You Don’t Have to Agree to RCN-D: Northland Utilities (NWT) Limited v. Town of Hay River and its Implications
Author: Thomas D. Marriott, Q.C., Managing Partner
A recent decision out of the Court of Appeal for the Northwest Territories looks to have significant implications for Alberta municipalities contemplating entering into franchise agreements for utility service, or those seeking to exercise the right to purchase utility assets at the end of a franchise term. The decision is Northland Utilities (NWT) Limited v. Town of Hay River, 2021 NWTCA 1, which was released on January 20, 2021. Brownlee represented the Town in the litigation.
Background and History (AKA Why We Care About a NWT Case)
In both the Northwest Territories and Alberta, a municipality has the right to enter into a franchise agreement with another party for the purpose of providing a utility service. At the end of the franchise agreement, the municipality may choose to renew the agreement, buy out and take over the utility, or enter into a franchise agreement with another party (see sections 45-47 of the Alberta Municipal Government Act (“MGA”), and section 91 of the NWT Cities, Towns and Villages Act (“CTV Act”)). Cases dealing with municipalities’ rights in one jurisdiction can, therefore, be relevant and persuasive for cases in the other jurisdiction.
In this case, the Town of Hay River had reached the end of its franchise term with a utility and chose to exercise its right to buy the utility out and take over the utility system. It relied on section 91(5) of the CTV Act, which allowed it to purchase “any or all of the rights under the franchise and any or all property used in connection with the franchise.” (The Alberta counterpart is section 47(2) of the MGA, which gives the municipality “the right to purchase the rights, systems and works of the public utility”.)
The Town and the utility were not able to agree to the terms of purchase, and so the matter went before an arbitrator (in Alberta, such a dispute would be heard by the Alberta Utilities Commission, as required by section 47(3) of the MGA).
Key Issues
The major battleground between the parties was valuation – how to determine the price of the franchise assets to be purchased by Hay River. In the Northwest Territories, as in Alberta, the legislation does not specify what valuation method must be used, and neither did the franchise agreement in this case. Accordingly, the parties took very different positions as to how valuation should be done:
- The utility wanted the valuation to be based on Replacement Cost New Less Depreciation – commonly referred to as “RCN-D” – which starts with the cost of installing new assets today, based on today’s dollars and today’s standards, and then factors in depreciation to reflect the fact that the assets purchased are not new.
- Hay River wanted to use an approach based on an expert opinion of what a willing buyer would be prepared to pay a willing seller, for the current system, based on the income that could be generated from it.
These two approaches produced starkly different valuations: the Town’s income-based approach would result in a slight premium to the net book value of the assets to be purchased; RCN-D would result in a price approximately three times the net book value. The difference amounted to approximately $24 million.
The arbitrator considered that his overarching goal was to achieve a result that was fair to both parties, and ultimately selected an approach similar to the Town’s preferred approach (applying “modified book value” approach, adding a 30% premium to book value that resulted in a price 1.3 times net book value).
The utility appealed the arbitration award to a single judge in the Northwest Territories Supreme Court (the NWT counterpart to the Alberta Court of Queen’s Bench), but was not successful. It then appealed again to the Court of Appeal for the Northwest Territories, leading to the decision at hand.
Results of Appeal to NWTCA
Fortunately for the Town of Hay River, and for other municipalities, the utility’s appeal was dismissed. The Court of Appeal affirmed that the arbitrator was correct in seeking to choose a valuation method based on what would be fair and equitable to both sides, and noted that the arbitrator’s selection of the modified book value approach was reasonable as a means to achieve a fair result for both parties.
Notably, the utility had argued before the Court of Appeal, as well as at the Supreme Court level, that there was a line of binding Supreme Court of Canada decisions providing that RCN-D was the correct valuation methodology, and that the arbitrator had therefore erred by not using RCN-D. Like the Supreme Court, the Court of Appeal disagreed, stating at paragraph 59 that “this line of regulatory and court decisions relied on by NU do not support the proposition that the required or default method of valuation is the RCN-D method, or that the Arbitrator was obliged to apply the RCN-D method as a question of law.” The decisions relied on by the utility did not mandate the use of RCN-D, but only provided examples of situations where the RCN-D valuation method was utilized.
Over 60 days have now passed since this decision was issued. As such, it does not appear that the utility will be seeking leave from the Supreme Court of Canada to appeal this decision further.
Implications of this Decision
The major concern with the utility’s appeal, and its attempts to argue that RCN-D is the default or required valuation method, was the potential that a Court decision accepting the utility view could render effectively meaningless the municipality’s right to purchase franchise assets at the end of the franchise term. Buying an asset at a price three times greater than its net book value, or some similarly high value under RCN-D, would often be prohibitively expensive and simply not worthwhile for a municipality, so if RCN-D was accepted by the Courts as the sole accepted valuation standard for a franchise-purchase dispute, this would present a serious practical limitation to a municipality’s ability to exercise its purchase rights.
By rejecting the utility’s argument in this regard, this decision assists in preserving, for practical purposes, the municipality’s power to purchase utility assets when terminating a franchise agreement. The Court of Appeal appears to have been aware of this, stating at paragraph 62 that the “fairness to both sides” approach “best achieves the intention of the legislature that utility systems be constructed for municipalities that lack the resources to immediately fund their purchase, but that those municipalities, in due course, have the opportunity to acquire ownership of those systems that serve their residents.”
The decision also underscores an important consideration to municipalities that may be contemplating entering into a franchise agreement. In negotiating the terms of such an agreement, the utility may seek to have the municipality agree to RCN-D as the valuation methodology in the event of an exercise of the right to purchase. There is no legal requirement to agree to this, Had the franchise agreement between Hay River and the utility specifically required RCN-D to be used, it would likely have been obligated to accept the resulting valuation, which would have made the exercise economically unfeasible. The effect of agreeing to such a clause may be to turn an agreement that the statute limits in Alberta to a 20 year term, into one that for practical purposes is of perpetual duration. Because the franchise agreement in this case was silent on the valuation methodology to be used, the Town was able to push for a valuation approach that resulted in greater fairness, and was ultimately successful in defending that approach. Municipalities in Alberta may able to do similarly before the AUC.
Given that an appellate court in a jurisdiction with similar legislation has supported the need for valuation to reflect fairness for both sides, we would suggest that Alberta municipalities considering a new franchise agreement carefully consider whether the agreement prescribes a particular valuation methodology upon purchase of assets at the end of the franchise term (and whether that valuation methodology is RCN-D). Agreeing to RCN-D at the outset will close the door to the potential that the AUC could impose a valuation method that is fairer to the municipality. In a similar vein, Alberta municipalities nearing the end of a franchise term and considering whether to exercise their purchase rights should review their franchise agreement for valuation terms as well – if the agreement imposes RCN-D, then the municipality should be aware that this may limit the feasibility of exercising such purchase rights.
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