cases by consent orders, the competition authorities have often provided for arbitration in the settlement agreement where there is a dispute as to whether access is being properly granted. The American antitrust authorities did this in the El Paso Energy and DTE Energy merger cases.^[125] The Canadian authorities did it in the Air Canada and the United Grain Growers merger cases.^[126] There is no reason why those disputes would not be within an arbitrator’s jurisdiction.

One area in which arbitrators are likely to be offside concerns disputes with respect to franchise agreements. These are often awarded by municipalities and approved by the regulator. Usually they have a 20-year term, but regulators can and have reduced the term when they felt the utility was not performing in terms of service quality. An arbitrator would have no authority to modify a franchise agreement, given that it is subject to a specific order of the regulator unless the regulator had authorised arbitration as part of the approved agreement.

The second question is whether, if arbitrators exercise jurisdiction, they have an obligation to apply the principles of public utility or regulatory law – and what happens if they do not apply those principles.

The short answer is that if arbitrators are going to deal with disputes involving regulated utilities, they have to apply the law that applies to those utilities. Those utilities have obligations established under legislation and court decisions interpreting that legislation. They are required to meet those standards.

Those standards will affect the manner in which an arbitrator deals with the parties. For example, under public utility law, regulated utilities have a duty to serve and an obligation not to discriminate between customers and competitors. Public utilities also have special rights. In most jurisdictions, regulated public utilities are not subject to the laws of negligence except to the extent of gross negligence.

The gross negligence provision is particularly interesting. Although this was initially a common law rule, most utilities now have it in their governing statute or regulations. In Kristian v. Comcast,^[127] the US Court of Appeals held that the provisions in an arbitration decision that prevent the exercise of statutory rights under federal or state law are invalid.

Earlier in this chapter, we noted that even if courts elect not to review arbitration decisions involving regulated public utilities, the regulators may. If a public utility does not like an arbitration award, the first authority they will run to is not a court but the energy regulator that controls most of its actions. This is particularly the case in two sets of circumstances. First, if the dispute involves the interpretation of a regulatory statute or regulatory principle; and second, if the arbitrators have failed to consider those laws and jurisprudence.

This is what happened in Central Alberta Rural Electrification, in which the arbitration award had been issued. One of the parties went to the regulator, which decided the issue, stating that the regulator was not bound by res judicata because the arbitrator had not considered the regulatory statute, which was the issue before the regulator.

Next, an application was made to the court for leave to appeal the arbitration award. The court refused to grant leave because it recognised that the regulator had intervened and deference should be accorded. It was pretty clear that the Canadian court was deferring to the regulator and had essentially adopted a US primary jurisdiction rule.

There is no reason why the arbitrator could not have dealt with the regulatory legislation. The arbitrator did not and the regulator moved in. The interesting question is whether regulators will insist that they have exclusive jurisdiction.

It is likely that regulators will defer to arbitrators on public policy grounds. However, it will be a more cautious deference than courts grant, particularly if their home statute is at issue. And if it is, and the arbitrators have not considered the legislation or have considered it wrongly, the regulator is likely to exercise primary jurisdiction.

In the end, this simply means that where arbitrators move into areas of public law, particularly regulatory law, and one of the parties before them is a regulated utility, then they should be aware of the special laws that apply to the industry and to publicly regulated utilities in particular. It also means that this type of arbitration is more reviewable than most – if not by the court, then certainly by the regulator. And if a court has to choose between an arbitrator and a regulator in these cases, the regulator will probably get the nod.

There is no clear distinction, but if the subject is an area in which the regulator has a record of exercising jurisdiction and has issued orders directed at the utility in question, a red light should flash.

Notes