DATE: 20060721

DOCKET: C44333

COURT OF APPEAL FOR ONTARIO

LASKIN, BORINS and JURIANSZ JJ.A.

B E T W E E N :

NATURAL RESOURCE GAS LIMITED

Alan Mark and Jennifer Teskey for the appellant

Appellant

• and -

ONTARIO ENERGY BOARD

Glenn Zacher for the respondent

Respondent

Heard: April 28, 2006

On appeal from the order of the Divisional Court dated April 21, 2005.

JURIANSZ J.A.:

I. Introduction

[1] Natural Resource Gas Limited (“NRG”) appeals from a decision of the Divisional Court dated April 21, 2005, dismissing its appeal of the Review Decision of the Ontario Energy Board (the “OEB”) dated April 19, 2004.

[2] NRG purchases gas from producers and distributes it to its customers at rates regulated by the OEB. Because of an accounting error, NRG had unrecorded costs of purchasing gas in the amount of $531,794 during the period from October 1, 2002 to December 31, 2003. Had these costs been recognized, they would have been passed on to NRG’s customers in the normal course. After an initial unsuccessful application, NRG made a second application to the OEB on January 20, 2004 in which it sought authorization to record the unrecorded costs as a debit as of January 1, 2004 and an order allowing the recovery of the unrecorded costs by increasing its rates over a twelve month period commencing May 1, 2004. The OEB’s Review Decision on that application is the subject of this appeal.

[3] In that decision, the OEB found the unrecorded costs were material and had been prudently incurred and therefore NRG should be permitted to recover them. The OEB also decided that NRG’s recovery of the costs would be deferred over three years to minimize rate volatility to customers. Then, in what gives rise to this appeal, the OEB went on to decide that NRG would not be allowed to recover any of its regulatory costs or the interest charges associated with the deferral of the recovery of the unrecorded costs.

[4] NRG contends that the interest and regulatory expenses result not from the accounting error but from the OEB’s decision to defer recovery the unrecorded costs. NRG submits that since the OEB decided that the unrecorded costs were prudently incurred, it follows that the expenses that are associated with the OEB’s decision to defer recovery are also prudently incurred. NRG asserts that as a matter of law it would not be “just and reasonable” to deny their recovery.

[5] I would dismiss the appeal because the OEB's decision satisfies the applicable standard of review: reasonableness.

II Issues on Appeal

1. What is the standard of review that applies to the OEB’s decision?

2. Did the OEB commit reversible error by denying NRG recovery of its regulatory costs and interest charges?

III Standard of Review

[6] The Divisional Court applied a standard of reasonableness: “[I]n view of the lack of a privative clause, the OEB’s disposition attracts at least a standard of reasonableness.” NRG submits the Divisional Court erred and that the proper standard of review of the OEB’s decision in this case is correctness.

[7] In two recent decisions, Graywood Investments Ltd. v. Toronto Hydro-Electric System, [2006] O.J. No. 2030 (C.A.) and Enbridge Gas Distribution Inc. v. Ontario (Energy Board), 2006 10734 (ON CA), [2006] O.J. No. 1355 (C.A.), this court has considered the standard of review of decisions of the OEB.

[8] In Enbridge, while the result did not turn on the standard of review, Doherty J.A. did note (at para. 17) that the OEB had advanced a “forceful argument that the standard of review should, at the highest, be one of reasonableness”.

[9] In Graywood, MacPherson J.A. recognized the expertise of the OEB in general (at para. 24):

First, the OEB is a specialized and expert tribunal dealing with a complicated and multi-faceted industry. Its decisions are, therefore, entitled to substantial deference.

[10] In order to take this case outside the application of this general conclusion, NRG must establish that the nature of the question in dispute and the relative expertise of the OEB regarding that question are different in this case than in Graywood.

[11] Graywood concerned a dispute as to whether the parties had agreed that Toronto Hydro would install an electricity distribution system in a Graywood building project before November 1, 2000. This case concerns whether the OEB’s decision to deny recovery of certain regulatory and interest expenses is “just and reasonable”. I am satisfied the nature of these questions is sufficiently different that it is necessary to address the standard of review that applies in this case afresh. That Graywood was not available to the parties when this case was argued provides additional reason to do so.

[12] Determining the applicable standard of review requires a pragmatic and functional consideration of four factors:

i) the existence of a privative clause;

ii) the expertise of the tribunal;

iii) the purpose of the statute as a whole, and the provision in particular; and

iv) the nature of the question in dispute.

Pushpanathan v Canada (Minister of Citizenship and Immigration), 1998 778 (SCC), [1998] 1 S.C.R. 982, at paras. 29-38.

[13] These factors, in my view, need not be analysed separately or in any particular order. I address all four factors in the following general discussion

[14] The OEB derives its authority from the Ontario Energy Board Act, 1998, S.O. 1998, c.15, Sched. B (the “Act”).

[15] The objectives of the OEB with respect to gas regulation are set out in section 2 of the Act:

2. The Board, in carrying out its responsibilities under this or any other Act in relation to gas, shall be guided by the following objectives:

3. To facilitate competition in the sale of gas to users.

4. To protect the interests of consumers with respect to prices and the reliability and quality of gas service.

5. To facilitate rational expansion of transmission and distribution systems.

6. To facilitate rational development and safe operation of gas storage.

7. To promote energy conservation and energy efficiency in a manner consistent with the policies of the Government of Ontario.

5.1 To facilitate the maintenance of a financially viable gas industry for the transmission, distribution and storage of gas.

6. To promote communication within the gas industry and the education of consumers. 1998, c. 15, Sched. B, s. 2; 2002, c. 23, s. 4 (2); 2003, c. 3, s. 3; 2004, c. 23, Sched. B, s. 2.

[16] The OEB also has a broad rule-making regulatory jurisdiction:

44.(1) The Board may make rules,

(a) governing the conduct of a gas transmitter, gas distributor or storage company as such conduct relates to its affiliates;

(b) governing the conduct of a gas distributor as such conduct relates to any person,

(i) selling or offering to sell gas to a consumer,

(ii) acting as agent or broker for a seller of gas to a consumer, or

(iii) acting or offering to act as the agent or broker of a consumer in the purchase of gas;

(c) governing the conduct of persons holding a licence issued under Part IV;

(d) establishing conditions of access to transmission, distribution and storage services provided by a gas transmitter, gas distributor or storage company;

(e) establishing classes of gas transmitters, gas distributors and storage companies;

(f) requiring and providing for the making of returns, statements or reports by any class of gas transmitters, gas distributors or storage companies relating to the transmission, distribution, storage or sale of gas, in such form and containing such matters and verified in such manner as the rule may provide;

(g) requiring and providing for an affiliate of a gas transmitter, gas distributor or storage company to make returns, statements or reports relating to the transmission, distribution, storage or sale of gas by the gas transmitter, gas distributor or storage company of which it is the affiliate, in such form and containing such matters and verified in such manner as the rule may provide;

(h) establishing a uniform system of accounts applicable to any class of gas transmitters, gas distributors or storage companies;

(i) respecting any other matter prescribed by regulation. 1998, c. 15, Sched. B, s. 44 (1).

[17] The provision in issue is s. 36 of the Act. It prohibits a gas distributor from selling gas or charging for its distribution except in accordance with an order of the OEB and provides that the OEB is not bound by the terms of the contract. It authorizes the OEB to approve or fix “just and reasonable rates” for the sale, transmission, distribution and storage of gas. It allows the OEB, in approving or fixing just and reasonable rates, to adopt any method or technique that it considers appropriate. At the time it provided in part:

36 (1) No gas transmitter, gas distributor or storage company shall sell gas or charge for the transmission, distribution or storage of gas except in accordance with an order of the Board, which is not bound by the terms of any contract.

(2) 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.

(3) In approving or fixing just and reasonable rates, the Board may adopt any method or technique that it considers appropriate.

[18] It is clear that the Act constitutes the OEB as a specialized expert tribunal with the broad authority to regulate the energy sector in Ontario. In carrying out its mandate, the OEB is required to balance a number of sometimes competing goals. On the one hand, it is required to protect consumers with respect to prices and the reliability and quality of gas service, but on the other hand, it is to facilitate a financially viable gas industry. The legislative intent is evident: the OEB is to have the primary responsibility for setting gas rates in the province.

[19] The Act does not contain a privative clause. Section 33 provides a right of appeal to the Divisional Court from an order of the OEB “only upon a question of law or jurisdiction”.

[20] NRG would characterize the question at issue as one of law, namely, the definition of the phrase “just and reasonable” as used in section 36 of the Act. NRG submits that, properly interpreted, the words “just and reasonable” require that a utility be allowed to recover all its legitimate, prudently incurred costs. NRG argues that the OEB, having found that the unrecorded costs were prudently incurred but not initially recognized because of an accounting error, cannot disallow interest costs that result not from the accounting error, but from the OEB’s decision to defer recovery over three years.

[21] The OEB suggests that the question is one involving the manner in which the OEB exercised its discretion in fixing NRG’s rates.

[22] The Divisional Court described the nature of the question in this way:

The question before the Board was therefore not simply whether recovery of costs prudently incurred should be allowed, as the appellant characterized it. The matter was compounded by the added issue of how to deal with the accumulation of costs caused by the appellant’s inadvertence. The Board determined that customers must pay the prudently incurred unrecorded costs of the appellant, but the impact of recovery of the accumulated total should be ameliorated by allowing recovery over three years. The accumulated cost of the time over which recovery from customers would be required and the appellant’s regulatory costs … must be borne by the appellant. That issue was not a question of law but one involving fact-finding, policy considerations, rate-setting expertise, and law.

[23] I agree. While the question does involve the meaning of the phrase “just and reasonable”, it requires the application of that phrase to the particular and unusual facts of this case. The question is one of mixed fact and law and involves policy considerations as well. The OEB possesses greater expertise relative to the court in determining the question.

[24] Consequently, I conclude that the OEB’s decision is reviewable on a standard of reasonableness.

IV Is the Decision in This Case Reasonable?

[25] The Supreme Court of Canada, in Law Society of New Brunswick v. Ryan, [2003] S.C.R. 247, explained (at 270) what the reasonableness standard requires of a reviewing court:

A decision will be unreasonable only if there is no line of analysis within the given reasons that could reasonably lead the tribunal from the evidence before it to the conclusion at which it arrived. If any of the reasons that are sufficient to support the conclusion are tenable in the sense that they can stand up to a somewhat probing examination, then the decision will not be unreasonable and a reviewing court must not interfere.

[26] NRG submits that, as a matter of law, rates that deny utilities recovery of their legitimate prudently incurred costs cannot be “just and reasonable”. Rates must be “just and reasonable” to utilities as well as to consumers. Utilities cannot be expected to provide service if they are not allowed to recover their costs and a fair return.

[27] NRG relies on the decision of the Federal Court of Appeal in TransCanada Pipelines Limited v. National Energy Board, 2004 FCA 149, [2004] F.C.J. No. 654 (C.A.). Under its governing legislation, the National Energy Board’s authority to determine just and reasonable tolls, like that of the OEB, is not limited by any statutory directions. Rothstein J.A. indicated that the impact on customers or consumers could not be a factor in the determination of the utility’s cost of equity capital. However, any resulting increase could be so significant that it would be proper for the Board to phase in the tolls over time provided there was no economic loss to the utility. He said (at para. 43), “In other words, the phased in tolls would have to compensate the utility for deferring recovery of its cost of capital.”

[28] I do not read the OEB's decision to be inconsistent with the proposition that a utility must be allowed to recover all of its prudently incurred costs. The OEB, upon concluding that the unrecorded gas costs had been prudently incurred, allowed NRG to recover them. However, the OEB did not accept the premise of NRG’s position on this appeal — that if the unrecorded gas costs were prudently incurred, it must logically follow that the regulatory costs to recover them and the interest costs associated with the deferral of their recovery were also prudently incurred. Rather, the OEB found the accumulation of these costs was attributable to NRG’s failures to properly record them and to discover its error promptly:

We are surprised and disappointed with the time that it took NRG to realize that its PGCVA mechanism was incorrect, which exposed the utility and its customers to unnecessary risk and created a difficult situation for the customers and the Board. However, we accept that the misrecording was the result of error, not a purposeful action by NRG.

[29] The OEB went on to observe:

Had NRG recorded the gas cost variances properly in the PGCVA, the present conundrum would have been avoided.

... we find the NRG’s error has resulted in a substantial and avoidable accumulation of potential customers’ charges, through no fault of the customers.

[30] These factual findings of the OEB are not open to question on appeal. In light of these findings, the OEB said, “[W]e must therefore look for a balance”. The OEB struck that balance in the following terms:

Considering the need for NRG to recover its prudently incurred unrecorded gas costs and mitigating the impact on customers, as well as not creating undue inter-generational inequity, we find that a reasonable balance is recovery of the $531,794 amount over a three year period, in equal portions, without interest.

[31] The OEB went on to say that NRG could not recover its regulatory costs incurred in the proceeding.

[32] On my reading, the OEB took the view that NRG’s regulatory costs were not prudently incurred. That view is reasonable. But for NRG’s accounting error and the delay in recognizing it, NRG would not have had to incur costs to seek and obtain the OEB’s decision to permit recovery of the unrecorded costs.

[33] NRG emphasizes that it did not seek recovery of any interest charges from the time the costs were not recorded to the date of the OEB’s decision finding the costs to have been prudently incurred. Therefore it submits that the interest charges it claims are the direct result of the OEB’s decision to rate-smooth and not of NRG’s accounting error.

[34] In my view, it was open to the OEB to consider the underlying as well as the direct cause of the interest charges. The OEB said, “It is also our view that customers should not be burdened by any interest charges that would not have accrued had the customers been presented with the appropriate timely billing”. While the interest charges directly result from the OEB’s decision to defer their recovery, the OEB would not have faced the situation that prompted that decision “had NRG recorded the gas costs variances properly” and there had been no “substantial and avoidable accumulation of potential customers’ charges”. Rather, the “present conundrum could have been avoided”.

[35] The line of analysis from the OEB’s findings of fact to the conclusion it reached is reasonable. It's balancing of the various considerations and interests before it lies at the heart of its function and expertise. Its reasons withstand a probing analysis.

V Disposition

[36] I would find that the OEB’s decision was reasonable and dismiss NRG's appeal.

[37] The parties indicated they would make efforts to resolve the issue of costs. If they are unable to do so they make written submissions through the court’s senior legal officer.

“R.G. Juriansz J.A.”

“I agree J. Laskin J.A.”

“I agree S. Borins J.A.”

RELEASED: July 21, 2006