Court File and Parties

CITATION: Union Gas Ltd. v. Ontario (Energy Board), 2013 ONSC 7048

DIVISIONAL COURT FILE NO.: 581/12

DATE: 20131220

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

C. McKINNON, HIMEL AND WILTON-SIEGEL JJ.

BETWEEN:

UNION GAS LIMITED Appellant

– and –

ONTARIO ENERGY BOARD Respondent

COUNSEL:

Patricia D.S. Jackson, Crawford Smith and Alex Smith, for the Appellant

Michael Millar, for the Respondent

HEARD: October 16, 2013

Reasons for Decision

C. McKINNON J.

Background

[1] This is an appeal from a decision of the Ontario Energy Board dated November 19, 2012 referred to as Board proceeding EB-2012-0087. The purpose of that proceeding was to determine the amount of the appellant Union Gas Limited’s 2011 utilities earnings that would be returned to ratepayers through an Earnings Sharing Mechanism (ESM). Specifically, the proceeding focused on $22 million of earnings related to the Firm Transportation Risk Alleviation Mechanism (FT-RAM), a program initiated by Trans-Canada Pipelines (TCPL) and made available to all gas utilities in the country. The Board determined that the revenue generated by those transactions could not properly be described as “utilities revenue” but was in fact “gas transportation costs”, the profits of which should have been passed on to the ratepayers instead of being divided in accordance with the ESM that applied to “utilities revenue”, which would have resulted in $5.3 million less being returned to ratepayers. Union submits that the classification of the funds being “gas transportation costs” amounted to impermissible retroactive ratemaking.

[2] The decision under appeal incorporates by reference a companion decision of the Board, rendered on October 24, 2012, some three weeks before the decision under appeal, being decision number EB-2011-0210. That decision dealt with an application commenced November 10, 2011, by Union, for an Order of the Board approving or fixing rates for the distribution, transmission, and storage of natural gas to be effective from January 1, 2013 for a five year period.

[3] For the purposes of the appeal, both decisions are relevant to the outcome.

[4] Union procures natural gas supply and transportation to meet the needs of its customers, the ratepayers. In order to fulfill this responsibility, Union enters into a variety of contracts for both gas commodity and transportation services. Historically, the costs for gas commodity and transportation services are a straight “pass-through” to ratepayers. Whatever Union pays for these services is passed on dollar for dollar to its ratepayers. These are referred to in the business as “Y-factor items.”

[5] The actual amount of gas that will be required during any year cannot be predicted with any certainty and there are times when a utility will have contracted for more gas transportation capacity then it needs. Fluctuations in the market, the addition or loss of customers, and variations in weather can all affect demand in unpredictable ways. To encourage utilities to seek the best value of this unplanned surplus transportation, they are permitted to sell off this excess transportation space and share the proceeds with taxpayers. This practice is referred to as “upstream transportation optimization.” Revenue generated from “upstream transportation optimization” is referred to as Transactional Services Revenue or “utilities revenue” and had historically been kept in a deferred account so that the amount could be properly assessed and distributed at year end in a proceeding before the Board.

[6] Rate hearings before the Board proved lengthy and costly, so that in 2007 Union entered into a new Incentive Regulation Mechanism (IRM) Settlement Agreement with 22 separate intervenors which covered the years 2008-2012. The Settlement Agreement was approved by the Board. As part of the Agreement, the deferral account that captured Transactional Services Revenues (or “utilities revenue”) was eliminated in favour of a General Earnings Sharing Mechanism. It was agreed that Union would provide ratepayers a guaranteed rate discount of $6.9 million (increased from $2.6 million) and would be allowed to keep 100 percent of its “over-earnings”, namely earnings in excess of the utilities regulated return on equity for the first 2 percent. Any “over-earnings” beyond 2 percent would be shared 50/50 with ratepayers. The Agreement provided that sharing would be “based on…actual utility earnings” which would be calculated “using the regulatory rules prescribed by the Board” and that Union would “not make any material changes in accounting practices that had the effect of reducing utility earnings.” The IRM Agreement provided for an amending provision that allowed the parties to re-open the Agreement if Union exceeded its regulated return on equity by more than 3 percent.

[7] Additionally, the IRM Agreement recognized that disputes might arise with respect to the methodology for determining return on equity in which “all parties to the Agreement will be free to take such positions as they consider appropriate with respect to the proceeding.” (For example, see IRM Agreement, section 6.1)

[8] Section 11 of the Agreement requires Union to make annual filings with the Board in relation to all of its income broken down into various classes including such items as: “summary revenue from regulated storage and transportation” “delivery revenue by service type and rate class and service class” and “other revenue”. Union agreed to prepare an earnings sharing calculation following release of its audited financial statements for the prior year. The parties agreed that “stakeholders, including all parties to this proceeding, should have a reasonable opportunity to review the application and calculations, including the ability to make reasonable requests for additional information with respect thereto from Union, and to make submission or provide comments thereon.”

[9] Section 12 of the IRM provided for a process whereby annual rate adjustments would be made by the Board. Union would present a draft rate order to the Board with supporting documentation by October 31 [of each year] which would reflect the impact of its pricing, including “Y-factor items”.

[10] In my view, an objective reading of the Settlement Agreement leads me to believe that at all times the Board had the power to alter its terms as events unfolded.

[11] In fact, Union did earn excess revenue beyond 3 percent which permitted the parties to re-open the Agreement. An “amended IRM Agreement” was negotiated in June of 2009. The split between Union and its ratepayers had been 50/50 over 2 percent. Under the amended IRM the split became 50/50 between 2 and 3 percent and 90/10 in favour of Union’s ratepayers above 3 percent over Union’s regulated rate of return. In effect, the parties agreed that the benefits of higher earnings, if any, would pass to a greater extent to ratepayers. The amended Agreement increased ratepayers’ share of Union’s 2008 earnings from a proposed $15.2 million to the sum of $34.2 million. Significantly, the amended IRM stated that “the Amendments are intended to modify the IR formula so as to produce rates that are just and reasonable during the IR term.”

[12] Union’s actual earnings and the amount which had to be returned to ratepayers can only be determined after the fact, once Union’s annual financial statements have been completed. Thus, at the end of each year of the IRM, the Board conducted an ESM proceeding to assess and dispose of Union’s accounts.

[13] Over the course of the first few years of the IRM, Union began to generate significantly more revenue through transactional services by making use of TCPL’s FT-RAM program, which essentially facilitated utilities swapping pipeline capacity contracts by way of a system of credits which could be monetized.

[14] In 2011, a number of the intervenors, who were parties to the IRM, began to challenge whether the FT-RAM transactions were properly categorized as Transactional Services Revenue or “utilities revenue” but should rather be categorized as “gas transportation costs.”

[15] In light of the concern of the intervenors, and in addition to fresh evidence filed by Union in the companion proceeding, the Board decided to review Union’s use of Transactional Services to generate revenue as a “preliminary matter” to the ESM proceeding for Union’s 2011 earnings. The Board’s preliminary decision is the subject of this appeal. The Board found on the evidence before it that Union was not merely taking advantage of market opportunities as they arose in the normal course of business, but in fact was engaging in FT-RAM transactions on a planned basis by “manufacturing optimization opportunities.” The Board found that Union was essentially over‑purchasing transportation contracts, which are paid for in their entirety by ratepayers and then selling the inevitable surplus, while concurrently shipping gas to its customers using lower cost arrangements. This allowed it to share in the “saved” revenue with ratepayers instead of simply delivering gas at a lower cost.

[16] As noted earlier, it was always agreed that the cost of transport constituted a 100 percent flow through to the ratepayer, so if cheaper delivery methods were known in advance to be available, the lower cost should have accrued entirely to rate payers. As noted previously, flow-through costs are referred to as “Y-factor items” and include gas costs and gas transportation costs. The 2008 Settlement Agreement specifically identified gas costs and gas transportation costs as “Y-factor items.” The parties agreed that “identified Y-factors will not be adjusted…but will be passed through to rates” and that the “disposition of Y-factors amounts will be in accordance with existing Board approved allocation methods and allocators.” (IRM Agreement, section 5.1)

[17] The fundamental disagreement between the parties arises from the fact that prior to the decision under appeal, Union alleges that the Board had already approved the rates for revenue held in Union’s Gas Reduction Costs Deferred Account during a “Quarterly Rate Adjustment Mechanism” (QRAM) proceeding. Union submits that the reclassification of its ESM earnings as “gas transportation costs” in the subsequent ESM proceeding amounted to retroactive ratemaking. The Board submits that the 2011 ESM earnings were always subject to approval at the ESM proceeding and were therefore properly before the Board. Thus, the key issue in this case is whether the Board was authorized to reclassify Union’s 2011 optimization revenues as “gas transportation costs” instead of “utilities revenue.”

The Appeal

[18] This Court has jurisdiction to hear Union’s appeal pursuant to section 33 of the Ontario Energy Board Act, 1998, S.O. 1998 c. 15, Schedule B, (the “Act”) which provides that an appeal lies to the Divisional Court from an order of the Board. An appeal may be made only upon a question of law or jurisdiction.

Standard of Review

[19] Union submits that decisions of the Board involving retroactive ratemaking are reviewable on a standard of correctness, citing the leading authority, Dunsmuir v. New Brunswick, 2008 SCC 9. The Supreme Court confirmed that a correctness standard applies where: first, prior authority has established the standard; second, the decision involves a true question of jurisdiction; or third, a question of law is of central importance to the legal system and lies outside the adjudicator’s area of expertise. The Supreme Court has applied the correctness standard to jurisdictional questions involving energy and utility boards, including whether the rule against retroactive ratemaking is engaged: ATCO Gas & Pipelines v. Alberta (Energy & Utilities Board), 2006 SCC 4 and Bell Canada v. Canada (Canadian Radio Television and Telecommunications Commission), [1989] 1 S.C.R. 1722 (“Bell 1”). The Superior Court in the Northwest Territories has held that where a utility board engaged in retroactive ratemaking it raised a true question of jurisdiction inviting the correctness standard: Northland Utilities Ltd. v. Northwest Territories Public Utilities Board, 2010 NWTSC 92.

[20] It should be noted that other than the Northland case, both ATCO and Bell 1 were decided prior to Dunsmuir. Union argues that the decision implicates a legal question of central importance falling outside of the Board’s specialized expertise. Retroactive ratemaking has been addressed by the Supreme Court and provincial appellate courts on multiple occasions and while the Board has considerable expertise in the area of ratemaking, it has no specialized expertise relating to the rule against retroactive ratemaking. Union argues in the alternative that even if the court were to conclude that the proper standard of review is one of reasonableness, it submits that a decision in which the Board fails to follow well established binding precedent governing retroactive ratemaking is manifestly unreasonable.

[21] The Board submits that the proper standard of review is reasonableness, and that the standard has been applied in virtually all post-Dunsmuir cases involving a tribunal’s interpretation of its home statute. The Board submits that the issues raised in this case directly engaged a presumption that the reasonableness standard should be applied and the stringent test for rebutting that presumption has not been met. Citing Alberta (Information and Privacy Commissioner) v. Alberta Teachers’ Association, 2011 SCC 61, [2011] 3 S.C.R. 654, the Supreme Court reaffirmed that if a tribunal is interpreting its home statute, reasonableness is the appropriate standard of review with only rare exceptions. In a passage that was recently adopted and applied by this court, (Cornish v. Ontario Securities Commission, 2013 ONSC 1310 (Div. Ct.), para 32), the Supreme Court explained at para 34:

…unless the situation is exceptional, and we have not seen such a situation since Dunsmuir, the interpretation by the tribunal of its own statute or statutes closely connected to its function, with which it will have particular familiarity should be presumed to be a question of statutory interpretation which it will have particular familiarity should be presumed to be a question of statutory interpretation subject to deference on judicial review.

[22] The threshold for “exceptional situations” that will overcome or avoid this presumption is a high one and involves a conjunctive test. As the Supreme Court held in Alberta (Information and Privacy Commissioner), “for the correctness standard to apply, the question has to not only be one of central importance to the legal system, but also outside the adjudicator’s specialized area of expertise.” It is submitted that neither of these requirements is satisfied in the case under appeal.

[23] Deference to the Board is not limited to matters involving fact finding, the exercise of discretion or policy making. As a statutory tribunal with the exclusive jurisdiction to hear and determine all questions of law raised in matters properly before it, the Board has a long recognized expertise in statutory interpretation when it involves interpreting its home statute.

[24] The Ontario Court of Appeal and this Court have repeatedly held that the OEB, when interpreting a question of law within its own jurisdiction, is reviewed on a standard of reasonableness: Toronto Hydro Electric System Ltd. v. Ontario (Energy Board), 2010 ONCA 284; Great Lakes Power Ltd. v. Ontario (Energy Board), 2010 ONCA 399; Electricity Distributors Assn. v. Ontario (Energy Board), 2013 ONSC 3118; Summitt Energy Management Inc. v. Ontario (Energy Board), 2013 ONSC 318; Goldcorp Canada Ltd. v. Ontario (Energy Board), 2012 ONSC 3097; Power Workers’ Union (Canadian Union of Public Employees, Local 1000) v. Ontario (Energy Board), 2013 ONCA 359 at para 24. Fixing rates that are just and reasonable and interpreting the nature of transactions specific to the gas industry, are squarely within the expertise and jurisdiction of the Board. A deferential standard should be adopted.

[25] It is my view that the appropriate standard for this appeal is reasonableness. This case concerns ratemaking. Ratemaking is at the core of the Board’s expertise and home statute. Whether a rate has been fixed retroactively is largely a factual determination. This Court has repeatedly held that the Ontario Energy Board is a highly specialized tribunal and that its decisions are deserving of considerable deference. In Bell Canada v. Bell Aliant Regional Communications, 2009 SCC 402, [2009] 2 S.C.R 764 (“Bell 2”), the Supreme Court of Canada recently held that the CRTC’s determination with respect to retroactivity was entitled to deference and reasonableness was the standard of review. The Alberta Court of Appeal has similarly found that a tribunal’s determination of whether or not a rate is retroactive should be considered using reasonableness as the standard: Calgary (City) v. Alberta (Energy and Utilities Board), 2010 ABCA 132.

[26] As previously noted, other than the Northland case, all cases cited by Union were decided pre-Dunsmuir. The reasoning of the Supreme Court of Canada in Bell 2 is more persuasive to that of the Northwest Territories Superior Court in Northland.

Applicable Statutory Provisions

[27] The following provisions of the Ontario Energy Board Act, 1998 are relevant to the issue arising in this appeal:

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…

(4.1) If a gas distributor has a deferral or variance account that relates to the commodity of gas, the Board shall, at least once every three months, make an order under this section that determines whether and how amounts recorded in the account shall be reflected in rates.

(4.2) If a gas distributor has a deferral or variance account that does not relate to the commodity of gas, the Board shall, at least once every 12 months, or such shorter period as is prescribed by the regulations, make an order under this section that determines whether and how amounts recorded in the account shall be reflected in rates.

(5) Upon an application for an order approving or fixing rates, the Board may, if it is not satisfied that the rates applied for are just and reasonable, fix such other rates as it finds to be just and reasonable…

(7) If the Board of its own motion, or upon the request of the Minister, commences a proceeding to determine whether any of the rates for the sale, transmission, distribution or storage of gas by any gas transmitter, gas distributor or storage company are just and reasonable, the Board shall make an order under subsection (2) and the burden of establishing that the rates are just and reasonable is on the gas transmitter, gas distributor or storage company, as the case may be.

[28] In my view subsections (2), (5) and (7) establish that the Board has an overarching obligation to ensure that rates are “just and reasonable.” Subsections (1) and (3) establish that the Board is not fettered in any manner in making orders to ensure that rates are just and reasonable.

[29] I have been provided with the draft dissenting reasons of my colleague Wilton-Siegel J. The fundamental matter upon which my colleague and I disagree is upon the interpretation of section 36 of the Act. In my view, my colleague reads the provisions of section 36 in a manner that is overly restrictive. It is his opinion that the provisions of section 36 of the Act, while not specifying a particular procedure for making orders regarding just and equitable rates, the Board has nonetheless developed two approaches towards the fixing of adjusting reasonable rates, namely a cost of service application for a particular year and an IRM framework covering a fixed term of a number of years. My colleague opines that there is no provision in the Act that imposes an obligation on the Board to ensure that rates are at all times “just and reasonable” in respect of periods for which rate orders have already been granted, nor is there any provision for revisiting any such orders at the end of the rate period based on further or new information.

[30] I agree with that observation as far as it goes. However, I would note that the provisions of section 36 of the Act are liberal in construction and do not in any manner constrain the Board from making orders respecting matters which arose in a previous year but had not been specifically dealt with as a discrete item in the ratesetting process, which is what happened in the decision under appeal. In my view, the provisions of section 36 empower the Board to ensure that rates are just and reasonable in any given circumstance. I do not read the provisions as limiting the powers of the Board, as my colleague’s reasons appear to suggest.

[31] My colleague expresses the view that Union’s level of disclosure to the Board with respect to its FT‑RAM revenues was sufficient and incapable of being reassessed and opines that if the Board had concluded that had Union intentionally failed to provide information regarding its FT-RAM related revenues or its Transactional Service Revenues (or “utilities revenue”) more generally at the time of negotiation of the Settlement Agreement and/or Board approval of the agreement to establish the IRM framework, the Board would have been entitled to re-open the proper classification of the FT-RAM related revenues based on contractual principles of mistake or misrepresentation. In fact, my colleague opines that in such circumstances the Board would have a duty to do so.

[32] If that is the test, then I would simply note that section 36 of the Act specifically provides that the Board is not bound by the terms of any contract, and that in approving or fixing just and reasonable rates, “the Board may adopt any method or technique it considers appropriate.”

[33] My colleague notes that FT-RAM related earnings were disclosed to the Board as part of the $23.3 million of short term transportation and exchange revenue earned in 2008 in an answer to an interrogatory of Board staff filed April 21, 2009, in connection with a hearing held in accordance with the terms of the Settlement Agreement. The FT-RAM earnings were not pursued during the 2009 hearing. Moreover, the Board cleared the deferral accounts and approved of the ESM distributions in 2009 and 2010 even though revenues addressed in those proceedings included FT-RAM related revenues. My colleague opines that it is only because the FT-RAM revenues were so large in 2011 that the Board decided to intervene.

[34] I disagree. In my view, the intervenors and the Board did not have sufficient information to make meaningful submissions or decisions in relation to FT-RAM revenues until the hearings held in the year 2012 leading to the decision under appeal, which incorporates by reference its decision and Order of October 24, 2012. That companion decision must be read closely because the Board used much stronger words when describing Union’s treatment of the FT-RAM revenues than in the decision under appeal. That decision was the first cost of service application for setting rates since 2007. It noted that from 2008-2012 rates were set under an IRM, which adjusted rates “through a mechanistic formula”. During the 2012 hearing Union proposed a formula which would permit them to keep the first $11.6 million of revenue and any balance to be shared 75/25 in favour of ratepayers. At page 26 of the decision, the Board stated:

Board staff submitted that Union had used the capacity that is excess to its gas supply plan to generate a significant amount of revenue over the years. In cases where the transportation capacity was assigned to a third-party, Union earned revenue by selling this capacity. Revenues generated through assignments flowed to ratepayers through the Unabsorbed Demand Charges (“UDC”) deferral account. However, when Union needed the supply and it was being delivered through an alternate route, revenue generated as a result of such assignment flowed to Union’s Utility earnings. If the empty pipeline was TCPL capacity, then Union generated RAM credits through TCPL’s FT-RAM program. Board staff submitted that under the FT-RAM program Union was monetizing RAM Credits and it was then delivering gas though alternate and cheaper routes. In other words, Union was selling transportation capacity paid for by ratepayers and repurchasing the same service at a lower cost while keeping the margins. Board staff along with a number of intervenors submitted that Union had generated significant revenues using the FT-RAM program during the IRM period, the majority of which flowed through to Union’s shareholder.

Board staff submitted that almost all revenue generated as a result of using pipeline capacity that customers have paid for in gas supply costs should go back to the offset gas costs. Board staff submitted that customers have paid for this capacity and they should therefore derive any benefit as a result of optimization. However, Board staff did recognize that Union needs some incentive to optimize and proposed that 90% of the revenues generated through optimization activities related to transportation capacity that in-franchise customers have paid for should go to offset gas costs while the remaining amount should flow to utility earnings.

[35] Most intervenors submitted that 100 percent of the revenues should flow back to ratepayers. The Board found as follows, at page 36 of its decision:

Union defines optimization as a market-based opportunity to extract value from the upstream supply portfolio held by Union to serve in-franchise, bundled customers. Union asserts that exchanges are nothing more than a type of optimization activity. Union has defined an exchange as a contractual agreement where party A agrees to give physical gas to party B at one location, and party B agrees to give physical gas to party A at another location. Either party A or party B may agree to pay the other party for this service. An exchange can only happen between a point on Union’s system and a point off Union’s system…

The Board finds that the record in this proceeding is clear that firm assets are being made available for transactional services on a planned basis, with releases occurring prior to the commencement of the heating seasons and with capacity being assigned for up to a full year. The revenues or margins arising from these services are not being returned to customers as an offset to gas supply costs.

The Board observes Union’s statements that the purpose of the gas supply plan is to ensure secure and reliable gas supply to bundled customers from a diverse supply range, all at a prudently incurred cost. However, the record in this proceeding suggests that Union’s optimization activities have, in their own right, become a driver of the gas supply plan, and are no longer solely a consequence of it.

The Board finds that Union’s ability to “manufacture” optimization opportunities undermines the credibility of Union’s gas supply planning process, the planning, methodology, and the resulting gas supply plan.

As submitted by various parties to this proceeding and Board staff, Union has had an incentive to contract excessive upstream gas transportation services to the detriment of the ratepayer. Union has not filed convincing evidence that the amount and type of upstream gas transportation contracts procured on behalf of ratepayers reflects the objective application of its gas supply planning principles.

For example the Board is of the view that the schedule filed by Union showing decontracting on the TCPL system is not helpful. The schedule does not inform the Board’s overall assessment of whether the gas supply plan is prudent, as the schedule does not speak to whether too much or too little TCPL capacity has been released. Further, the schedule does not inform the Board as to whether the increase in tolls on the remaining long-term FT capacity with TCPL arising from decontracting has been more than offset by reduction in tolls on alternative transportation routes, including those pipeline companies in which Union’s parent company has, or will have, an economic interest.

Union provided evidence that it did not consider this type of cost-benefit analysis in its gas supply planning function and that the gas supply personnel look only at current tolls when making a purchasing decision. Moreover, Union testified that its gas supply planning personnel may not have an understanding of the basis upon which the rates of tolls paid for upstream transportation are calculated.

The Board does not accept this approach. The Board is of the view that the principles used by Union’s gas supply planning group are a very high level and thus provide little guidance with respect to how the costs that Union incurs are calculated, and whether the costs would, in fact, be prudently incurred.

Union’s evidence on its optimization activities has not been clear and Union’s approach with respect to optimization in general has not been helpful. The Board notes that absent the TCPL application filed with the OEB on September 1, 2011, little information describing the nature of these activities (notably FT-RAM) would have been available.

In RP-1999-01, the Board, quoting from E.B.R.O 452 (paragraph 6.5 of that decision) stated that:

Regulation is intended to be a surrogate for competition in the marketplace and the legislation intended that the company has an opportunity to recover its costs and to earn a fair rate of return on its shareholders’ equity...The system requires the regulator to act on faith with the utility, bearing in mind the prospective nature of the evidence. The regulator expects the utility, in return, to provide the best possible forecast data that can be made available, on a timely basis.

The Board also said in paragraph 4.2 of RP-1999-0001:

The Board appreciates that business plans are not carved in stone and the utility must have flexibility to meet ongoing demand of the marketplace; however, this flexibility must be balanced against the utility’s obligations as a regulated entity. This is particularly true when the Company is not responding to exogenous events, beyond the Company’s control, but is implementing its own initiatives.

Union stated that there have been at last 20 separate proceedings before the Board relating to QRAMs, deferral accounts, and rebasing and argue that the Board’s discovery-related powers are tools that the Board has at its disposal which go well beyond what even a court of law has in a civil context. The implication of these arguments is that these issues should have been identified by intervenors and Board staff via interrogatories, document production, and technical conferences.

The Board disagrees with Union’s assertion that it is the responsibility of intervenors and Board staff to undertake adequate discovery to ensure that the record is complete. Union is a rate regulated entity, and the information asymmetry in evidence in this proceeding is illustrative of the need for the Board to reintegrate Union’s affirmative disclosure obligations.

At paragraph 4.5 in RP-1999-001 the Board clearly sets out a utility’s affirmative obligation to disclose by stating:

The Company has an affirmative obligation to provide the Board with the best possible evidence and it is not incumbent on the intervenors to ensure, through cross examination of the Company’s witnesses, that the record is adequate and complete. The company cannot shirk its responsibility as a regulated entity by submitting evidence that is vague and incomplete.

Union has not met this affirmative obligation…

Consistent with the description provided by Union, the Board will define optimization as any market-based opportunity extract value from the upstream supply portfolio held by Union to serve in-franchise bundled customers, including, but not limited to, all FT-RAM activities and exchanges.

The Board finds that 90% of all optimization net revenue shall accrue to ratepayers and 10% shall accrue to Union as an incentive to continue to undertake these activities on behalf of ratepayers…

The Board orders the establishment of a new gas supply variance account in which 90% of all optimization margins not otherwise reflected in the revenue requirement are to be captured for the benefit of ratepayers…(emphasis added)

[36] In my opinion, the excerpted portions of decision EB-2011-0210 incorporated by reference in the decision under appeal clearly establish that Union was less than forthright in their disclosure obligations with respect to FT-RAM revenues and pursuant to section 36 of the Act, the Board had an obligation to address the situation and set just and reasonable rates. A review of the record of disclosure by Union of its FT-RAM revenues completely supports the findings of the Board. The disclosure was minimal, if not misleading. Furthermore, by stating that Union was “manufacturing” optimization opportunities, the Board effectively found that Union had acted improperly. One cannot “manufacture” opportunities unintentionally. The Board had an obligation to intervene and correct the situation, exercising its unfettered powers under section 36 of the Act.

Retroactive Ratemaking

[37] Union argues that there is a presumption that an administrative body may not exercise its authority retroactively unless expressly authorized by legislation. Retrospective ratemaking is contrary to “just and reasonable” rate making. A utility should be able to rely on a final rate order and the revenues that follow in order to properly conduct its business. “Out of period” rate adjustments are outside the jurisdiction of the Board. Union argues that section 36 of the Act gives the Board power to make orders fixing just and reasonable rates but appellate courts have repeatedly held that this power is prospective. Deferral accounts and interim orders which can be varied retroactively are not an exception to this rule since changes to these decisions are contemplated from the outset.

[38] Union points out that prior to the 2008 Agreement, a deferral account had been used to capture upstream optimization revenues for future determination but as a result of the 2008 IRM Agreement, this account was closed and no account was created to replace it. When the Board decided to reclassify revenue from optimization transactions, it failed to recognize that gas transportation costs for 2011 had already been the subject of final orders in the QRAM proceedings. By requiring Union to credit a newly created deferral account with revenues from upstream transactions, subject to a future rate determination, the Board engaged in retroactive ratemaking. It purported to remedy the imposition of rates approved of in the past that it subsequently determined to be unjust and unreasonable.

[39] Union argues that the Board justified its ratemaking on the grounds that it did not have the necessary evidence to properly characterize the revenues as reduction in gas transportation costs at the time that it made its earlier final orders. This is not a justifiable basis for the Board to engage in impermissible retroactive rate making. It is no answer for the Board to point to its general rate making authority or any purported failure by Union to have disclosed earlier how, mechanically, it was making use of the FT-RAM program.

[40] Union submits that there is a presumption that an administrative body such as the Ontario Energy Board may not exercise its authority retrospectively or retroactively, unless expressly authorized by legislation. The classic explanation of this general presumption against retrospective operation being given to a statute is found in Young v. Adams, [1898] A.C. 469 where Lord Watson said at page 476: “It manifestly shocks one’s sense of justice that an act legal at the time of doing should be made unlawful by some new enactment.”

[41] The Board’s reply to this submission is that during the proceeding under appeal, the Board found on the basis of the evidence before it that Union was “manufacturing” optimization opportunities. It was capitalizing on inevitable oversupply capacities by trading in FT-RAM credits that been paid for by the ratepayers. Union’s use of the FT-RAM program differed significantly from transactional services which involves the unplanned sale of surplus transportation. Therefore, the Board determined that for 2011, that is, for the revenues currently before it in the proceeding, the FT-RAM revenues would not be treated as “utility earnings” but rather “gas transportation costs,” which are a “Y-factor” that should pass through to ratepayers. FT-RAM revenues that had been treated as utility earnings and shared with ratepayers on that basis in previous ESM proceedings were not affected by the decision. In other words, notwithstanding the fact that ratepayers asked the Board to impose similar treatment for revenues from the years 2008-2010, the Board refused to give retroactive effect to their decision.

[42] Furthermore, the 2011 FT-RAM revenues did not belong in any of the deferral accounts that were considered by the Board in the four QRAM proceedings during the year 2011 and were not, and indeed could not have been, dealt with by final Orders in those proceedings. Union did not bring forward the $22 million in FT-RAM earnings from 2011 for disposition in any of the four 2011 QRAM proceedings, nor had it even sought to dispose of FT-RAM revenues through a QRAM proceeding. The first and only time the 2011 FT-RAM revenues came before the Board was in the proceeding itself, the decision of which is the subject of this appeal.

[43] The $22 million brought forward for disposition was “housed in what was for all intents and purposes an ESM deferral account.” As noted earlier, Union’s earnings in a calendar year can only be calculated after that year has ended and therefore the disposition of any excess earnings can only occur after the year has concluded. Thus, the earnings were clearly identified by the Board as “encumbered” and subject to future disposition. That is exactly how things proceeded in the first three years of the IRM Framework. Union calculated its earning for year one, then brought them forward for disposition in year two. No party, including Union, has ever suggested that this approach gives rise to a retroactivity problem.

[44] Union argued that once the Board reclassified the $22 million as “gas transportation costs” it was forbidden from dealing with these amounts because all gas supply costs for 2011 had been disposed of in the QRAM hearings. The Board submits that this argument should be rejected. Whatever its initial classification, the $22 million was “encumbered” and was brought forward for disposition for the first time in the proceeding under appeal. The Board determined that going forward the FT-RAM earnings would be given different treatment and be considered annually outside of the QRAM process. Put simply, the FT-RAM revenues have nothing to do with the QRAM process. The fact that the QRAM accounts for 2011 had already been disposed of is of no consequence whatever. In this case, based on a clearer understanding of the nature of the FT-RAM revenues, the Board decided to change the sharing ratio for these revenues on a going forward basis. It did this to ensure that rates paid by consumers remained “just and reasonable,” which is the core function of the Board pursuant to the Act creating it. As the Board stated in the decision under appeal at page 25:

At all times, the Board must be of the view that the rates arising from the IRM Framework are just and reasonable. The Board agrees with CCC, who stated in its argument that the IRM Framework does not dislodge the obligation of the Board to ensure that all components of the IRM Framework have been properly characterized and the revenues derived from the operation of those components have been allocated properly.

The Board is of the view that there is no tension between the objectives of the IRM Framework and its rate setting mandate. The Board makes findings during the IRM term based on the evidence properly put before it in the rate adjustment processes that are embedded in the IRM Framework. There is nothing inherent in the IRM Framework that requires the Board to depart from its normal approach to rate setting. The Board’s discretion with regard to setting rates within the IRM term exercised based on the facts placed before it and with due consideration of any new issues that have arisen. These are not new concepts.

The Board has an ongoing responsibility to determine whether activities undertaken during the IRM term are being characterized in accordance with the IRM Framework and have been characterized in a manner which results in just and reasonable rates.

It necessarily follows then, that the annual disposition of deferral accounts, earnings sharing and other accounts that are part of Union’s IRM Framework is not merely a mechanical exercise. Rather, it is a process that is informed by evidence relating to the balances in those accounts and whether those balances reflect the appropriate application of the IRM Framework and the regulatory principles inherent in it.

The IRM Framework reflects a long-standing regulatory principle that the cost of gas and upstream transportation are treated as pass-through items…

As cited above, the Settlement Agreement specifically established that the costs of gas and upstream transportation are Y-factors and are treated as pass-through items…

The evidence in this case supports CMR’s contention that Union generated revenue by creating unabsorbed demand charges of UDC on a planned basis and then either concurrently assigned or exchanged its FT contracts on the TCPL Mainline to monetize the FT-RAM credit value of the unused FT contracts.

The Board agrees with the submission of parties that the utilization of TCPL’s FT-RAM program by Union allows Union to manage its upstream transportation arrangements on a planned basis by leaving pipe empty and flowing gas on a different and cheaper path. The Board finds that the effect of this activity is that higher upstream transportation costs that are paid for by Union’s customers, have been substituted with lower costs upstream transportation arrangements.

The Board finds that Union had used TCPL’s FR-RAM program to create a profit from the upstream transportation portfolio and has treated this profit as utility earnings, subject only to the provisions of the earning sharing mechanism.

The Board finds that this treatment is inconsistent with the Settlement Agreement on the IRM Framework and contrary to long standing regulatory principle inherent in the IRM Framework that the cost of gas and upstream transportation are to be treated pass-through items, and therefore that Union cannot profit from the procurement of gas supply for its customers.

As such, the Board finds that Union’s upstream transportation FT-RAM optimization revenues are gas costs reductions, and are properly considered Y‑factor items in accordance with Union’s IRM Framework. The Board directs Union to confirm that the net revenue amount related to FT-RAM optimization activities for 2011 is $22 million dollars.

Union has argued that a finding to this effect will undo the IRM Framework. The Board does not agree. This determination is in no way a departure from the IRM Framework. The Board is simply re-classifying revenues based on evidence that has been filed with the Board, as a part of Union’s rebasing proceeding (EB-2011-0210) and incorporated by reference in this proceeding. This re-classification of revenues results in a treatment that is consistent with the IRM Framework and the regulatory principles inherent in it. As stated earlier, the Board considers the rate adjustment processes embedded in the IRM Framework to have the purpose facilitating the type of review that has occurred here in this case.

The Board notes that Union has classified the revenues generated from its upstream transportation FT-RAM optimization activities as transactional services revenues because it believes that these activities are no different that its traditional transactional service activities. However, the Board finds that a review of the evidence filed by Union in previous proceedings to answer the question: “what are transactional services” does not lead to this conclusion.

In RP-2003-0063 / EB-2003-0087, Union’s description of its transactional services, cited below, implies that the upstream transportation asserts related to the gas supply plan that are optimized are only those assets that are surplus to the needs of the gas supply plan for reasons outside of Union’s control.

With a balanced gas supply portfolio, which meets the forecast in-franchise and ex-franchise firm demands, there will be few, if any, firm assets available to support TS on a future planned basis.

The Board notes that, in the above passage, Union clearly states that upstream transportation asserts are generally only available on an unplanned basis. (emphasis added)

[45] The Board went on to provide further evidence that Union should only profit from upstream transportation assets on an unplanned basis. At page 29 of the decision the Board stated:

Union has not pointed to any previously filed evidence that fully explained how these revenues were being generated. The record on the Preliminary Issue has been almost entirely informed by evidence from Union’s 2013 rebasing proceeding which has been incorporated by reference. The evidence describing the nature of Union’s FT-RAM optimization activities in this proceeding far exceeds any that has been provided to the Board in the past…

The Board has found that the FT-RAM optimization activities associated with Union’s upstream transportation services represent a departure from long-standing regulatory principle that the cost of gas and upstream transportation are treated as pass-throughs. The Board finds that Union must be mindful of the information asymmetry that exists between it and ratepayers. In particular, the Board finds that Union has an obligation to disclose departures or potential departures that it intends to make from regulatory principle inherent in the IRM Framework during the term of the IRM. The Board finds that the nature of Union’s FT-RAM optimization activities and its treatment of the resulting revenue is an example of the type of departure that warrants a much higher level of disclosure than was produced in prior proceedings. (emphasis added)

[46] When read together, the decision of the Board under appeal and the decision incorporated by reference clearly establish that Union had not met its disclosure obligations with respect to FT-RAM revenue and the revenue could only be properly categorized by the Board following the 2012 hearings. It follows that the $22 million was indeed “encumbered” because Union, in accordance with the statutory framework and Board policy was bringing forward its 2011 accounts for review and approval. The argument that these funds had been dealt with during the QRAM proceedings must be rejected. The reasoning and findings of the Board are clear that the QRAM proceedings never dealt with the $22 million in dispute and it was only during the rate hearings held in 2012 that the true scope and nature of the FT-RAM program was revealed to the intervenors and the Board. It must also be remembered that the Board was not dealing with money that belonged to Union. It is money that had been provided to Union by ratepayers.

[47] The argument advanced by Union that what the Board was doing amounted to “classic retroactive rate setting” must be rejected. There was nothing improper in the Board deciding to reclassify the treatment of what had previously been treated as ordinary earnings for the purposes of the earning share of the ESM on a going forward basis.

[48] My colleague Wilton-Siegel J.’s opinion that the Board’s mandate regarding “just and reasonable” rates is not embedded in the Settlement Agreement and consequently has engaged in retrospective rate setting has, in my view, been fully answered by the Board in its own reasons. Implicit in the Settlement Agreement and explicit in the amending Agreement is the recognition that the Board has an over-arching obligation to ensure that rates are “just and reasonable”, and subject to yearly review and approval. In that sense, the obligation to ensure that rates are just and reasonable do not “trump” the terms of the Settlement Agreements; rather, the Settlement Agreement recognizes it may be trumped by virtue of the express provisions of section 36 of the Act, specifically that rates under the Agreement must be “just and reasonable.”

[49] In Epcor Generation Inc. v. Alberta (Energy and Utilities Board), 2003 ABCA 374, the Alberta Court of Appeal noted that the tribunal in that case dealt with certain deferral which when initially established split revenue 50/50 with ratepayers. However, when it came time to dispose of the accounts, it was discovered that the balances were much higher than had been initially anticipated, the tribunal therefore altered the sharing ratio from 50/50 to 98/2 in favour of ratepayers. The Alberta Court of Appeal held that this decision did not constitute retroactive ratemaking:

[50] EPCOR's retroactive ratemaking argument hinges on the characterization of the original order as interim or final, which in turn depends largely on the facts. EPCOR contends that because of unique factual circumstances, the sharing ratio was neither an interim order nor a standard deferral account provision, but a final order.

[51] The Board viewed the circumstances differently. In deciding to vary, the Board relied on the fact that Decision U99099 contemplated Board review of the deferral account balances, and recognized that adjustments might be required as a result of that review. The Board decided the deferral accounts were therefore "left open" and "continued" within the meaning of section 57(2)(c) of the Electric Utilities Act, supra and, because the deferral accounts had not been reconciled or the moneys disbursed, a decision to review the sharing ratio and the ultimate collection and disbursement of funds would be prospective in nature (Decision 2001-45 at 23). These findings are within the Board's jurisdiction and expertise and, on judicial review, this Court would defer to the Board on such matters.

[52] The Newfoundland Court of Appeal has also held that tribunals retain a significant discretion in determining how to dispose of amounts held in deferral accounts, irrespective of how those accounts may have been treated in the past: Newfoundland and Labrador Hydro v. Newfoundland and Labrador (Board of Commissioners of Public Utilities), 2012 NLCA 38.

[53] It is clear that insofar as revenues remain “encumbered,” their determination cannot be considered retroactive: See Bell 2 at paras 61-64. The use of deferral account precludes a finding of retroactivity or retrospectively.

[54] Simply stated, the Board dealt with the $22 million in the course of a hearing in which Union offered up its accounts for approval and finalization. It would be absurd to hold a lengthy hearing and hear from numerous intervenors if in fact the revenues at issue had previously been finally disposed of.

[55] I should state in passing that not only do I find the decision of the Board reasonable in the sense that it demonstrates the existence of the requirements of justification, transparency and intelligibility within the Board’s decision making process and falls within a range of possible acceptable outcomes which are defensible in respect of the facts and law, but I also find the decision to be correct.

[56] For these reasons, the appeal is dismissed. In accordance with the agreement of the parties, there shall be no order as to costs.

C. McKinnon J.

Himel J.

WILTON-SIEGEL J. (dissenting)

[57] The issue in this proceeding is the Board’s authority to re-classify and treat Union’s 2011 FT-RAM related revenues as gas supply cost reductions.

[58] I agree with my colleagues that the standard of review is reasonableness for the reasons set out in their decision. In particular, the Divisional Court held in Goldcorp, supra, at para. 25 that the Board is a highly specialized tribunal and that, accordingly, its decisions are deserving of deference when it is interpreting the provisions of the Ontario Energy Board Act, 1998, (the “Act”) its home statute, and are reviewable on a standard of reasonableness. I consider that the same standard is applicable in reviewing a decision of the Board that involves the interpretation of an agreement that has been approved by the Board pursuant to the authority granted to it under the Act. However, I consider the decision of the Board dated November 19, 2012 in the Board’s proceeding EB-2012-0087 (the “Decision”) to be unreasonable for the reason that it entails retroactive rate-making.

[59] I propose to proceed by first making several observations that inform the conclusions reached below, and then setting out my analysis and conclusions in greater detail.

Preliminary Observations

[60] Three preliminary observations are important for the context in which the issues in this proceeding are analyzed and the conclusions reached herein.

[61] First, the issue in this proceeding must be approached as a matter of contractual interpretation of the Settlement Agreement, as approved by the Board in its capacity as the regulatory authority having jurisdiction over Union. Insofar as the Decision relies on the Board’s authority under the Act to override the provisions of the Settlement Agreement, it is necessary to identify the basis for such authority in the Act. This is addressed further below.

[62] Second, as I understand the facts of this case, the Board’s reference to Union generating revenue “by creating unabsorbed demand charges or UDC on a planned basis” is not a finding that Union entered into more firm transportation contracts than were necessary to implement its gas supply plan in accordance with the governing principle of that plan. Rather, it is a finding that Union found market opportunities to reduce its need to transport gas utilizing the firm transportation contracts previously entered into, for example by exchanging gas received from a third party in Ontario for gas delivered to the third party in Alberta. In addition, as a related matter, the Board did not object to the firm transportation contracts entered into by Union as contemplated by its gas supply plan. As described below, the costs of these contracts were factored into Union’s cost of service.

[63] In the companion decision of the Board, being decision number EB-2011-0210 (the “Companion Decision”), the Board approved Union’s gas supply plan for 2013 as filed. This gas supply plan was prepared using the same peak-day methodology as was used in respect of the gas supply plan that grounds the IRM Framework. While the Board stated that it “has concerns with Union’s gas supply planning process, its planning methodology and the resulting supply plan in light of Union’s actions over the incentive regulation period”, the Board stopped short of making any finding on these matters. Instead, the Board ordered an expert, independent review of the matters of concern to the Board. The absence of any finding on these matters is an important starting point for the issues in this proceeding.

[64] Third, while the Board expressed concerns regarding the extent of the disclosure that it received from Union regarding the nature and extent of its FT-RAM related activities, the Board did not find that Union intentionally failed to disclose or mislead it.

[65] The Board stated instead that “Union has an obligation to disclose departures or potential departures that it intends to make from regulatory principle inherent in the IRM Framework during the terms of the IRM”. The Board then concluded that “the nature of Union’s FT-RAM optimization activities and its treatment of the resulting revenue is an example of the type of departure that warrants a much higher level of disclosure than was produced in prior proceedings.” In carefully worded language, the Board stops short of finding that Union breached such an obligation.

[66] In particular, the Board did not suggest that Union’s level of disclosure provided the basis for its asserted authority to re-classify the FT-RAM related revenues as gas supply costs. This undoubtedly reflects, at least in part, the fact that Union disclosed to the Board the existence of FT-RAM related earnings as part of the $23.3 million of short-term transportation and exchange revenue earned in 2008 in an answer to an interrogatory of Board staff filed April 21, 2009 in connection with a hearing held in accordance with the terms of the Settlement Agreement. That hearing resulted in an amendment to the Earnings Sharing Mechanism in the IRM Framework, rather than to a reinstatement of the former mechanism for treating such revenues as a reduction in gas supply costs. As counsel for the Board acknowledged, neither the Board nor the intervenors chose to pursue this matter in the 2009 hearing. Nor did the Board address in this proceeding the orders clearing the deferral accounts and approving the Earnings Sharing Mechanism distributions in 2009 and 2010, even though revenues addressed in those proceedings included FT-RAM related revenues.

[67] In the Companion Decision, while the Board finds that Union failed to meet its obligation to provide the Board with the best possible evidence on its activities, the Board again stops short of finding that Union deliberately failed to provide the best evidence of its FT-RAM related activities. In fact, in one passage, the Board appears to conclude that the explanation lies, at least in part, with the very high level of the principles used by Union’s gas supply group which do not permit guidance as to the calculation, or an assessment of the prudence, of the costs incurred by Union. Whatever the explanation, however, the important fact is that the Board has not concluded that Union intentionally misrepresented the relevant facts. Accordingly, for present purposes, in my opinion, the Board must approach the issues on the basis that the amount of the FT-RAM related revenues constitutes an unanticipated circumstance at the time of the amendment to the IRM Framework in 2009. The significance of this conclusion is addressed below.

[68] I accept that, if the Board had concluded that Union intentionally failed to provide information regarding its FT-RAM related revenues, or its “transactional service revenues” more generally, at the time of negotiation of the Settlement Agreement or the amendment to it and/or Board approval of the Agreement to establish the IRM Framework or the amendment thereto, the Board would have been entitled to re-open the proper classification of the FT-RAM related revenues based on contractual principles of mistake or misrepresentation. Indeed, if such behaviour had been established, I think the Board would have been required to re-open all of the years of the IRM Framework, not just the 2011 year. Instead, however, the Board proceeded down a middle way that I do not think was open to it.

Basis of the Board’s Decision

[69] The Board based its Decision on the following three determinations:

1. That under the Settlement Agreement the reference to transportation costs as a Y-factor is intended to mean that all revenues generated by selling transportation assets continue to be a pass-through item;

2. That under the Settlement Agreement “transactional service revenues” is a meaningful concept that refers to identifiable revenues subject to the Earnings Sharing Mechanism that do not include FT-RAM related revenues; and

3. That the Board’s rate setting mandate is embedded in the IRM Framework in the rate adjustment processes contemplated therein, so that there is nothing inherent in the IRM Framework that requires the Board to depart from its normal approach to rate setting.

[70] I accept that, if these three determinations as they are expressed by the Board were correct, the Decision would be a reasonable one and could not be characterized as retroactive rate-making. It is the manner and extent to which these determinations are not correct, however, that leads to the conclusion that the Board engaged in retroactive rate-making. I will address each of these three determinations in turn.

Transportation Costs as a Y-factor

[71] The Board says the Settlement Agreement “specifically establishes that the cost of gas and upstream transportation are Y-factors and are treated as pass-through items”. It says that Union’s activities are inconsistent with this alleged feature of the Settlement Agreement and “contrary to long standing regulatory principle inherent in the IRM Framework that the cost of gas and upstream transportation are to be treated as pass-through items”.

[72] There is a long-standing regulatory principle that the cost of gas is treated as a pass-through item. That was true before implementation of the IRM Framework and remains true under the IRM Framework. While I agree that the same principle applied historically to transportation costs, the treatment of gas supply costs under the IRM Framework is so different that it must be concluded that this principle has not been implemented in the Settlement Agreement. Indeed, the differences between prior practice respecting the pass-through of transportation costs and the provisions of the Settlement Agreement, as well as the difference in treatment of the cost of gas and transportation under the Settlement Agreement, compel the conclusion that any revenues from transportation assets are not to be treated as gas supply costs and fall into general revenues subject to the Earnings Sharing Mechanism.

[73] As mentioned, gas costs have historically been treated as a pass-through item. This treatment continued under the IRM Framework with gas costs being expressly treated as a Y-factor. More importantly, the Settlement Agreement expressly preserved the historic deferral accounts that had been established before the IRM Framework came into force to pass through actual gas costs by means of quarterly rate adjustments. In contrast, while transportation costs are expressed to be a Y-factor under the Settlement Agreement, the deferral account that had historically operated to pass net transportation costs through to the customer base (account #179-69) was expressly terminated when the IRM Framework came into existence.

[74] The implication of this difference in treatment, from the perspective of contractual interpretation of the Settlement Agreement, is that the intended Y-factor under the Settlement Agreement was gross transportation costs, as set out in the firm transportation contracts and any other transportation costs, rather than net transportation costs. That is, the intended Y-factor in respect of transportation costs consists of the costs associated with the firm transportation contracts entered into as contemplated by Union’s gas supply plan, without regard for any netting or pass-through of profits or losses on the sale of any such contracts.

[75] This interpretation of the Settlement Agreement is confirmed by the agreed reduction of $6.9 million from revenues as an agreed adjustment to reflect profits on the sale of transportation assets, i.e., of fixed transportation agreements. As a fixed deduction from revenues, Union bears the risk that it will not earn sufficient “transactional service revenues” to offset this adjustment. While Board counsel argued that there was no link between Union’s acceptance of this $6.9 million deduction and the treatment of all other transactional service revenues as subject to the Earnings Sharing Mechanism, the Board’s own decision in EB 2008-0220 makes this connection explicit. Further, there is no evidence to suggest that the parties intended that Union would bear the risk of failing to achieve $6.9 million of such revenues but would not be entitled to any excess it might achieve. The foregoing Board decision states exactly the opposite. The existence of this agreed adjustment also evidences an intention of the parties that the Y-factor under the Settlement Agreement in respect of transportation costs would be the gross costs of the firm transportation contracts entered into by Union, rather than the net costs.

[76] This interpretation is further supported by the Board’s determination of the means of implementation of the Decision. The Board did not stipulate that the FT-RAM related revenues should fall into an existing deferral account, as certain intervenors suggested. In recognition of the reality of its Decision, the Board required the creation of a new deferral account.

[77] Based on the foregoing, I conclude that under the terms of the Settlement Agreement, the FT-RAM related revenues are to be treated as revenues subject to the Earnings Sharing Mechanism, there being no other account or provision that would mandate a different treatment. This is a critical determination for the conclusion reached in these reasons as set out below. It raises the question of the Board’s authority for re-classifying such costs as gas supply costs.

Transactional Service Revenues

[78] The Board also suggests that there is a concept that is meaningful in the context of the IRM Framework of “transactional service revenues” that has consistently been limited to revenues generated from “assets that are surplus to the needs of the gas supply plan for reasons outside of Union’s control”. If such a concept were embedded in rate setting principles, even though it is not established in the Settlement Agreement, there could be a basis for treating FT-RAM related revenues differently from other revenues subject to the Earnings Sharing Mechanism. However, the evidence does not support this conclusion. I have the following observations regarding “transactional service revenues” based on the evidence in the record.

[79] First, as used by the Board in its Decision, “transactional service revenues” means all revenues that are not expressly treated under specified accounts in the IRM Framework. However, this is not a concept that is mentioned in the Settlement Agreement. In particular, there is nothing in the Settlement Agreement that treats “transactional service revenues” differently from any other revenues that are subject to the Earnings Sharing Mechanism.

[80] Second, this is not a concept that is embedded in the IRM Framework. Insofar as “transactional service revenues” could be a meaningful concept under the IRM Framework, the contents of “transactional service revenues” have, at least since 2003, included revenues generated as a result of planned activity by Union. The TCPL programmes under which such revenues have been generated have changed over time but, until the FT-RAM revenues, there has been no question regarding the treatment of revenues generated as a result of planned activities.

[81] The evidence discloses that, at least as far back as 2003, Union contemplated that transactional revenue could include revenues generated as a result of market factors as well as weather. This is reflected in the following excerpt from evidence provided by Union in RP-2003-0063/EB 2003-0087, which was referred to by the Board in the Decision:

Over the last few years, the level of S&T transactional revenue has been impacted by warmer weather and favourable market pricing conditions. In addition, certain TCPL services (e.g. FT make-up, AOS) that were approved and in place for 2002 only provided transactional revenue opportunities in 2002 and are no longer available. For 2003 and 2004, the Gas Supply Plan reflects a balanced or ‘normal’ asset utilization forecast.

The actual assets available for S&T transactional services will change on an ongoing basis dependent upon actual weather and market factors including the amount of direct purchase switching, T-Service switching, in-franchise growth, changes in customer use, market prices, and customer demand for S&T services. Union’s forecast for S&T transactional services for 2003 and 2004 reflects normal market and operating conditions.

[82] In particular, these revenues included revenues from a TCPL programme referred to as “FT-Makeup”, which was of limited duration but, of significance for the present proceeding, was similar to FT-RAM related revenues.

[83] Further, the evidence regarding the Dawn Overrun Service (DOS-MN) is that Union’s revenues generated under this TCPL programme were also based on the utilization of assets on a planned basis, rather than as a result of factors outside Union’s control. Since the introduction of the IRM Framework, revenues generated under the DOS-MN programme of TCPL have not been netted against transportation costs for the reason that, as mentioned above in respect of the Board decision in EB-2008-0220, “ratepayers have already been credited with an amount intended to reflect the transactional services activity of the company.” This observation is confirmed by the Board Staff in its submission in this proceeding, which concluded that given the treatment of a similar type of revenue, being DOS-MN revenue, Union’s treatment of the FT-RAM related revenues was “not unreasonable”.

[84] Third, accordingly, the difference between the FT-RAM revenues and the other “transactional service revenues” is not qualitative but quantitative. It is the size of these revenues, not the manner in which they were generated, that distinguishes the FT-RAM revenues from the other revenues that are treated as “transactional service revenues”. This is not a legitimate basis for distinguishing these revenues, there being no such principle in the IRM Framework. It is the unanticipated amount of these revenues that has given rise to the concern addressed by the Board. As mentioned above, the issue in this proceeding is therefore the authority of the Board to amend its prior approval order in respect of the IRM Framework given such unanticipated circumstances.

[85] From the foregoing, I conclude that the concept of “transactional service revenues” does not, by itself, provide a basis for the re-classification of the FT-RAM related revenues as gas supply costs.

The Board’s Mandate is Embedded in the IRM Framework

[86] The issue in this application arises because of the determination above that the Settlement Agreement provides that the FT-RAM related revenues are to be treated as revenues subject to the Earnings Sharing Mechanism. The Board therefore has to establish a basis for the authority it asserts to re-classify these revenues as gas supply costs. The Board seeks to do this in reliance on a third determination – that this authority is to be found in the Board’s obligation to ensure that at all times the rates arising from the IRM Framework are just and reasonable.

[87] The issue in this proceeding is the manner in which this principle is implemented in the context of an IRM Framework rather than a cost of service hearing.

[88] The best expression of the Board’s view regarding its authority is found in the following paragraph:

The Board is of the view that there is no tension between the objectives of the IRM Framework and its rate setting mandate. The Board makes findings during the IRM term based on the evidence properly put before it in the rate adjustment processes that are embedded in the IRM Framework. There is nothing inherent in the IRM Framework that requires the Board to depart from its normal approach to rate setting. The Board’s discretion with regard to setting rates within the IRM term is exercised based on the facts placed before it and with due consideration of any new issues that have arisen. These are not new concepts.

[89] The Board also stated it considered that it had “an on-going responsibility to determine whether activities undertaken during the IRM term are being characterized in accordance with the IRM Framework and have been characterized in a manner that results in just and reasonable rates”.

[90] Lastly, in response to Union’s argument that the Board’s Decision will “undo the IRM Framework”, the Board stated:

The Board does not agree. This determination is in no way a departure from the IRM Framework. The Board is simply re-classifying revenues based on evidence that has been filed with the Board, as part of Union’s rebasing proceeding (EB-2011-0210) and incorporated by reference in this proceeding. This re-classification of revenues results in a treatment that is consistent with the IRM Framework and the regulatory principles inherent in it. As stated earlier, the Board considers the rate adjustment processes embedded in the IRM Framework to have the purpose of facilitating the type of review that has occurred here in this case.

[91] The Board’s reasoning prompts two interrelated questions. First, is the authority asserted by the Board to re-classify the FT-RAM related revenues to ensure “just and reasonable” rates embedded in the Settlement Agreement and engaged by the terms of the Settlement Agreement in the present circumstances? Or, is this authority derived from a source outside the Settlement Agreement which “trumps” the IRM Framework in the sense that the Board can re-classify any revenues whose treatment under the Settlement Agreement has resulted in rates that it does not consider to be just and reasonable? Second, if the Board does not derive its authority to re-classify revenues in the circumstances of this case from the Settlement Agreement, does the Act grant it such authority?

Is the Board’s Authority Derived From the Settlement Agreement?

[92] From the statements of the Board set out above, it appears that the Board purports to proceed on the basis that its authority is derived from, or is “embedded in”, the Settlement Agreement and, therefore, the IRM Framework. However, for the reasons set out below, I do not consider that the Board can ground its authority to re-classify the FT-RAM related revenues in the language or the principles of the IRM Framework.

[93] As I understand the approach of the Board, the IRM Framework is intended to reflect a set of agreed-upon principles which will, on an annual basis, result in rates that are to be considered just and reasonable without the need for a cost of service hearing, provided Union’s treatment of its revenues and expenses is in accordance with the IRM Framework and the regulatory principles inherent in it.

[94] In other words, the IRM Framework removes the need for an annual cost of service hearing based on an agreement of the stakeholders in advance that, for the term of the IRM Framework, the results generated by the application of the IRM Framework and the regulatory principles inherent in it to Union’s revenues and expenses will result in rates that are just and reasonable. The purpose of the quarterly Q-RAM hearings and the annual hearings regarding the disposition of deferral and other accounts is to review whether the relevant costs and revenues have been applied in accordance with the IRM Framework, that is in accordance with the terms of the Settlement Agreement as approved by the Board, and the regulatory principles inherent in it. It is not intended that any such hearings would constitute a cost of service hearing.

[95] Critical to this process is that the rules, and the implementing mechanisms, be established in advance. In this case, in order to implement the Decision, it was necessary to establish a deferral account to accumulate the FT-RAM related revenues on a retroactive basis. This is a substantive requirement, not merely a technical matter of implementation. Deferral accounts cannot be established on a retroactive basis, except to the extent that the relevant revenues or costs have been identified, or “encumbered”, in some manner prior to the commencement of the relevant period. In the Decision, the Board failed to address the absence of any such mechanisms in advance, whether in the Settlement Agreement or otherwise. I think its failure to do so recognizes the fact that the Settlement Agreement provides a coherent scheme for dealing with all revenues, including FT-RAM related revenues, under which Union’s earnings are not subject to any deferral account.

[96] The Board attempted to address this flaw in the reasoning in the Decision at the hearing before this Court. In its oral submissions, the Board argued that all revenues of Union were “encumbered” prior to the Board hearing to approve distribution of its earnings in accordance with the Earnings Sharing Mechanism in the IRM Framework. The concept of “encumbered” revenues is not limited to the FT-RAM related revenues for the reason that there is no obvious principle in the record by which these revenues can be separated from Union’s other revenues for this purpose. Significantly, these revenues are alleged to be “encumbered” without any mechanism to allocate such revenues to a deferral account.

[97] The principle that all revenues are “encumbered” in such manner is, however, a radical position. It frames the issue. The characterization of FT-RAM revenues, or any revenues for that matter, as “encumbered” is conclusory not substantive. Merely characterizing revenues as “encumbered” does not make them so. It begs the question of how, in the absence of any applicable deferral account, this condition arises.

[98] I see no basis in sections 11 and 12 of the Settlement Agreement for such treatment. Section 11 provides only for reporting obligations respecting various operational and financial data while section 12 deals with unrelated matters. Section 11 does require Union to make an application for the disposition of earnings subject to the Earnings Sharing Mechanism. However, significantly, it does not require any application if earnings, including FT-RAM related earnings, do not exceed the threshold for the Earnings Sharing Mechanism. As a result, there would have been no authority in section 11 of the Settlement Agreement for a review of the characterization of the FT-RAM related revenues if they had not been large enough to trigger the Earnings Sharing Mechanism in respect of Union’s earnings. The consequence is that, even on the Board’s approach, revenues are only “encumbered” to the extent that earnings exceed the threshold for the Earnings Sharing Mechanism at the end of the year. I would also note that the application contemplated by section 11 of the Settlement Agreement is not described as a rate order and, given the operation of that term of the Agreement, it is at least arguable that any such application should not be treated as an application for a rate order under s. 36 notwithstanding the fact that the other matters that were also the subject of Union’s year end application may require such an order.

[99] The approach of the Board calls into question the purpose and benefit of the IRM Framework. Union is correct that the implication of this approach is that all items in its revenues would be subject to potential reclassification until such time as an order is issued in respect of the distribution of Union’s earnings pursuant to the Earnings Sharing Mechanism. This consequence suggests that there is a problem with the Board’s reasoning regarding its authority.

[100] In addition, it points to a more fundamental difficulty. I think the Board’s approach contradicts the conceptual approach upon which the IRM Framework is based. This conclusion is based on two propositions regarding the Board’s authority under the Act. First, as mentioned, when the Board approved the Settlement Agreement to establish the IRM Framework, the Board in effect also approved, as just and reasonable, the rates for each year of the IRM Framework that result from the application of the principles of the IRM Framework. Such an order is made in the exercise of the discretion granted the Board under s. 36, in particular s. 36(3), of the Act. By doing so, the Board removes the need for a cost of service hearing for each such year. Second, if the IRM Framework were not in effect, the Board would lack the authority to conduct two cost of service hearings in respect of the same year – one before and another after the end of the rate year based solely on more detailed evidence of a particular category of revenues. There is no basis in the Act for a different result during the operation of the IRM Framework.

[101] Therefore, having approved the IRM Framework for the years comprising the term of the IRM Framework, the Board cannot amend its approval order for any of those years after the end of such year, just as it could not make a second cost of service order after the end of a rate year for which a tariff order had previously been made. Put another way, the argument appears to call into question the conceptual framework upon which Board approval of the IRM Framework is given in the first place. If the IRM Framework cannot satisfy the Board’s obligation under the Act to approve rates that are just and reasonable for each year of the term of an IRM Framework at the time of establishment of the IRM Framework, then the only manner in which the Board can satisfy its obligation is to conduct annual cost of service hearings. On the other hand, if the IRM Framework does satisfy the Board’s obligation under the Act regarding the approval of rates during the term of the IRM Framework, which I understand to be the Board’s position, there would appear to be no basis for a further hearing that amounts to a cost of service hearing for any particular year.

[102] I conclude, therefore, that notwithstanding the Board’s mandate to ensure just and reasonable rates, there nevertheless remain constraints on its authority to issue rate orders for a particular year under the IRM Framework subsequent to the Board’s approval order. For the same reason, the Decision of the Board is inconsistent with my understanding of the intention of the parties, including the Board, regarding the conceptual basis in law upon which the IRM Framework is based. For this reason, I think it is incorrect for the Board to suggest that its approach in the Decision is a re-classification of revenues that results in a treatment that is consistent with the IRM Framework and the regulatory principles inherent in it rather than a departure from the IRM Framework.

Does the Board have Authority Under Section 36 of the Act?

[103] On the basis of the foregoing analysis of the operation of the Settlement Agreement and the IRM Framework, I conclude that the alleged authority of the Board to re-classify the FT-RAM related revenues must arise outside of the Settlement Agreement and of the Board’s approval of it to establish the IRM Framework. The Decision is based on an assertion that the Board’s authority to ensure “just and reasonable” rates “trumps” the IRM Framework as and when the Board chooses. This raises the question of the basis for such authority. The only possible source of the Board’s alleged authority is section 36 of the Act. The Board appears to proceed on the basis that its authority under section 36 is essentially unconstrained by any prior rate orders made under that provision in the exercise of its mandate. The Board has not, however, offered any legal analysis for this approach to its authority, apart from referring to an obligation, to which it says it is subject, to ensure rates are at all times just and reasonable.

[104] There are two possibilities presented in the present circumstances.

[105] First, if the Board had found that Union intentionally mislead the Board by non-disclosure of material information or otherwise, I would have concluded that the Board had the authority to re-classify the FT-RAM related revenues for not only the 2011 rate year but for all of the rate years covered by the IRM Framework. Indeed, I consider that it may well have had the obligation to do so. However, as set out above, my understanding of the Decision and the Companion Decision is that, while the Board considers that it has received inadequate disclosure from Union, it was not prepared at this time to find that Union intentionally withheld material information. Accordingly, the Board stops short of saying that Union’s actions give it the authority to re-classify the FT-RAM related revenues for reasons of intentional non-disclosure.

[106] The second possibility is the basis of my colleagues` decision – that section 36 of the Act grants the Board the authority to amend tariff orders as and when it considers it appropriate to do so in order to ensure that rates are at all times just and reasonable. They find that the Settlement Agreement is subject to the express provisions of section 36.

[107] I agree that the provisions of section 36 of the Act provide that the Board is to make orders regarding just and equitable rates as and when applications are made to it for the Board’s approval or fixing of rates. The Act does not specify a particular procedure for such orders. The Board has developed two approaches toward the fixing of just and reasonable rates - a cost of service application for a particular year and an IRM Framework covering a fixed term of a number of years. Under the IRM Framework, Union has applied to the Board annually for an order approving the distribution of earnings for purposes of the Earnings Sharing Mechanism. It is important to note, however, that the Settlement Agreement has been approved by the Board in a decision that itself constitutes a tariff order. Accordingly, the issue in this proceeding engages the authority of the Board to amend its own tariff order based on circumstances that were not anticipated at the time of the prior order.

[108] As described above, it is at least arguable that the order sought by Union in its application pursuant to section 11 of the Settlement Agreement does not constitute a rate order for purposes of s. 36 of the Act. Even assuming that such order is technically a rate order, the scope of the Board’s authority, in the circumstances in which Union is required to make such an application, remains an issue. The issue is whether the Board has complete discretion to reclassify revenues for the purposes of any such order or is limited to a review of the conformity of the revenues and expenses of Union to the principles articulated in the Settlement Agreement and established regulatory principles.

[109] As mentioned, there is no provision of the Act that expressly imposes an obligation on the Board to ensure that rates are at all times “just and reasonable” in respect of periods for which rate orders have already been granted. Nor is there any provision for revisiting any tariff orders at the end of a rate period based on unanticipated circumstances, including more detailed information. More specifically, there is no provision in the Act granting authority to the Board to re-classify revenues in a manner that differs from the result stipulated under the Settlement Agreement. Further, as mentioned, insofar as the IRM Framework only contemplates an application under section 11 of the Settlement Agreement when Union’s earnings exceed the Earnings Sharing Mechanism threshold, there is an express restriction on the circumstances giving rise to the Board’s alleged authority under section 36 of the Act to re-classify revenues.

[110] As mentioned by my colleagues, the Alberta Energy and Utilities Board (the “AEUB”) addressed similar circumstances in Epcor. In that case, the issue was the appropriate earnings sharing mechanism in respect of substantially higher than expected revenues due to higher than anticipated spot prices for electricity. Fruman J. held that the AEUB had the authority to review its earlier decision regarding the sharing ratio at a hearing to close the deferral account for the year.

[111] However, in that case, the AEUB had express statutory authority for such action in the language of section 57(2)(c) of the Electric Utilities Act, R.S.A. 2000, c. E-5. That provision granted jurisdiction to the AEUB if, since the date of a tariff order, circumstances have changed in a substantial and unforeseen manner that renders the continuation of the tariff unjust or unreasonable. There is no similar provision in the Act.

[112] My colleagues also refer to the decision of the Newfoundland Court of Appeal in Newfoundland and Labrador Hydro v. Newfoundland and Labrador (Board of Commissioners of Public Utilities), 2012 NLCA 38. However, that case involved the treatment of an express deferral account established pursuant to interim rate orders under the Public Utilities Act, R.S.N.L. 1990, c. P-47. In that case, the Newfoundland and Labrador Board of Commissioners of Public Utilities (the “Board of Commissioners”) had express powers under the statute to “address the disposition of the amounts accrued in the deferral account including, in particular, the provisions of s. 75(3) of the Public Utilities Act. That provision granted the Board of Commissioners the authority, among other things, to order that excess revenue that was earned as a result of an interim order not previously confirmed by the Board of Commissioners be refunded to the customers of the public utility. There is also no comparable provision in section 36 of the Act.

[113] In the Decision, the Board, in effect, interpreted section 36 of the Act to grant it authority similar to that expressly granted to its counterparts in Epcor and Newfoundland and Labrador Hydro. I am not persuaded, however, that the Act can be so interpreted. In the absence of express language, I see no basis in the provisions of section 36 for an interpretation that grants authority to amend tariff orders on the basis of an overarching obligation to ensure that rates are at all times just and reasonable. For the same reason, I am not persuaded that the Act can be interpreted to imply an authority to amend a tariff order based on developments that were not anticipated at the time of the prior order.

[114] The Board is a creature of the Legislature. Its powers are defined entirely by the language of the statute creating it. In my opinion, the absence of any provisions in the Act comparable to the provisions in the Alberta and Newfoundland statutes, or any other express grant of authority, prevents the Board from asserting the authority upon which it relied in the Decision – an overarching authority to ensure that rates are just and reasonable at all times. Similarly, in the absence of a provision similar to that included in the comparable Alberta legislation, the Act does not give the Board an authority to amend a prior rate order based on circumstances that were not anticipated at the time of the prior order. Accordingly, while I accept that the standard of review of the Board’s statutory interpretation of the Act, in particular section 36, is one of reasonableness, I consider the Board’s interpretation of the Act to provide it with the authority that it asserts is unreasonable.

[115] Given the conceptual basis of the IRM Framework, I therefore conclude that the Board`s authority under the Act in respect of an approval of a proposed distribution of Union’s earnings subject to the Earnings Sharing Mechanism is limited to a review of the determination of such earnings for compliance with the Settlement Agreement as approved by the Board and applicable regulatory principles.

[116] As mentioned above, I consider that, in the absence of a finding that Union intentionally misled the Board, by withholding disclosure or otherwise, the circumstances addressed by the Board must be treated as unanticipated circumstances and no more. The present circumstances arose subsequent to a prior rate order - in this case, the order approving the amended IRM Framework - which were unanticipated at the time of such order. In the absence of express statutory authority to amend a prior tariff order as in Epcor, the Board does not have the authority to amend or set aside a prior rate order in these circumstances.

Conclusion

[117] Based on the foregoing, I conclude that the Board`s re-classification of the 2011 FT-RAM related earnings of Union for purposes of the Earnings Sharing Mechanism constituted retroactive rate-making which is, by definition, unreasonable. I would therefore grant the appeal.

Wilton-Siegel J.

Date: December 20, 2013

CITATION: Union Gas Ltd. v. Ontario (Energy Board), 2013 ONSC 7048

DIVISIONAL COURT FILE NO.: 581/12

DATE: 20131220

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

C. McKINNON, HIMEL AND WILTON-SIEGEL JJ.

BETWEEN:

UNION GAS LIMITED Appellant

– and –

ONTARIO ENERGY BOARD Respondent

C. McKinnon J.

Himel J.

Wilton-Siegel J.

Released: December 20, 2013