COURT FILE NO.: Divisional Court File No. 287/04
DATE: 20050421
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
LANE, HOWDEN AND MOLLOY JJ.
B E T W E E N:
NATURAL RESOURCE GAS LIMITED
Alan Mark, for the appellant
Appellant
- and -
THE ONTARIO ENERGY BOARD
Glenn Zacher, for the respondent
Respondent
HEARD: March 10, 2005
HOWDEN J.
[1] The issue in this case is whether the Ontario Energy Board (the Board) is bound, as a matter of law, to authorize recovery of interest charges and regulatory costs relating to prudently incurred costs which, due to inadvertence, were not reported in a timely manner.
[2] Natural Resource Gas Limited delivers natural gas to residential, commercial, agricultural and industrial customers in southwestern Ontario. It is an “embedded” distributor of natural gas. Of the three natural gas distribution utilities in Ontario, it is the only one which lies within the distribution system of another gas distributor. As an embedded distributor, it must arrange for a forecast supply of gas to be delivered daily to Union Gas Limited and, from Union, it must procure and provide gas to its own customers as they require it.
[3] Gas prices constantly fluctuate. All three companies use a variance account to record the difference between the actual cost of gas purchased for system gas customers and the forecast price paid by their customers (i.e. PGCVA – Purchase Gas Cost Variance Account). The purpose of this methodology is to recover fully the company’s actual gas costs. The variance account methodology is recognized and allowed by the Board “to ensure that the utility recovers and the customers pay the actual cost of gas, no more and no less”. (Board’s Review Decision, April 19, 2004, para 35).
[4] The Board is charged with regulating and setting rates for the natural gas and electricity sectors. Its important mandate, in the context of this appeal, is to “fix rates that are just and reasonable” [Ontario Energy Board Act, 1998, section 36(3)]. It does so for gas commodity rates on a quarterly basis called QRAM (Quarterly Rate Adjustment Mechanism). The purpose of QRAM is not questioned in this appeal. Its purpose is to pass on to customers the actual cost of gas in a timely manner, both in the utility’s interest and to avoid sudden disturbing rate consequences for customers. (Board’s Review Decision, para 36).
[5] In October 2003, the appellant found that its gas costs for fifteen months (October/02 to December/03) were under-collected by $531,794 due to a flaw in the application of the PGCVA accounting methodology to the appellant’s situation. The appellant reported the discrepancy to the Board, and applied to the Board on November 24, 2003 to recover the unrecorded costs. By the original decision of December 23, 2003, the Board permitted the appellant to set up a new account (GPRA – Gas Purchase Rebalancing Account) to catch future otherwise unrecorded costs. However, the Board refused the retroactive order requested by the appellant. The Board approved the appellant’s costs of $60,312 regarding the December 31, 2003 gas inventory shortfall. On a further application made with the Board’s consent, the Board held a hearing and, in its Review Decision of April 19, 2004, authorized the appellant to recover its past unrecorded costs over three years, rather than one year as the appellant had requested, without interest. It directed the appellant to bring the request forward on its next rate application. The Board further ordered that the appellant recover the previously approved costs of $60,312 for re-evaluating its December/03 inventory, but denied its regulatory costs for the review proceeding.
[6] The Board identified the issues in its Review decision as follows:
(a) Has NRG failed to recover prudently incurred costs, that is, was there a miscalculation?
(b) If yes, would recovery of those costs as proposed by NRG place an undue burden on customers and, if the costs are to be recovered, what would be a reasonable recovery?
The Board made the following findings:
Given the evidence provided by NRG, we are satisfied that the PGCVA mechanism, as applied by NRG for the period October 1, 2002 to December 31, 2003, did not fully account for the difference between actual gas costs and the gas costs reflected in rates. While NRG’s PGCVA mechanism follows general industry practice, it does not take into account the gas purchasing requirement that arises from NRG’s commitments as a Bundled Transportation M9 customer of Union Gas.
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.
Under the trigger mechanism, NRG applied for and received approval to change its rates in March and May 2003 for reasons of increased gas costs. It did so again for October 2003, January 2004 and April 2004 under the legislated QRAM process.
Had NRG recorded gas cost variances properly in the PGCVA, the present conundrum would have been avoided. Also, the inter-generational inequities inherent in disposing of historic balances through prospective ratemaking would have been minimized.
In light of the above, while we accept that the NRG’s customers have underpaid by $531,794 and the 2003 PGCVA balances have not been finalized by the Board, we find that NRG’s error has resulted in a substantial and avoidable accumulation of potential customers’ charges, through no fault of the customers.
We must therefore look for a balance.
It would not be reasonable in our view to deny NRG recovery of reasonably incurred gas costs of a magnitude of $531,794, because of an accounting error. These are legitimate costs incurred prudently on behalf of the customers, and are of material consequence to the utility.
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.
Further, NRG shall not include the regulatory costs it incurred in this proceeding in estimating the regulatory costs for future test years.
[7] Orders of the Board are appealable to this court only on a question of law or jurisdiction [OEB Act, 1998, sec. 33(2)]. The appellant submits that the Board, having found the unrecorded costs of $531,794 to have been prudently incurred and recoverable over three years, made an error in law in refusing recovery of the interest cost during that period and in denying its regulatory costs.
[8] The appellant’s position is that the “cost of service” principle used by the Board carries an inherent constraint on regulatory discretion which has been upheld judicially, that is, the regulator cannot use denial of recovery of prudently incurred costs including costs of financing them to mitigate rates for consumers, having adopted a “cost of service” regime to fix rates and balance investor and consumer interests. B.C. Electric Railway Co. Ltd. v. Public Utilities Commission of B.C., [1960] S.C.R. 837; TransCanada PipeLines Limited v. Canada (National Energy Board) 2004 FCA 149.
[9] The appellant further submits that the standard of review of the Board’s refusal to allow recovery of interest and costs should be correctness. Using the pragmatic and functional analysis, the decisive factors in the appellant’s submission are lack of a privative clause, the question being one of law, and no requirement of a policy-laden, polycentric analysis to determine the matter. Finally, even if the standard of review is one of reasonableness, the appellant argues that the unrecorded costs, if picked up contemporaneously, would have been part of the rates charged to customers and that this order is unreasonable in providing customers the benefit of a time cushion of three years, financed at the appellant’s expense. It is the appellant’s position that, on either standard, the appeal should be allowed and the appellant should be permitted to recover interest and all of its regulatory costs associated with the unrecorded costs.
[10] The appellant’s factum referred also to what seemed a second ground of appeal, that is, that the Board’s order was punitive in nature and beyond the authority of the Board. When this was raised with counsel, he stated that this ground was subsumed in the submission referred to above that the Board’s disposition was unreasonable.
[11] The respondent’s position is that, unlike the tribunal in B.C. Electric Railway, this Board’s mandate and discretion in setting utility rates to be charged customers is not limited by directory, legislated criteria. What is just and reasonable is a matter of policy and discretion for the Board to determine. The respondent’s counsel submits that, having found that the appellant made an error in not identifying and reporting the unrecorded costs in a timely manner, the Board faced the problem of how to deal with the accumulated cost incurred over three rate-adjustment periods for which rate increases had already been granted. In balancing consumer and utility interests in light of the cause of the problem determined after hearing evidence, the Board acted within its statutory mandate, on proper principles.
[12] There is no question that the unrecorded costs of $531,794 were accepted by the Board as having been prudently and legitimately incurred. In my view, what the Board also found was that the same PGCVA methodology had been in place since 1999 but the appellant had failed to identify its owns costs and report them until October 2003. As a result of this error, the problem became how to deal with their recovery considering the interests not only of the appellant but its customers.
[13] There is no doubt on this record that it was the appellant’s obligation within the regulated context of its business to report its costs and reconcile accounts. (NRG Response to Board Staff Interrogatories, Appeal Book, Tab 6, page 76). The appellant’s expectation of Board notification in case of calculations inconsistent with the other two companies misses the point – as the Board found, only the appellant was an embedded distributor with a banked gas account which it did not appear to check and verify periodically because it only needed to balance in September of each year. (Appellant’s Factum, paragraphs 25-33; Board’s Review Decision, paragraphs 24-25). The Board found:
[36] The Board has established principles and methodologies to ensure that the balances in variance accounts are disposed of in a timely manner to maintain the financial integrity of the utility and at the same time avoid sudden or otherwise disturbing rate consequences for customers. …
[38] Had NRG recorded gas cost variances properly in the PGCVA, the present conundrum would have been avoided. Also, the inter-generational inequities inherence in disposing of historic balances through prospective ratemaking would have been minimized.
These are findings well within the legislated mandate and expertise of the Board and are therefore findings entitled to deference. 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.
[14] 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 (over and above the $60,312 allowed it) 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.
[15] In view of the lack of a privative clause, the Board’s disposition attracts at least a standard of reasonableness. Its disposition and reasoning withstand the somewhat probing analysis required by that standard. Canada (Dir. Of Investigations and Research) v. Southam Inc., [1997] 1 SCR 748, at paragraph 56-57. The Board’s disposition, in seeking and determining a reasonable balance, was not punitive in nature. The authorities cited by the appellant are “rate of return” determinations dealing with ongoing return on capital on a long term basis including compensation for prudently incurred costs and the public interest in continued supply of a necessary commodity. The issue before the Board in this case is much more confined: how to deal with the consequences of a failure to identify and report prudently incurred costs, and in determining that question the Board was entitled within its broad mandate to consider both the utility’s and customers’ interests, as it did.
[16] Accordingly, the appeal is dismissed. If costs are not agreed, counsel may file written submissions.
HOWDEN J.
LANE J.
MOLLOY J.
Released: