Ontario Power Generation Inc. v. Ontario Energy Board Power Workers' Union et al. v. Ontario Energy Board et al. Society of Energy Professionals v. Ontario Energy Board et al. [Indexed as: Ontario Power Generation Inc. v. Ontario Energy Board]
109 O.R. (3d) 576
2012 ONSC 729
Ontario Superior Court of Justice,
Divisional Court,
Aitken, Swinton and Hoy JJ.
February 14, 2012
Administrative law -- Boards and tribunals -- Ontario Energy Board -- Ontario Power Generation ("OPG") applying to Ontario Energy Board for approval of payment amounts for 2011 and 2012 -- Board disallowing part of OPG's compensation costs for that period -- Board not restricted to considering whether OPG's collective agreements were prudent when they were entered into in assessing reasonableness of OPG's compensation costs -- Board entitled to consider current compensation comparators in fixing rates that were just and reasonable to consumers as well as to OPG -- Decision not amounting to intrusive legal control on freedom of OPG and unions to bargain and not violating s. 2(d) of Charter -- Canadian Charter of Rights and Freedoms, s. 2(d).
Ontario Power Generation Inc. ("OPG") applied to the Ontario Energy Board pursuant to s. 78.1 of the Ontario Energy Board Act, 1998, S.O. 1998, c. 15, Sch. B for approval of payment amounts -- essentially the amounts it could pass on to [page577] consumers through the rates it charged -- for the test period of January 1, 2011 through December 31, 2012. About 90 per cent of OPG's staff in regulated businesses was unionized, and the collective agreements to which OPG was a party contained provisions which limited its ability to unilaterally reduce its workforce. The Board disallowed part of OPG's nuclear compensation costs for the period. OPG appealed.
Held, the appeal should be dismissed.
Per Hoy J. (Swinton J. concurring): In assessing the reasonableness of OPG's compensation costs, the Board was not restricted to considering whether the collective agreements were prudent at the time they were entered into and was not required to presume that the agreements were prudent. The Board was entitled to consider current compensation comparators in fixing rates that were just and reasonable to consumers as well as to OPG. There was evidence on which the Board could reasonably conclude that OPG's compensation levels were excessive, based on current market comparisons with other worksites, and that OPG's overtime charges and staffing levels were also excessive. While collective agreements were in place, management had the ability to manage, on a go-forward basis, to reduce total compensation costs within the framework of those agreements. An analysis based solely on whether it was prudent for OPG to have entered into the collective agreements would not permit the Board to fulfill its statutory objective of promoting cost effectiveness in the generation of electricity. The Board's decision did not amount to an intrusive legal control on the freedom of OPG and the unions to bargain and did not violate s. 2(d) of the Canadian Charter of Rights and Freedoms.
The Board's reasons met the requirements of transparency, intelligibility and justification.
Per Aitken J. (dissenting): Any limitation on OPG's ability to manage nuclear compensation costs on a prospective basis, due to binding collective agreements in effect prior to the application and the test period, were costs previously incurred and subject to an after-the-fact, two-step, prudence review. In considering OPG's nuclear compensation costs, the Board was required (in its analysis, though not necessarily in its final number) to differentiate between earlier incurred liabilities and other aspects of the nuclear compensation cost package that were truly projected and not predetermined. The Board failed to conduct this type of prudence review.
APPEAL from a decision of the Ontario Energy Board.
Cases referred to Enbridge Gas Distribution Inc. v. Ontario (Energy Board), 2006 10734 (ON CA), [2006] O.J. No. 1355, 210 O.A.C. 4, 41 Admin. L.R. (4th) 69, 147 A.C.W.S. (3d) 131 (C.A.), revg (2005), 2005 4941 (ON SCDC), 75 O.R. (3d) 72, [2005] O.J. No. 756, 195 O.A.C. 234, 26 Admin. L.R. (4th) 233, 137 A.C.W.S. (3d) 843 (Div. Ct.), distd
Other cases referred to Advocacy Centre for Tenants-Ontario v. Ontario (Energy Board), 2008 23487 (ON SCDC), [2008] O.J. No. 1970, 293 D.L.R. (4th) 684, 166 A.C.W.S. (3d) 384, 238 O.A.C. 343 (Div. Ct.); Canadian Assn. of Broadcasters v. Society of Composers, Authors and Music Publishers of Canada, [2006] F.C.J. No. 1547, 2006 FCA 337, 354 N.R. 310, 54 C.P.R. (4th) 15, 152 A.C.W.S. (3d) 415; Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190, [2008] S.C.J. No. 9, 2008 SCC 9, 329 N.B.R. (2d) 1, 64 C.C.E.L. (3d) 1, 164 A.C.W.S. (3d) 727, EYB 2008-130674, J.E. 2008-547, [2008] CLLC Â220-020, 170 L.A.C. (4th) 1, 372 N.R. 1, 69 Imm. L.R. (3d) 1, 291 D.L.R. (4th) 577, 69 Admin. L.R. (4th) 1, 95 L.C.R. 65, D.T.E. 2008T-223; Great Lakes Power Ltd. v. Ontario (Energy Board), [2010] O.J. No. 2335, 2010 ONCA 399, 262 O.A.C. 245; Natural Resource Gas Ltd. v. Ontario Energy Board, 2006 24440 (ON CA), [2006] O.J. No. 2961, 214 O.A.C. 236, 149 A.C.W.S. (3d) 889 (C.A.); [page578] Newfoundland and Labrador Nurses' Union v. Newfoundland and Labrador (Treasury Board), [2011] 3 S.C.R. 708, [2011] S.C.J. No. 62, 2011 SCC 62, EYB 2011-199662, 2012EXP-65, J.E. 2012-46, D.T.E. 2012T-7, 424 N.R. 220, 340 D.L.R. (4th) 17, 317 Nfld. & P.E.I.R. 340, [2012] CLLC Â220-008, 208 A.C.W.S. (3d) 435, 213 L.A.C. (4th) 95; Northwestern Utilities Ltd. v. Edmonton (City), 1929 39 (SCC), [1929] S.C.R. 186, [1929] S.C.J. No. 3, [1929] 2 D.L.R. 4; Ontario Power Generation Inc. (Re), unreported, March 20, 2011 (Ontario Energy Board); Ontario Power Generation Inc. (Re), Court File No. EB-2007-0905 (Ontario Energy Board); Ontario Power Generation Inc. (Re), Court File No. EB- 2009-0084; Ontario Power Generation Inc. (Re), 2008 LNONOEB 36, November 3, 2008 (Ontario Energy Board); Southwestern Bell Telephone Co. v. Arkansas Public Service Commission, 824 F.2d 672 (8th Cir. 1987), writ of certiorari denied 485 U.S. 989 (1988); Toronto Hydro-Electric System Ltd. v. Ontario (Energy Board) (2010), 99 O.R. (3d) 481, [2010] O.J. No. 1594, 2010 ONCA 284, 261 O.A.C. 306, 317 D.L.R. (4th) 247, 187 A.C.W.S. (3d) 567, 68 B.L.R. (4th) 159; Transcanada Pipelines Ltd. v. Canada (National Energy Board), [2004] F.C.J. No. 654, 2004 FCA 149, 319 N.R. 171, 130 A.C.W.S. (3d) 1044; Violet v. Federal Energy Regulatory Commission, 800 F.2d 280 (1st Cir. 1986)
Statutes referred to Canadian Charter of Rights and Freedoms, s. 2(d) Labour Relations Act, 1995, S.O. 1995, c. 1, Sch. A Nuclear Safety and Control Act, S.C. 1997, c. 9 Ontario Energy Board Act, 1998, S.O. 1998, c. 15, Sch. B, ss. 1(1), 33.(1) [as am.], (2) [as am.], 36 [as am.], 78 [as am.], 78.1, (6) Public Sector Compensation Restraint to Protect Public Services Act, 2010, S.O. 2010, c. 1, Sch. 24 [as am.]
Rules and regulations referred to Payments under Section 78.1 of the Act, O. Reg. 53/05 [as am.]
John B. Laskin and Crawford Smith, for respondent Ontario Power Generation Inc. Glen Zacher and Patrick Duffy, for respondent Ontario Energy Board. Richard P. Stephenson and Emily Lawrence, for appellant Power Workers' Union, Canadian Union of Public Employees, Local 1000. Paul J.J. Cavalluzzo, Jo-Anne Pickel and Adrienne Telford, for appellant Society of Energy Professionals. Robert Warren, for intervenor Consumers Council of Canada. Jay Shepherd, for intervenor Ontario Education Services Corporation.
HOY J. (SWINTON J. concurring): -- Overview
[1] Ontario Power Generation Inc. ("OPG"), Power Workers' Union, Canadian Union of Public Employees, Local 1000 (the [page579] "PWU") and the Society of Energy Professionals (the "Society") appeal from the decision with reasons (the "Decision") of the Ontario Energy Board (the "OEB") released March 20, 2011.
[2] OPG is Ontario's largest electricity generator. It is a monopoly subject to rate regulation by the OEB. OPG applied to the OEB pursuant to s. 78.1 of the Ontario Energy Board Act, 1998, S.O. 1998, c. 15, Sch. B (the "Act") for approval of payment amounts -- essentially the amounts it could pass on to consumers through the rates it charges -- for OPG's generation facilities for the test period of January 1, 2011 through December 31, 2012. The OEB disallowed $145 million of the forecast nuclear compensation costs for the test period.
[3] Approximately 90 per cent of OPG's workforce are members of either PWU or the Society, and OPG is bound by collective agreements with them. PWU and the Society were among the 13 intervenors in the proceedings before the OEB.
[4] The Consumers Council of Canada ("CCC") and Ontario Education Services Corporation ("ESC") intervened in the proceeding before the OEB, are intervenors on this appeal and support the Decision.
[5] At issue are (1) whether, in assessing the reasonableness of OPG's compensation costs, the OEB was (as the appellants argue) restricted to considering whether the collective agreements with PWU and the Society were prudent at the time they were entered into and should have presumed those agreements were prudent; and (2) the adequacy of the OEB's reasons for its Decision. The Regulatory Framework
[6] The OEB regulates the Ontario electricity and gas sectors. Two of its principal statutory obligations are "to protect the interests of consumers with respect to prices and the adequacy, reliability and quality of electricity service" and to "promote economic efficiency and cost effectiveness in the generation . . . of electricity and to facilitate the maintenance of a financially viable electricity industry". [See Note 1 below] The OEB fulfills this mandate by, inter alia, regulating the rates and payment amounts charged by monopoly electric utilities, including OPG.
[7] Pursuant to s. 78.1 of the Act, the OEB is to fix payment amounts that it finds to be "just and reasonable". Its authority to determine just and reasonable amounts is not limited by any statutory directions. O. Reg. 53/05 (Payments under Section 78.1 [page580] of the Act) provides that the OEB "may establish the form, methodology, assumptions and calculations used in making an order that determines payment amounts for the purpose of section 78.1 of the Act". [See Note 2 below]
[8] As noted in Transcanada Pipelines Ltd. v. Canada (National Energy Board), [2004] F.C.J. No. 654, 2004 FCA 149, at paras. 31 and 32, where a regulator is not constrained by statute, there are a number of methodologies for determining just and reasonable rates. One of those is the cost of service methodology, which TransCanada describes as compensating the utility through rates for its prudently incurred costs, including its cost of capital. The Court of Appeal in Natural Resource Gas Ltd. v. Ontario Energy Board, 2006 24440 (ON CA), [2006] O.J. No. 2961, 214 O.A.C. 236 (C.A.) also recognized the entitlement of a utility to recover its prudently incurred costs.
[9] In this case, OPG requested to have payment amounts set on a forecast cost of service methodology. It sought approval of a "revenue requirement" comprised of a forecast of its costs over the test period of January 1, 2011 through December 31, 2012. It was therefore required to undergo a prudency review, and satisfy the OEB that those costs were reasonable before passing those costs on to consumers. See Great Lakes Power Ltd. v. Ontario (Energy Board), [2010] O.J. No. 2335, 2010 ONCA 399.
[10] Pursuant to s. 78.1(6) of the Act, the burden of proving that the payment amounts sought are just and reasonable is on the applicant.
[11] Pursuant to s. 33(1) and (2) of the Act, an appeal of a decision of the OEB lies to this court and may be made only upon a question of law or jurisdiction. Factual Background
[12] OPG emerged in 1999 as one of the successor corporations to Ontario Hydro. Its regulated facilities include three nuclear generating stations and six hydroelectric plants, generating approximately half of Ontario's electricity. OPG's sole shareholder is the Province of Ontario.
[13] OPG employs approximately 10,000 staff in its regulated business, 95 per cent of whom are associated with OPG's nuclear business. As indicated above, 90 per cent of the staff in [page581] the regulated businesses are unionized. Sixty per cent are represented by PWU and 30 per cent are represented by the Society.
[14] At the time of the underlying application, OPG was party to a collective agreement with PWU for nuclear employees with a term of April 1, 2009 to March 31, 2012. The agreement provides for a 3 per cent wage increase in each of 2011 and 2012. OPG was also bound by a collective agreement with the Society with a term of January 1, 2006 to December 31, 2010. OPG and the Society were engaged in collective bargaining during the OEB's hearing of this matter. A collective agreement was subsequently awarded by an interest arbitrator on February 3, 2011, following the OEB's hearing in this case. The arbitrator awarded a 3 per cent increase effective January 2011, 2 per cent effective January 2012 and 1 per cent effective April 2012.
[15] In its application to the OEB, OPG forecast 3 per cent wage increases in each of 2011 and 2012. It also forecast a further 1 per cent increase to account for step progressions and promotions under the collective agreements and an 8.6 per cent staff reduction between 2008 and 2012.
[16] Labour relations for OPG and its employees are governed by the Labour Relations Act, 1995, S.O. 1995, c. 1, Sch. A.
[17] As a successor company to Ontario Hydro, OPG was required by law to adopt the collective agreements covering the staff transferred to OPG from Ontario Hydro. Some modifications have since been negotiated. The collective agreements contain provisions which limit the ability of OPG to unilaterally reduce its workforce. The Society's collective agreement contains a no-strike/no-lockout provision which requires impasses to be resolved by way of a binding mediation/ arbitration process.
[18] In addition to being subject to provincial rate regulation, OPG is subject to the jurisdiction of the Canadian Nuclear Safety Commission, an independent federal government agency that is responsible for ensuring compliance with the Nuclear Safety and Control Act, S.C. 1997, c. 9. As a result, OPG is subject to operational constraints. The Decision
[19] OPG applied for a total forecast revenue requirement of $6,909.6 million and deferral and variance account recovery of $373.1 million for the test period. If approved, this would have resulted in an average increase in payment amounts of 6.2 per cent.
[20] The OEB made various adjustments to the requested amounts which, when considered together, the OEB estimated would limit the increase in payment amounts to 1 per cent. Most [page582] significantly, the OEB disallowed $55 million of forecast nuclear compensation costs for 2011 and $90 million of forecast compensation costs for 2012. In making its adjustments, the OEB stated that it had broad discretion to adopt the mechanisms it judged appropriate in setting just and reasonable rates, and went on to explain, at pp. 18 and 19:
. . . the Board may take into account a broad suite of factors that affect the company and factors that affect consumers. Both considerations are relevant in determining just and reasonable payment amounts. For example the Board may consider evidence on economic conditions and factors influencing other aspects of electricity rates. These sorts of factors may well be relevant in terms of deciding the appropriate pacing or level of expenditures. The Board must be satisfied that the rates are just and reasonable and it must consider all evidence that it finds relevant for that purpose. For the current proceeding, the Board finds that evidence regarding the economic situation and the trend in overall electricity costs is a relevant consideration, along with a variety of other factors (such as inflation rates, interest rates, legislation, business needs, benchmarking results.)
OPG and PWU would have the Board constrain its consideration for the various spending proposals to a very few narrow examinations based on the presumption that all proposed expenditures are reasonable unless proved otherwise. In the words of OPG"Only costs that are found to be dishonestly incurred, or which are negligent or wasteful losses, may be excluded from the legitimate operating costs of the utility in determining the rates that may be charged." The Board disagrees. When considering forecast costs, the onus is on the company to make its case and to support its claim that the forecast expenditures are reasonable. The company provides a wide spectrum of such evidence, including business cases, trend analysis, benchmarking data, etc. The test is not dishonesty, negligence, or wasteful loss; the test is reasonableness. And in assessing reasonableness, the Board is not constrained to consider only factors pertaining to OPG. The Board has the discretion to find forecast costs unreasonable based on the evidence -- and that evidence may be related to the cost/benefit analysis, the impact on ratepayers, comparison with other entities, or other considerations.
The benefit of a forward test period is that the company has the benefit of the Board's decision in advance regarding the recovery of forecast costs. To the extent costs are disallowed, for example, a forward test period provides the company with the opportunity to adjust its plans accordingly. In other words, there is not necessarily any cost borne by shareholders (unless the company decides to continue to spend at the higher level in any event). Somewhat different considerations will come into play when undertaking an after- the-fact prudence review. In the case of an after-the-fact prudence review, if the Board disallows a cost, it is necessarily borne by the shareholder. There is no opportunity for the company to take action to reduce the cost at that point. For this reason, the Board concluded there is a difference between the two types of examination, with the after-the-fact review being a prudence review conducted in the manner which includes a presumption of prudence.
[21] In pp. 80-89, the OEB dealt in depth with compensation. At pp. 80 to 81, the OEB explained that OPG used the data from a survey prepared by Towers Perrin, comparing compensation [page583] data among a variety of employers across Canada where job matches are sufficiently strong, to prepare a chart comparing OPG's salary levels for 30 unionized positions (accounting for 2,804 employees) with those of other organizations in the survey. In preparing the chart, OPG identified from the Towers Perrin survey those companies and those job positions OPG considered comparable. The chart showed that OPG was slightly above the 75th percentile on an overall basis.
[22] At p. 84, the OEB expressed its concern with both the number of staff and the level of compensation paid in light of the overall performance of the nuclear business. It noted the extensive use of overtime in the nuclear business.
[23] It opined that OPG had the opportunity to reduce the overall number of employees further as a means of controlling total costs and enhancing productivity. It noted that the "ScottMadden Phase 2 report" [See Note 3 below] observed that OPG's staffing levels per unit exceed both the industry median and those of Bruce Power, a competitor. The OEB expressed disappointment that in response to a staffing analysis of OPG's Radiation Protection Function by ScottMadden, which concluded that 13 full-time positions could be eliminated, OPG had eliminated only one position.
[24] At p. 85, the OEB wrote:
Although collective agreements may make it difficult to eliminate positions quickly, it is not reasonable for ratepayers to bear these additional costs in the face of strong evidence that the positions are in excess of reasonable requirements. With 20 to 25 per cent of staff expected to retire between 2010 and 2014, the Board concluded that OPG has a timely opportunity to review its organizational structure, taking actions to reassign functions and eliminate positions. The Board is not suggesting that a specific percentage of the retiring staff will not need to be replaced, but this may provide an opportunity for reducing the overall staffing complement without disrupting negotiated commitments with the unions.
[25] On the issue of compensation levels, the Board found that the compensation benchmark for staff employees should be set at the 50th percentile, as with management employees. It [page584] held that the OPG had not provided any compelling evidence to conclude that a higher percentile was warranted for non-management staff. The Board found, at p. 86, that the OPG's own analysis "provides sufficient evidence to conclude that for a significant proportion of OPG's staff the compensation is excessive based on market comparisons".
[26] The OEB dismissed PWU's argument that there was no evidence to rebut the presumption that the expenses arising from the collective agreements are prudent, writing as follows, at pp. 86 and 87:
The ratepayers should only be required to bear reasonable costs -- and in determining reasonable costs the Board can be guided by market comparison. It is the responsibility of the Board to send a clear signal that OPG must take responsibility for improving its performance. In order to achieve this, the Board will reduce the allowance for nuclear compensation costs by $55 million in 2011. This amount is derived considering a number of factors:
-- Reducing the compensation for the 30 positions from the Towers Perrin data would require a reduction of $37.7 million.
-- Given the breadth of positions in the analysis and the prevailing pattern that wages are well in excess of the 50th percentile, it is reasonable to conclude that the same pattern exists for the vast majority of all staff positions in the company. There was certainly no evidence to suggest otherwise. Therefore, the total adjustment to move all regulated staff to the 50th percentile is substantially in excess of $37.7 million.
-- In determining the appropriate adjustment, the Board recognizes that it will be difficult for OPG to make significant savings through compensation levels alone in the short to medium-term given the collective agreements with its unions.
-- OPG has already indicated that there will be no increase in management salaries through April 1, 2012, and this reduction was not incorporated into the original filing. [See Note 4 below]
-- The ScottMadden benchmarking analysis supports the conclusion that there is excess staff overall and that this is one component of OPG's relatively poor performance (in comparison to its peers). A further reduction in the allowance for compensation is warranted for this factor.
-- The ScottMadden benchmarking analysis also demonstrates that OPG's overall performance is poor on certain key benchmarks, for [page585] example non-fuel operating costs. Compensation is a significant costs driver for the metric, and OPG's poor ranking supports the Board's decisions to make reductions on account of compensation costs.
The same reduction will apply in 2012, but there will also be an additional reduction of $35 million to represent further progress toward the 50th percentile, further progress in reducing excess headcount, and further progress toward achieving a reasonable level of costs performance. The total reduction for 2012 is $90 million.
While a more aggressive reduction was argued by some intervenors, the Board recognizes that changes to union contracts, staffing levels and movement to the 50th percentile benchmark will take time. Indeed, the Board recognizes that OPG may not be able to achieve $145 million in savings in the test period through compensation reductions alone. The Board is making these adjustments so that payment amounts are based on a reasonable level of performance. If costs are in excess of a reasonable level of performance, then those excess costs are appropriately borne by the shareholder. Standard of Review
[27] The parties agree that on the first issue -- which concerns the substance of the OEB's decision disallowing a portion of the compensation costs sought -- the appropriate standard of review is reasonableness. In considering whether the Decision is reasonable, the court must consider both whether there is justification, transparency and intelligibility in the reasons for the Decision and whether the Decision falls "within a range of possible, acceptable outcomes which are defensible in respect of facts and law". Toronto Hydro-Electric System Ltd. v. Ontario (Energy Board) (2010), 99 O.R. (3d) 481, [2010] O.J. No. 1594, 2010 ONCA 284, at para. 42; Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190, [2008] S.C.J. No. 9, at para. 47.
[28] At the hearing, OPG and the Society argued that the second issue raised -- the functional adequacy of the OEB's reasons -- was a question of whether the OEB breached natural justice by failing to give adequate reasons. Following the hearing, the Supreme Court of Canada released its decision in Newfoundland and Labrador Nurses' Union v. Newfoundland and Labrador (Treasury Board), [2011] 3 S.C.R. 708, [2011] S.C.J. No. 62, 2011 SCC 62. That decision makes clear that where, as here, there are reasons, the decision cannot be attacked on grounds of procedural unfairness; any challenge to the reasoning/result of the decision should be made within the Dunsmuir reasonableness analysis. As to the proper approach in considering the reasons, Abella J. writes, at paras. 14 and 16:
Read as a whole, I do not see Dunsmuir as standing for the proposition that the "adequacy" of reasons is a stand-alone basis for quashing a decision, or as advocating that a reviewing court undertake two discrete [page586] analyses -- one for the reasons and a separate one for the result (Donald J.M. Brown and John M. Evans, Judicial Review of Administrative Action in Canada (loose-leaf at 12:5530 and 12:5510). It is a more organic exercise -- the reasons must be read together with the outcome and serve the purpose of showing whether the result falls within a range of possible outcomes. . . . . . . . .
Reasons may not include all the arguments, statutory provisions, jurisprudence or other details the reviewing judge would have preferred, but that does not impugn the validity of either the reasons or the result under a reasonableness analysis. A decision-maker is not required to make an explicit finding on each constituent element, however subordinate, leading to its final conclusion (Service Employees' International Union, Local No. 333 v. Nipawin District Staff Nurses Assn., 1973 191 (SCC), [1975] 1 S.C.R. 382, at p. 391). In other words, if the reasons allow the reviewing court to understand why the tribunal made its decision and permit it to determine whether the conclusion is within the range of acceptable outcomes, the Dunsmuir criteria are met. Was the OEB's Decision to Disallow a Portion of the Forecast Compensation Costs Reasonable?
The Enbridge decision
[29] Much of the argument before this court focused on Enbridge Gas Distribution Inc. v. Ontario (Energy Board) (2005), 2005 4941 (ON SCDC), 75 O.R. (3d) 72, [2005] O.J. No. 756 (Div. Ct.), revd on other grounds 2006 10734 (ON CA), [2006] O.J. No. 1355, 210 O.A.C. 4 (C.A.). It is the only case in Canada drawn to our attention that has applied a prudent investment test to anything other than a past capital investment.
[30] Enbridge is a gas distributor and seller regulated by the OEB. It had delivered gas via the TransCanada Pipeline. It entered into four agreements to deliver some of its gas via other pipelines. The new routes proved to be more expensive than TransCanada's pipelines and it sought an increase in rates to cover the higher costs it had incurred. At issue before the OEB was whether those increased costs had been prudently incurred. While the parties described it in somewhat varying terms, in the Board's view, they were in substantial agreement on the general approach the Board should take to reviewing the prudence of a utility's decision. The Board agrees that a review of prudence involves the following:
-- Decisions made by the utility's management should generally be presumed to be prudent unless challenged on reasonable grounds. [page587]
-- To be prudent, a decision must have been reasonable under the circumstances that were known or ought to have been known to the utility at the time the decision was made.
-- Hindsight should not be used in determining prudence, although consideration of the outcome of the decision may legitimately be used to overcome the presumption of prudence.
-- Prudence must be determined in a retrospective factual inquiry, in that the evidence must be concerned with the time the decision was made and must be based on facts about the elements that could or did enter into the decision at the time. [See Note 5 below]
[31] The OEB disallowed the additional costs associated with two of the new agreements. Enbridge appealed. Neither it nor the OEB took issue with the OEB's description of what a prudence review entailed.
[32] The Divisional Court allowed Enbridge's appeal, holding that while the OEB had correctly described the "prudence test", it had misapplied it by using hindsight in its determination of prudence.
[33] The Court of Appeal restored the decision of the OEB, holding that when the OEB's decision was read as a whole, it was clear that the OEB had conducted a proper prudence inquiry, and hindsight had only been considered in determining whether the presumption of prudence had been rebutted. At para. 11, Doherty J.A. confirmed that if the presumption of prudence is overcome, the onus is on the utility to show that its decision was reasonable under the circumstances that were known to, or ought to have been known to, the utility at the time it made the decision.
The parties' positions
[34] The appellants argue that the test as articulated in Enbridge applies, and the OEB failed to apply it. They submit that the bulk of the costs disallowed by the OEB arise out of the compensation levels established by the collective agreements; there is a presumption that OPG's decision to enter into the collective agreements was prudent and that presumption was not [page588] displaced; in any event, the OEB did not attempt to engage in a "retrospective factual inquiry"; and the OEB erred in focusing on the legally irrelevant question of current comparators and the impact on consumers. They submit that unless shown to be imprudent, the impact on consumers is irrelevant in fixing payment amounts. The appellants further submit that the alternatives to entering into the collective agreements -- including the difficulty in operating OPG's nuclear plants in the event of a strike or lockout -- must be considered in evaluating the reasonableness of OPG's decision to enter into the collective agreements.
[35] Counsel for the Society argued that, given the unique labour relations framework, the terms of collective agreements should be considered prima facie reasonable, unless there is cogent evidence to the contrary. This is particularly so, he argues, where, as in the case of the Society, the terms of the collective agreement now in effect were determined by an interest arbitrator with special expertise in deciding fair and reasonable compensation in light of all the relevant factors. Counsel for the Society points to a recent decision where an arbitrator refused to apply the Ontario government's non- legislated compensation restraint policy, and argues the result of any arbitration would likely be an award with increases comparable to those forecast by OPG.
[36] Counsel for the Society also argues that the Decision undermines the collective bargaining process and employees' statutory and constitutional rights and does not adequately take into account OPG's obligations under the Nuclear Safety and Control Act.
[37] The OEB argues that both Enbridge and Violet v. Federal Energy Regulatory Commission, 800 F.2d 280 (1st Cir. 1986), on which the Divisional Court relied, at para. 9, in Enbridge in affirming that a prudence review must be done retrospectively, are very different from this case.
[38] The OEB argues that at the time of the application, the compensation costs were forecast costs that had not yet been incurred and were capable of being managed by OPG through, amongst other things, reassigning staff, reducing staff through retirements, reducing the use of overtime and negotiating new or amended collective agreements. It submits that when considering forecast compensation costs, and not costs already incurred, there is no presumption of prudence and it was not restricted to considering whether it was prudent for OPG to have entered into the collective agreements. [page589]
[39] Violet v. Federal Energy Regulatory Commission considered whether an investment made in a nuclear plant could be recovered. In Enbridge, costs incurred since 2000 were considered in fixing rates for 2002. The OEB says the analysis in Enbridge does not apply where the costs have not yet been incurred and that to hold otherwise would rob regulated utilities of the incentive to manage in a cost-effective manner.
[40] Enbridge, it further notes, did not deal with labour costs. The OEB points to Southwestern Bell Telephone Co. v. Arkansas Public Service Commission, 824 F.2d 672 (8th Cir. 1987), writ of certiorari denied 485 U.S. 989 (1988). Southwestern Bell was bound by collective agreements. In setting rates, the Arkansas Public Service Commission cut Southwestern Bell's compensation costs on the basis that they were unreasonable when compared with expenses for wages and benefits for similar jobs at similar companies in the geographic region. The United States Court of Appeals for the Eighth Circuit dismissed the argument that doing so was, by virtue of the existence of the collective agreements, prohibited by the National Labour Relations Act. The OEB argues that Southwestern Bell, decided after Violet, demonstrates that a retrospective approach need not be taken in assessing labour costs not yet paid.
[41] The OEB submits that the statutory framework gives it a broad discretion in how it sets payment amounts and does not support a presumption of prudence. It argues that its approach was consistent with its statutory objectives to protect the interests of consumers and promote cost effectiveness in the generation of electricity.
[42] The CCC and ESC agree with the OEB's position.
[43] ESC argues that Enbridge is also distinguishable because the OEB's statutory objectives with respect to gas regulation do not include promoting economic efficiency and cost effectiveness. These specific statutory objectives with respect to the regulation of electricity, ESC argues, require the OEB to focus on the results of utility decisions, and not just on how prudently those decisions were made. ESC submits that the key element of cost effectiveness is that actual or proposed costs are tested against a benchmark that is considered reasonable by the regulator, and when they are more than the benchmark, they are prima facie not cost effective. Cost effectiveness, it argues, is an entirely results-oriented concept. ESC argues that if the OEB was not able to consider results, the OEB would not be able to carry out its role as a market proxy. [page590]
Analysis
[44] I address first the question of a presumption of prudence.
[45] The reasonableness of OPG's compensation costs was challenged by intervenors in this proceeding and in OPG's 2008 application for approval of payment amounts.
[46] In its decision with reasons (Ontario Power Generation Inc. (Re)), 2008 LNONOEB 36, EB-2007-0905, dated November 3, 2008, pp. 22-24, in response to OPG's 2008 cost of service application for approval of payment amounts, the OEB noted ESC's concern that reports prepared by Mercer Human Resources Consulting and Towers Perrin demonstrated that OPG's labour costs were well above market levels. ESC challenged OPG's compensation costs on reasonable grounds. The OEB significantly cut labour costs in relation to OPG's nuclear generating facility known as "Pickering A". [See Note 6 below] Otherwise, it allowed the nuclear compensation costs sought, noting that "A number of the planned expenditures are related to safety and cost improvements." It directed OPG to provide evidence comparing OPG's nuclear operations with those of similar operators.
[47] The ScottMadden Phase 1 and 2 Reports were provided to OPG before it filed its May 26, 2010 application for approval of payment amounts.
[48] In this proceeding, some intervenors again challenged the level of OPG's compensation costs.
[49] If there was a presumption of prudence despite the clear statutory direction that the onus is on the applicant to establish that the amounts it seeks are just and reasonable and the fact that the costs had not yet been incurred, there were reasonable grounds for challenging those forecasts. Therefore, the onus was on OPG to justify them.
[50] I note OPG's argument that the evidence that the increases in labour costs it agreed to were consistent with increases it had agreed to in the past that had been approved by the OEB supports the reasonableness of its compensation costs. As indicated above, in EB-2007-0905 not all of the past increases were approved. Moreover, what is a reasonable rate increase for [page591] one period of time is not necessarily a reasonable increase for a subsequent period of time. Economic conditions change.
[51] There was evidence on which the OEB could reasonably conclude that OPG's compensation levels were excessive, based on current market comparisons with other worksites, and that OPG's overtime charges and staffing levels were also excessive.
[52] As the OEB argues, this situation is also quite different from that in Enbridge. I agree that a solely retrospective analysis is inappropriate in the present case. In Enbridge, amounts had been paid -- or to the extent the decision spilled over to amounts still to be paid -- the amounts, given the nature of the agreements, were driven directly and wholly by the agreements. Here, while collective agreements are in place, management has the ability to manage, on a go-forward basis, to reduce total compensation costs within the framework of those agreements. The total compensation costs are not solely a result of the collective agreements; they are also a result of how OPG manages its business within the constraints of those agreements. An analysis based solely on whether it was prudent for OPG to have entered into the collective agreements, and OPG's alternatives to entering into those agreements, would not permit the OEB to fulfill its statutory objective of promoting cost effectiveness in the generation of electricity. Moreover, if the OEB could only consider the current reasonableness of expenses not covered by an existing contract, the ambit of its review, and its ability to protect consumers, would be significantly hampered.
[53] Even if Enbridge applies, the OEB did not ignore the collective agreements. It clearly appreciated the difficulty in making significant savings through compensation levels alone, given the collective agreements, and took that into effect in determining the amount of the compensation cuts. Given the complexity of OPG's business, and respecting its management's autonomy, OPG did not try to quantify precisely the amount by which OPG could reduce its forecast compensation costs within the framework of the existing collective bargaining agreements. The OEB has expertise in rate regulation. Its determination of the global amount of the reduction of costs is within a range of acceptable outcomes and is entitled to deference.
[54] The collective agreements were concluded between a regulated monopoly, which passes costs on to consumers, not a competitive enterprise, and two unions which account for approximately 90 per cent of the employees and amount to a near, second monopoly, based on terms inherited from Ontario Hydro and in face of the reality that running a nuclear operation [page592] without the employees would be extremely difficult. Given this dynamic, it is in my view important that the regulator -- tasked with acting as a market proxy -- has the ability to consider current compensation comparators in fixing rates that are just and reasonable to the consumers, as well as OPG.
[55] I agree with counsel for the Society that a collective agreement is different than other types of contracts. In the case of most other contracts, for example, a contract to purchase equipment, a utility has ready options. It considers whether supplier A or supplier B offers the best terms, and those suppliers, aware that the utility has options, bid competitively. In the case of the negotiation of a collective agreement, particularly in the circumstances facing OPG, the employer's options are limited.
[56] Counsel for the Society concedes that the Decision does not alter the obligations of the parties to the collective agreements. He submits that the Decision influences the compensation that an employer can negotiate by restricting its entitlement to recover those costs. An entity's finances are an economic factor in the negotiation of collective agreements. A monopoly utility should be no different. Indeed, art. 15 of the Society's collective agreement stipulates that an arbitrator must weigh, among other things, OPG's financial soundness and its ability to pay. The Decision does not, in my view, amount to an intrusive legal control on the freedom of OPG and the unions to bargain or violate the freedom of association guaranteed by s. 2(d) of the Canadian Charter of Rights and Freedoms. An American court came to a similar conclusion in Southwestern Bell. Similarly, the Decision does not purport to absolve OPG of compliance with its safety obligations, of which the OEB, given its expertise, would have been fully aware. It sends a signal to OPG that the OEB is unwilling to pass on compensation costs at the existing levels to consumers, and leaves to OPG the manner in which it will achieve the necessary savings, within the constraints of the collective agreements and its safety obligations.
[57] The appellants' argument that the OEB cannot consider the impact on consumers unless the costs are found to be imprudent is drawn from TransCanada Pipeline and EB-2009-0084, the OEB's report on the cost of capital for Ontario's regulated utilities. In TransCanada Pipelines, the National Energy Board (the "NEB") set the tolls for transporting natural gas in a pipeline on a cost-of-service basis. The largest single component of the costs was the cost of capital. The issue before the Federal Court of Appeal was whether the NEB erred in taking consumer interests into account in determining the rate of return on [page593] capital it would allow the pipeline to earn. Rothstein J.A. accepted the Pipelines' argument that while, when fixing the final tolls, the impact on consumers was relevant, it was irrelevant when determining the required return on equity. He found the argument in keeping with the decision of the Supreme Court of Canada in Northwestern Utilities Ltd. v. Edmonton (City), 1929 39 (SCC), [1929] S.C.R. 186, [1929] S.C.J. No. 3, which, at pp. 192-93 S.C.R., described the duty of a regulator charged with fixing fair and reasonable rates as a duty to fix "rates which under the circumstances, would be fair to the consumer on the one hand, and which, on the other hand, would secure to the company a fair return for the capital invested".
[58] EB-2009-0084 cites the principle in TransCanada Pipelines and, like that case, focuses on the entitlement of investors in a regulated utility to a fair return on their invested capital. In this case, the OEB specifically declined to reduce OPG's return on equity to mitigate impacts on consumers on the basis that doing so would violate the fair return standard in EB-2009-0084. [See Note 7 below] It set the rate of return on equity at 9.43 per cent for 2011 and 9.55 per cent for 2012 (which was an increase over the previous allowed rate of return of 8.75 per cent). At issue on this appeal is compensation for operating costs not yet incurred, not return on equity capital. TransCanada Pipelines does not, in my view, establish that the OEB cannot consider consumer interests in assessing the reasonableness of costs not yet incurred and fixing payment amounts.
[59] I also note that while the OEB referred to evidence regarding the economic situation and the trend in overall electricity costs as relevant considerations in the introductory pages to its Decision, they were not cited as a factor in its determination of the amount of the reduction in compensation. Those factors were all specific to OPG.
[60] The setting of just and reasonable rates lies at the heart of the OEB's function and expertise. In my view, both the OEB's conclusion that it was not limited, in assessing the reasonableness of OPG's compensation costs, to considering whether OPG's decision to enter into the collective agreements was reasonable under the circumstances that were known or ought to have been known to OPG at the time the decision was made to enter into the agreements, and the amount by which it reduced OPG's forecast compensation costs, were within a range of possible, acceptable outcomes which are defensible in respect of facts and law. [page594]
[61] Aitken J. disagrees with my conclusion. In her view, Enbridge applies, and, to the extent OPG's overall forecast nuclear compensation costs were locked in by the rates of compensation provided for in its collective agreements, OPG was only required to prove the reasonableness of those rates based on the circumstances that existed at the time it entered into the collective agreements. She concludes that the OEB erred in failing to specifically consider whether those rates were reasonable at the time agreed to and the Decision is as a result unreasonable. She agrees, however, that the OEB was not required to identify what portion of the reduction related to any particular factors.
[62] Respectfully, OPG would also have to have proven the extent to which its overall forecast nuclear compensation costs for the test period were driven by the rates in the collective agreements and could not be mitigated through management efforts. This would not have been an easy task, particularly given that the OEB had already expressed disappointment with management's efforts in response to ScottMadden's report. Any result would be imprecise. As I have attempted to indicate above, I believe that in moderating the amount of the reduction because of the collective agreements, the OEB achieved the purpose of the analysis that Aitken J. would have the OEB more precisely undertake. Do the Reasons Allow this Court to Understand Why the OEB Made its Decision and to Determine Whether the Conclusion is Within the Range of Acceptable Outcomes?
[63] OPG argues that the OEB's reasons do not permit OPG to understand why the OEB decided to reduce compensation costs by the amount that it did, as opposed to some other amount, and do not indicate how much of the reduction relates to each of the six factors referred to by the OEB as impacting on its determination.
[64] OPG says this case is analogous to Canadian Assn. of Broadcasters v. Society of Composers, Authors and Music Publishers of Canada, [2006] F.C.J. No. 1547, 2006 FCA 337 ("SOCAN"). The Copyright Board is responsible for fixing the rate of royalties payable by radio stations for the public performance of music and sound recordings. In SOCAN, it found"based on the evidence taken as a whole", that the previous royalty rate underestimated by between 10 per cent to 15 per cent the value of music to commercial radio stations, and that a 10 per cent increase to the tariffs payable to the Society of Composers Authors and Music Publishers of Canada was warranted. [page595] Nothing in the Copyright Board's reasons, or the record, explained how it had arrived at the 10 per cent to 15 per cent range. The Federal Court of Appeal found the Copyright Board's reasons inadequate [at para. 17]:
In my view, it was not sufficient in the circumstances of this case for the Board to justify its quantification of the undervaluation by merely referring to the evidence taken as a whole. It is not enough to say in effect: "We are the experts. This is the figure: trust us." The Board's reasons on this issue served neither to facilitate a meaningful judicial review, nor to provide future guidance for regulatees.
[65] As indicated by Abella J. in Newfoundland and Labrador Nurses' Union, a decision maker is not required to make an explicit finding on each constituent element, however subordinate, leading to its final conclusion. SOCAN predates Newfoundland and Labrador Nurses' Union. Moreover, the facts in this case are different than in SOCAN, and, in any event, SOCAN, at para. 19, indicates that it was not necessary for the OEB to quantify what portion of the aggregate reduction related to each of the six factors it identified:
It [the Board] is not bound to quantify each of the components that justify an increase, but may choose simply to explain the reasoning supporting its quantification of the global royalty rate increase.
[66] The Decision is 158 pages long, exclusive of appendices. The OEB's reasons, while comprehensive, are not perfect. Few sets of reasons are. They allowed this court, however, to understand why the OEB made its decision and to determine that its conclusion was within the range of acceptable outcomes.
[67] The OEB indicated the amount of the reduction with respect to each of 2011 and 2012, and the factors which impacted on its calculation. It was not essential that the OEB quantify the amount relating to each of the six factors. That being said, it is clear that compensation levels were the primary factor and, in the case of the fourth factor (that there would be no increase in management salaries through April 1, 2012), the OEB indicated, at p. 81, that this amounts to $12 million. The OEB is not responsible for managing OPG's business. How OPG manages its business in response to those cuts is left to OPG. The OEB explained the fact that a greater decrease ($90 million) was made in respect of 2012 than 2011 ($55 million) through its acknowledgement that time is required to make changes; OPG will have greater ability to effect savings in 2012 than 2011. Also apparent from the record is that the current PWU collective agreement expires in March 2012. This potentially provides an opportunity, in addition to reduction of overtime expenses and of staff through retirement, to address overall compensation levels. [page596] It is also clear from the OEB's Decision that it very substantially moderated its compensation cuts given the constraints of the collective agreements.
[68] In summary, the reasons meet the requirements of transparency, intelligibility and justification. Disposition
[69] For the foregoing reasons, the appeals are dismissed without costs. [See Note 8 below]
[70] AITKEN J. (dissenting): -- The issue which requires me to dissent in part from my colleagues is whether contractual liabilities incurred by OPG in collective agreements entered prior to the payment amount application and the test period (January 1, 2011 through December 21, 2012), but binding during all or part of the test period, should be considered "forecast costs", subject to a reasonableness test, or "costs previously incurred", subject to an after-the-fact, two-step, prudence review.
[71] OPG's collective agreement with PWU entered in April 2009 expires on March 31, 2012, leaving only nine months of the test period during which OPG will not be bound by the terms of the existing collective agreement (aside from any binding arbitration provisions in the existing agreement). OPG's collective agreement with the Society terminated on December 31, 2010; however, it contained a mandatory binding arbitration provision which resulted in an arbitrator's award on February 3, 2011 that imposed a collective agreement on OPG and bound it to certain rates of pay for Society members throughout the test period.
[72] I understand the submissions of OPG, PWU and the Society to be that, to the extent that OPG was bound by the collective agreements in place for PWU and the Society prior to the test period, these contractual liabilities represented costs incurred prior to the application. Therefore, when considering OPG's application, the OEB was required to conduct a prudence review in regard to such liabilities as described in Enbridge Gas Distribution Inc. v. Ontario (Energy Board), 2006 10734 (ON CA), [2006] O.J. No. 1355, 210 O.A.C. 4 (C.A.). Examples of contractual liabilities set out in the collective agreements would be mandated percentage increases in rates of pay or restrictions in the ability of OPG to lay off employees. The prudence review accepted in Enbridge is described, at para. 10, as follows: [page597]
-- Decisions made by the utility's management should generally be presumed to be prudent unless challenged on reasonable grounds.
-- To be prudent, a decision must have been reasonable under the circumstances that were known or ought to have been known to the utility at the time the decision was made.
-- Hindsight should not be used in determining prudence, although consideration of the outcome of the decision may legitimately be used to overcome the presumption of prudence.
-- Prudence must be determined in a retrospective factual inquiry, in that the evidence must be concerned with the time the decision was made and must be based on facts about the elements that could or did enter into the decision at the time.
[73] I also understand the submissions of OPG and PWU to be that, to the extent that OPG's nuclear compensation costs were not predetermined by binding collective agreements, the OEB was free to subject such costs to a straight reasonableness analysis, based on current considerations. Factors which influenced OEB's forecasted nuclear compensation costs, but which were not tied to earlier contractual obligations, included the attrition of staff through retirement and other means and OPG's ability to control management salaries and the use of overtime. I accept that, in doing a reasonableness assessment of such factors, the OEB can take into account wide- ranging evidence, including cost/benefit analyses, the impact on ratepayers, comparisons with other entities and current market and economic conditions.
[74] I understand the position of the OEB and the other intervenors to be that all of the nuclear compensation costs dealt with in the OEB Decision were properly considered forecast costs that were not subject to a prudence review. I interpret the reasons of Hoy J. as accepting that OPG's nuclear compensation costs for the test period were not yet incurred and therefore were not subject to a prudence review. To the extent that any were subject to a prudence review, there was adequate evidence before the OEB to justify a finding that the presumption of prudence had been rebutted. There was also adequate evidence to support the finding of the OEB that the nuclear compensation costs were not reasonable.
[75] Where I differ from my colleagues is as follows. First, I consider any limitation on OPG's ability to manage nuclear compensation costs on a go-forward basis, due to binding collective agreements in effect prior to the application and the test period, to be costs previously incurred and subject to an after-the-fact, two-step, prudence review. Second, I conclude that, in considering OPG's nuclear compensation costs, as set out in its application, the OEB in its analysis (though not necessarily in [page598] its final number) was required to differentiate between such earlier incurred liabilities and other aspects of the nuclear compensation cost package that were truly projected and not predetermined. Third, in my view, the OEB was required to undergo a prudence review in regard to those aspects of the nuclear compensation package that arose under binding contracts entered prior to the application and the test period. In regard to the balance of factors making up the nuclear compensation package, the OEB was free to determine, based on all available evidence, whether such factors were reasonable. Fourth, had a prudence review been undertaken, there was evidence upon which the OEB could reasonably have decided that the presumption of prudence had been rebutted in regard to those cost factors mandated in the collective agreements. Unfortunately, I cannot find anywhere in the Decision of the OEB where such an analysis was undertaken. The OEB lumped all nuclear compensation costs together. It dealt with them as if they all emanated from the same type of factors and none reflected contractual obligations to which the OPG was bound due to a collective agreement entered prior to the application and the test period. Finally, I conclude that, when the OEB was considering the reasonableness of the nuclear compensation package, it erred in considering evidence that came into existence after the date on which the collective agreements were entered when it assessed the reasonableness of the rates of pay and other binding provisions in the collective agreements. In my view, this approach ran afoul of the directives in Enbridge.
[76] My colleagues are of the view that Enbridge can be differentiated from the circumstances of this case in two significant respects. First, in Enbridge, the company had already paid additional expenses due to the pipeline contracts it had entered prior to its application for rate increases. In this case, OPG had not yet paid the bulk of its nuclear compensation costs for the test period and therefore had some scope to reduce such costs. Second, legislation defines the type of inquiry to be undertaken by the OEB when dealing with different utilities. The inquiry mandated for a rate review for a gas distributor (as in Enbridge) is different from the inquiry mandated for an electricity generator (OPG in this case). In my view, neither of these factors makes the principles enunciated in Enbridge inapplicable to this case.
[77] In Enbridge, the company had entered contracts with various entities to deliver some of its gas through alternate pipeline routes. The new routes became operational in 2000. It soon became apparent that the cost of using these new pipelines was [page599] greater than the cost that would have been incurred had the company shipped its gas through the TransCanada Pipeline System. In mid-2000, the company applied for a rate increase. A provisional agreement was entered pursuant to which the company undertook to set up a notional deferral account to record over a ten-month period the difference between its actual costs for the new pipelines and its hypothetical costs if it had used the TransCanada Pipeline. In 2001, the company applied for approval of increased rates for 2002, based in part on its increased pipeline costs. The application was heard by the OEB in June 2002, and a decision released in December 2002. The OEB decided that Enbridge had not acted prudently in incurring the costs associated with two of the new pipelines and, therefore, Enbridge was not allowed to build such increased costs into the rate increase it was seeking. The OEB, the Divisional Court [(2005), 2005 4941 (ON SCDC), 75 O.R. (3d) 72, [2005] O.J. No. 756 (Div. Ct.)] who heard Enbridge's appeal, and the Ontario Court of Appeal who ultimately decided the case all agreed that, in deciding the application, the OEB had to conduct a prudence review as set out above.
[78] In Enbridge, the OEB hearing occurred in June 2002, half-way through the period under consideration, and the Decision was issued on December 18, 2002, close to the end of the period. In this case, the hearing occurred in the fall of 2010, prior to the test period, but the Decision was released on March 10, 2011, almost three months into the test period. Thus, in both cases, when the OEB issued its Decision, the utility would already have paid for some of the costs dealt with in the Decision. In both cases, some of the costs under review were to be paid in the future. Although the OEB Decision in Enbridge was issued much closer to the end of the relevant period than the Decision in this case, I do not see this difference, in and of itself, as justifying a different test to be applied by the OEB. As well, in both cases, what is being dealt with is a previously negotiated rate for service: in Enbridge, the rate was for the use of a pipeline; in this case, the rate was for labour. I fail to see why the nature of costs previously committed to by contract changes the approach that should be taken to the contract. Employers and unions are obliged under the Labour Relations Act, 1995, S.O. 1995, c. 1, Sch. A to bargain in good faith and make every reasonable effort to reach an agreement. Therefore, it is arguable that the prudence review is of greater pertinence to collective agreements than to other commercial contracts. In this particular case, I note that the PWU and Society collective agreements were already in existence at the time of the demerger of Ontario [page600] Hydro, and OPG became a party to those agreements pursuant to the provisions of the Labour Relations Act. OPG inherited the collective agreements and had to go forward as best it could in the environment created by those agreements.
[79] In regard to the second reason advanced to distinguish Enbridge, the wording of the OEB's mandate to approve gas distribution rates is slightly different from the wording of its mandate to regulate payment amounts for electricity generators. However, in both cases, the legislative standard that the OEB must apply in determining whether to approve payments or rates is the "just and reasonable" standard (see the Ontario Energy Board Act, 1998, S.O. 1998, c. 15, Sch. B, ss. 36, 78, 78.1). As well, the acknowledged objective in both situations is for the OEB to render a decision that is, at once, fair to ratepayers, sufficient to enable the utility to provide the required service and adequate to secure to the utility a fair return on capital. I note that the OEB is given the following additional objective in regulating the electricity industry: "[t]o promote the economic efficiency and cost effectiveness in the generation, transmission, distribution, sale and demand management of electricity and to facilitate the maintenance of a financially viable electricity industry"; however, I consider this objective neutral in the discussion at hand. Promoting economic efficiency and cost effectiveness can be done through the lens of a prudence review.
[80] In substance, there are two significant differences between the two-step prudence review and a current reasonableness assessment. The prudence review starts with a presumption that decisions taken in the past by the utility were prudent when taken. If that presumption is rebutted, then the only significant difference in the two tests is that hindsight cannot be used in a prudence review, whereas all relevant evidence can be considered in a straight reasonableness assessment of forecasted future costs. In either circumstance, the OEB can consider whether the decision was prudent or reasonable from the perspective of whether it promotes objectives set for the industry -- including economic efficiency and cost effectiveness.
[81] Having concluded that the principles in Enbridge are applicable in this case, I conclude that the OEB erred in not following them, and its Decision, therefore, was unreasonable. First, as mentioned above, the OEB did not conduct a separate analysis as to whether the presumption of prudence in regard to OPG's entering the collective agreements with PWU and the Society had been rebutted. If it had, the OEB could have decided that the presumption had been rebutted based not only on the evidence relating to circumstances at the time the agreements [page601] were entered, but also based on subsequent evidence regarding benchmarking analyses and recent arbitral awards. This would have placed OPG in the position of having to prove that its decision to enter the collective agreements in question had been reasonable under the circumstances that were known or ought to have been known to OPG when it entered the collective agreements. Instead of applying this standard, the OEB forced OPG to prove that the compensation rates and layoff restrictions mandated under the collective agreements were reasonable in light of all of the evidence available at the time of the hearing. That evidence included a ScottMadden benchmarking report regarding staffing levels and a Towers Perrin survey comparing compensation data among comparable employers -- neither of which had been available to OPG when it entered the collective agreements. In reducing OPG's nuclear compensation costs by $55 million in 2011 and $90 million in 2012, the OEB relied heavily on these two studies, as reflected in the following excerpt from the dispositive portion of its Decision:
The ratepayers should only be required to bear reasonable costs -- and in determining reasonable costs the Board can be guided by market comparisons. It is the responsibility of the Board to send a clear signal that OPG must take responsibility for improving its performance. In order to achieve this, the Board will reduce the allowance for nuclear compensation costs by $55 million in 2011. This amount is derived by considering a number of factors:
-- Reducing the compensation for the 30 positions from the Towers Perrin data would require a reduction of $37.7 million.
-- Given the breadth of positions in the analysis and the prevailing pattern that wages are well in excess of the 50th percentile, it is reasonable to conclude that the same pattern exists for the vast majority of all staff positions in the company. There was certainly no evidence to suggest otherwise. Therefore, the total adjustment to move all regulated staff to the 50th percentile is substantially in excess of $37.7 million.
-- In determining the appropriate adjustment, the Board recognizes that it will be difficult for OPG to make significant savings through compensation levels alone in the short to medium-term given the collective agreements with its unions.
-- OPG has already indicated that there will be no increase in management salaries through April 1, 2012, and this reduction was not incorporated into the original filing. [This is the only itemized factor not related in some way to the collective agreements.]
-- The ScottMadden benchmarking analysis supports the conclusion that there is excess staff overall and that this is one component of OPG's relatively poor performance (in comparison to its peers). A further reduction in the allowance for compensation is warranted for this factor. [page602]
-- The ScottMadden benchmarking analysis also demonstrates that OPG's overall performance is poor on certain key benchmarks, for example non-fuel operating costs. Compensation is a significant cost driver for this metric, and OPG's poor ranking supports the Board's decision to make reductions on account of compensation costs.
The same reduction will apply in 2012, but there will also be an additional reduction of $35 million to represent further progress toward the 50th percentile, further progress in reducing excess headcount, and further progress toward achieving a reasonable level of cost performance. The total reduction for 2012 is $90 million.
While a more aggressive reduction was argued by some intervenors, the Board recognizes that changes to union contracts, to staffing levels and movement to the 50th percentile benchmark will take time. Indeed, the Board recognizes that OPG may not be able to achieve $145 million in savings in the test period through compensation reductions alone. The Board is making these adjustments so that payment amounts are based on a reasonable level of performance. If costs are in excess of a reasonable level of performance, then those excess costs are appropriately borne by the shareholder.
[82] In my view, the OEB's failure to undertake a prudence review in regard to the significant portion of OPG's nuclear compensation costs that were dependent on previously entered collective agreements, and OEB's use of hindsight in assessing the reasonableness of that portion of OPG's nuclear compensation costs, took its Decision outside the range of possible, acceptable outcomes defensible under the law and rendered its Decision unreasonable.
[83] In arriving at this conclusion, I want to be clear that there are many aspects of the reasons of Hoy J., with which I take no exception. More particularly, I agree that there was evidence pursuant to which the OEB could reasonably find that any presumption of prudence in regard to the compensation levels and layoff restrictions in the collective agreements had been rebutted. In finding the presumption of prudence rebutted, the OEB could properly use all relevant evidence available at the hearing -- including current benchmarking data and current market and economic conditions. I also agree that, ultimately, when considering the reasonableness of OPG's overall nuclear compensation costs, the OEB could consider the reasonableness, based on all of the evidence, of any factors which OPG had the ability to control during the test period on a go-forward basis. Furthermore, I agree that the onus was on OPG to establish the reasonableness of its overall nuclear compensation costs, including salary and staffing levels. The only point on which I differ is that, to the extent that components of such costs were predetermined, in the sense that they were locked in as a result [page603] of collective agreements entered prior to the date of the application and the test period, OPG only had to prove their prudence or reasonableness based on the circumstances that were known or that reasonably could have been anticipated at the time the decision to enter those collective agreements was made. In this limited regard, hindsight could not be used to assess reasonableness. Finally, I agree that, in arriving at a number by which the OEB was reducing OPG's overall nuclear compensation costs, the OEB was not required to stipulate what portion, if any, related to predetermined costs under the collective agreements and what portion related to other factors, as long as the analysis required under the law was first undertaken.
[84] I would return the matter to the same OEB panel with instructions to reconsider its Decision regarding nuclear compensation costs based on the existing record and these directions regarding the need for and the nature of a prudence review for obligations incurred under the two collective agreements.
Appeal dismissed.
Notes
[See Note 1 below]: Act, ss. 1(1).
[See Note 2 below]: This court in Advocacy Centre for Tenants-Ontario v. Ontario (Energy Board), 2008 23487 (ON SCDC), [2008] O.J. No. 1970, 293 D.L.R. (4th) 684 (Div. Ct.), at para. 23, has confirmed the OEB is not limited to the traditional cost of service regulation.
[See Note 3 below]: OPG retained ScottMadden to provide benchmarking consulting services in response to the OEB directive in EB2007-0905 decision with reasons (p. 37) that OPG should target cost and operational performance improvement as well as develop specific initiatives and actions to meet those performance targets. See Exhibit F2-T1-S1, Business Planning and Benchmarking-Nuclear, para. 3.2. ScottMadden is a management consulting firm specialized in serving clients in the utility sector. It produced a Phase 1 Report dated July 2, 2009 and a Phase 2 Report dated September 11, 2009.
[See Note 4 below]: At p. 81, the OEB indicated that this amounts to a $12 million saving. Based on the wage freeze required by the subsequently enacted Public Sector Compensation Restraint to Protect Public Services Act, 2010, S.O. 2010, c. 1, Sch. 24, OPG updated its evidence to forecast a 0 per cent increase for non-unionized employees through April 1, 2012, the period covered by that Act.
[See Note 5 below]: Excerpt from the OEB's decision, quoted at para. 10 of the Court of Appeal's reasons.
[See Note 6 below]: It cut OPG's operation, maintenance and administration, or OM&A, costs by ten per cent. The information in this proceeding is that labour costs average 76.7 per cent of total base OM&A expenditures over the test period. See s. 2.2, Exhibit N-T1-S1, Impact Statement. I assume labour costs constituted a comparable percentage in the period under review in 2008.
[See Note 7 below]: See p. 120 of the Decision.
[See Note 8 below]: The OEB does not seek costs, and under the Act, is not liable for costs in connection with an appeal under s. 33.