Yukon appeal court orders reconsideration of unpermitted diesel rental costs

The Court of Appeal of Yukon has ordered the Yukon Utilities Board to reconsider its approval of costs for diesel generators Yukon Energy Corporation was not permitted to operate. In Yee v. Yukon Energy Corporation, 2026 YKCA 1, decided January 19, 2026, the court held that the approval undermined environmental legislation in a way that threatened the integrity of the legal system.

Justice Gomery, with Justices Abrioux and MacPherson concurring, allowed Nathaniel Yee’s appeal, remitted Board Order 2024-05 for reconsideration and awarded Yee his costs. The dispute concerned the utility’s 2023/24 general rate application, not a determination of its rates for 2025 or 2026.

Emergency capacity and the disputed charges

Yukon Energy is a government-owned utility operating on a grid isolated from neighbouring systems. Most of its electricity comes from three large hydroelectric facilities. It rents mobile diesel generators to cover a shortfall if its largest hydroelectric facility goes offline, a contingency described as N-1 conditions.

The utility sought to recover the rental costs of 20 mobile generators in the 2023/24 application and acknowledged that its claim included capacity it lacked permission to operate. Yee, an intervenor before the Board, objected to making customers pay for that capacity. He had raised a similar objection in the earlier 2021 rate proceeding, but that decision was not under appeal.

The Board accepted rental diesel units as the only short-term solution to the capacity shortfall. It also noted that Yukon Energy had missed forecast timelines for clean-energy projects intended to eliminate the need for rentals and expected stronger evidence about those timelines in future applications.

Before the appeal court, Yee argued that unlawful activities could not be charged to customers regardless of need. Yukon Energy and the Board maintained that rate regulation and environmental permitting operated in separate legislative spheres. Yukon Energy said enforcement could be left to Environment Yukon; counsel for the Yukon government likewise stressed the environmental regulator’s choice of enforcement tools.

Environmental duties form part of the public interest

The appeal was confined to an error of law or jurisdiction under section 69(1) of the Public Utilities Act. The court could not intervene simply because of a factual error or disagreement with the Board’s exercise of discretion.

The Act gives the Board broad rate-setting powers, while requiring utilities to provide safe, adequate and reliable service. Rates must be fair to consumers and the supplier, allowing an opportunity to recover operating and capital costs over time. That objective does not require acceptance of every expense a utility submits.

Gomery rejected both sides’ categorical approaches. Drawing on the British Columbia Court of Appeal’s illegality decisions in Kim v. Choi, 2020 BCCA 98, and Youyi Group Holdings (Canada) Ltd. v. Brentwood Lanes Canada Ltd., 2020 BCCA 130, the court focused on consistency within the legal system. The question was whether allowing recovery would frustrate the policy behind the prohibition, considering the environmental legislation and the extent of the unlawfulness.

That approach did not support Yee’s proposition that “unlawful is unlawful.” Regulatory schemes can conflict, the court explained, and non-compliance does not automatically require the Board to reject an expense in every circumstance. The necessary analysis is contextual.

But the Board could not treat environmental protection as someone else’s concern. The Environment Act binds the Yukon government and requires environmental considerations to be integrated into public decision-making. The Board is an instrument of government, and environmental protection forms part of the public interest it must consider when setting rates.

The court also distinguished environmental assessment from operating permission. Section 49 of the federal Yukon Environmental and Socio-economic Assessment Act provides an emergency exception to assessment requirements. Avoiding an assessment requirement does not dispense with the permits required under the territorial environmental regime, or their binding conditions.

A deliberate four-year rental practice

The permitting regime protects against diesel emissions, giving the environmental policy substantial weight. Yukon Energy had pursued the rentals through two rate applications since 2021 despite Yee’s objections. Gomery characterized this as a deliberate practice maintained over four years, rather than accidental non-compliance.

Against that stood an undisputed, situational and well-motivated need for the generators. All parties accepted that emergency diesel generation could be necessary for residents’ health and security if a hydroelectric facility failed during winter. Even so, the court concluded that approving the charges undermined the Environment Act’s integrated approach to regulation. Environment Yukon’s decision not to enforce the permits did not resolve whether consumers should bear the costs.

Relief left to the Board

The court expressly declined to decide whether unpermitted generators should operate during N-1 emergencies. Its decision neither ordered a shutdown nor imposed a fine. It also did not set a refund amount or change a rate itself, leaving any appropriate rate modifications and consequential relief for the 2023/24 application to the Board.

At the appeal hearing, the court was told permits had since been issued for two of the three communities involved. No details were provided, and the court left those changed circumstances for the Board to address.

The Board subsequently opened a written reconsideration in Order 2026-05, dated February 19, 2026. It retained the relevant evidence from the original rate proceeding and the same participating parties, with a process for additional evidence and information requests.

Its July 29, 2026 Order 2026-12 amended that timetable, scheduling Yukon Energy’s rebuttal evidence for November 23, final written argument for December 22 and final reply argument for January 22, 2027. Those are procedural deadlines, not a ruling on what customers will ultimately pay.