Hydro One Networks Inc. v. Ontario Energy Board, 2020 ONSC 4331

Hydro One Networks Inc. v. Ontario Energy Board

CITATION: Hydro One Networks Inc. v. Ontario Energy Board, 2020 ONSC 4331

DIVISIONAL COURT FILE NO.: 200/19

DATE: 20200716

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

CORBETT, DUCHARME and GOMERY JJ.

B E T W E E N:

HYDRO ONE NETWORKS INC.

Geoff R. Hall, Gordon M. Nettleton and

Brandon Kain for the Appellant

Appellant

• and -

ONTARIO ENERGY BOARD

Fred Cass, for the Respondent

Respondent

Mark Rubenstein, for the Intervenor

Ontario Education Services Corp.

Richard Stephenson and Hailey Bruckner

For the Intervenor Power Workers’ Union

Heard: November 21, 2019¹

REASONS FOR DECISION

Ducharme J.:

PART I: NATURE OF PROCEEDING

1Hydro One Networks Inc. (“HONI”) appeals from the March 7, 2019, decision (the “Rehearing Decision”) of the Ontario Energy Board (the “OEB” or “the Board”) affirming its September 2017 decision (the “Original Decision”) with respect to the allocation of Future Tax Savings of $2.595 billion (the “Future Tax Savings”). HONI argued throughout the Board’s proceedings that all of the Future Tax Savings should be allocated to its shareholders. In the Rehearing Decision, the OEB ordered, as it had in the Original Decision, that 38% of the Future Tax Savings (or roughly $900 million) should instead be used to reduce HONI’s revenue requirements for 2017 and 2018, with the result that HONI’s customers would pay lower rates.

2HONI argues that the Rehearing Decision cannot stand because it fails to address errors in the Original Decision. It was these errors, identified by the OEB review panel (the “Review Panel”) in August 2018, that led to a rehearing on the allocation issue and the Rehearing Decision. HONI asks this Court to set aside the Rehearing Decision and substitute an order requiring the Future Tax Savings be allocated entirely to HONI’s shareholders or, in the alternative, directing that OEB should reconsider the allocation in light of errors in the Original Decision identified by the Review Panel.

PART II: OVERVIEW

3This appeal concerns nearly $900 million in Future Tax Savings that the Rehearing Decision allocated to HONI’s ratepayers instead of HONI’s shareholders. The Future Tax Savings arose after HONI’s ultimate shareholder, the Province of Ontario, made a public offering of its indirect parent company’s shares in 2015. HONI was then required to pay $2.271 billion (the “PILs Departure Tax”) to exit the provincial payments in lieu of taxes (“PILs”) regime. This increased the tax value of HONI’s assets, and thus its deductions in computing future federal/provincial income tax.

4HONI did not seek to recover the PILs Departure Tax from its ratepayers, as it was not a cost incurred to provide them with regulated utility services. The PILS Departure Tax instead arose from a transaction involving HONI’s unregulated indirect parent for the purchase of shares by Ontario. HONI submits that as it, and not its ratepayers, paid the cost of the PILs Departure Tax, HONI’s shareholders and not its ratepayers are entitled to the benefit of the Future Tax Savings flowing from this transaction.

5In the Original Decision on September 28, 2017, an OEB panel (the “Original Panel”) held that the PILs Departure Tax was not a real cost to HONI, as it was variable in the Province’s discretion and was funded by Ontario. The Original Panel therefore concluded that some of this money should benefit HONI’s ratepayers. It directed that HONI’s revenue requirements, and by extension its rates, should be reduced by 38% of the Future Tax Savings that the PILs Departure Tax produced or nearly $900 million. The remaining 62% of the Future Tax Savings could be paid to HONI’s shareholders.

6In the Review Decision on August 31, 2018, however, a different OEB panel (the “Review Panel”) found numerous errors with this reasoning. In particular, the Review Panel held that the Original Panel’s failure to treat the PILs Departure Tax as a real cost to HONI was contrary to both the evidence and the stand-alone utility principle, which distinguishes a utility corporation, like HONI, from its shareholders and limits its business activities and recoverable costs to the provision of regulated services. The Review Panel also found that the methodologies the Original Panel applied in allocating the Future Tax Savings to HONI’s ratepayers were flawed. It thus directed that the Original Decision should be “reconsider[ed] in light of these findings and all the evidence and argument the original panel and the reviewing panel heard”.

7The OEB panel that reheard the matter (the “Rehearing Panel”) failed to address the errors in the Original Decision identified by the Review Panel. The Rehearing Panel instead simply recited the arguments made by the parties and then concluded that the Original Panel’s allocation of Future Tax Savings was “within the realm of reasonable outcomes.” It also specifically failed to explain what methodology, if any, it relied on for this conclusion.

8As a result, pursuant to the Rehearing Decision, 38% of the Future Tax Savings, or nearly $900 million, was once again allocated for the benefit of HONI’s ratepayers instead of its shareholders. HONI submits that for two reasons, the Rehearing Decision must be set aside.

9First, HONI argues that once the Review Panel found that the PILs Departure Tax was a real cost to HONI based on the evidence and the stand-alone utility principle, the only reasonable decision possible was that HONI’s shareholders were entitled to all of the Future Tax Savings. The fundamental regulatory principle that “benefits follow costs” dictates that all Future Tax Savings be allocated to HONI’s shareholders, because HONI rather than its ratepayers incurred all the expenses necessary to generate them. Similarly, the stand-alone utility principle prevented HONI from recovering any costs for non-rate regulated activities from its ratepayers, so ratepayers cannot be allocated any benefits that these costs produce. In fact, the Review Panel found that the Original Panel’s failure to follow these principles was found to result in an “inappropriate allocation of the future tax savings”. HONI submits that there was no logical basis on which the Rehearing Panel could depart from these principles, and its reasons did not even attempt to explain why it did so.

10Second, HONI submits that the Rehearing Panel applied the wrong legal test. It held that the reconsideration motion required it to determine only whether the Original Decision would be “reasonable” if the errors found by the Review Panel were accepted. The Rehearing Panel failed to address the flaws identified by the Review Panel. It thus misapprehended its role and fettered its statutory discretion to vary the Original Decision without deference to the Original Panel.

11HONI therefore requests that the Rehearing Decision be set aside, and that the Court substitute an order that none of the Future Tax Savings be applied to reduce HONI’s transmission revenue requirements for 2017 and 2018. Alternatively, HONI requests that the Court remit the matter back to the OEB with the directions that: (a) the OEB shall consider and make an appropriate order varying the tax savings allocation in Original Decision by correcting the errors identified in it by the Review Panel; and (b) in doing so, the OEB shall apply and give effect to the findings in the Review Decision and each of the errors it identified in the Original Decision, including in respect of the applicable ratemaking principles.

PART III: THE FACTUAL CONTEXT

12HONI is an electric utility corporation that is regulated by the OEB. As of 2017, its transmission system accounted for about 98% of Ontario’s electricity transmission capacity, and it is also the Province’s largest electricity distributor.

13Currently, HONI is a wholly owned subsidiary of Hydro One Inc. (“HOI”), which is itself a wholly owned subsidiary of Hydro One Limited (“HOL”). Unlike HONI, neither HOI nor HOL is regulated by the OEB, because only HONI provides regulated electric transmission and distribution services.

14In 2015, the Province of Ontario, which until then had been the sole owner of HONI’s parents, undertook an initial public offering (the “IPO”) to begin divesting itself of HOL’s shares. The IPO had two interrelated tax consequences for HONI.

15First, HONI was required to immediately pay the PILs departure tax of $2.271 billion in exiting the PILs regime established by the Electricity Act (Ontario) and the Payments in Lieu of Corporate Taxes Regulation (the “PILs Regulation”).

16Prior to the IPO, HOL and its subsidiaries, including HONI, were exempt from federal income taxes pursuant to s. 149(1) of Canada’s Income Tax Act, which in turn made them exempt from provincial corporate income taxes under s. 27(2) of Ontario’s Taxation Act, 2007. So long as HONI was exempt from these taxes, it was required by ss. 88-89 of the Electricity Act to make PILs to the Ontario Electricity Financial Corporation in amounts equivalent to the federal and provincial taxes it would have paid were it a taxable entity.

17The IPO changed this. The province’s sale of more than 10% of HOL’s shares terminated HONI’s exemption from federal and provincial income taxes, such that the PILs regime ceased to apply to it. For tax purposes, this triggered a deemed disposition and reacquisition of all HONI’s assets at fair market value (“FMV”) under s. 149(10)(b) of the Income Tax Act (“ITA”) (the “Deemed Transaction”). The Deemed Transaction, in turn, triggered HONI’s liability to pay the PILs Departure Tax under s. 16.1 of the PILs Regulation in an amount equal to the tax under the ITA where an entity sells or is deemed to sell its assets at FMV.

18Second, the Deemed Transaction also provided HONI with Future Tax Savings of $2.595 billion.² The Future Tax Savings arose because the Deemed Transaction increased the tax value of certain of HONI’s assets by $9.794 billion, which increased the capital cost allowance and cumulative eligible capital claims that HONI could deduct in computing its taxable federal and provincial income in years after 2015.

19It is important to note that the Future Tax Savings do not represent a windfall for HONI. In order to receive the Future Tax Savings, HONI had to exit the PILs regime and pay the PILs Departure Tax as a result of the Deemed Transaction. In effect, the Future Tax Savings are a recovery over time of the PILs Departure Tax paid by HONI and funded by its shareholders.

1. The Transmission Approval Application

20In Ontario, utility rates are regulated through a process by which a utility seeks approval from the OEB for costs it has incurred or expects to incur in a specified period of time. Where the OEB approves of such costs as just and reasonable, it incorporates them into the utility’s rates pursuant to s. 78(3) of the OEB Act, so that the utility has a reasonable opportunity to recover them and earn a fair return during a rate period.³

21On May 31, 2016, HONI applied under s. 78(7) of the OEB Act for approval of the 2017 and 2018 “revenue requirements” for its transmission business, i.e., “the total revenue that is required by the company to pay all of its allowable expenses and also to recover all costs associated with its invested capital”, which once approved are “allocated to customers in the form of just and reasonable rates”.⁴

22In doing so, HONI did not seek to recover any part of the PILs Departure Tax applicable to its transmission business from ratepayers. The rationale for this decision was that the PILS Departure Tax was not a cost that pertained to the provision of rate-regulated utility services; rather, it arose from a transaction involving its unregulated indirect parent. HONI therefore paid the PILs Departure Tax itself, using funds it obtained by issuing shares to HOI as part of a trickle-down recapitalization of the corporation by its ultimate shareholder, the Province.

23Consistent with this decision, HONI took the position, supported by OEB staff, that all of the Future Tax Savings should be retained by its shareholders, and not be allocated to reduce its revenue requirement so as to lower the regulatory taxes that HONI’s ratepayers pay. It did so on the basis of rate-making principles accepted by the OEB in the Original Decision, including the “stand-alone or pure utility” and “benefits follow costs” principles. The Original Panel described these principles as follows:

3.3 STAND ALONE OR PURE UTILITY PRINCIPLE

This principle limits the amounts recoverable in utility rates to costs related to the provision of regulated utility services. For ratemaking purposes, costs related to unregulated or non-utility business activities are excluded from the ambit of the “standalone” or “pure” utility activities.

The business activities of a “stand-alone” or “pure” utility are limited to the provision of regulated services. For regulatory purposes, a “pure” utility is distinguishable from a holding company parent that already controls and is actively acquiring several other subsidiary enterprises.

3.5 BENEFITS FOLLOW COSTS

If a cost, not included in the utility’s revenue requirement, causes or produces a benefit, then, for ratemaking purposes, that benefit is allocated to utility shareholders and not to its ratepayers. This principle of allocation is considered in the determination of issues related to the allocation of tax benefits between utility ratepayers and shareholders.

Charitable donations are an example of costs not recoverable from ratepayers that produce a tax benefit. A portion of the donation can be used as a tax credit when calculating taxes payable. The utility’s actual income tax is lower because of the tax credit produced by the charitable donation. However, ratepayers do not receive the benefit of this lower tax amount because they did not pay the costs that caused it. The tax benefit is allocated to the shareholders who are responsible for the donation costs.

The taxes collected from ratepayers will be a notional sum that is higher than the actual amount paid by the utility. The notional sum will be calculated on the basis of a taxable income amount that excludes the charitable donation expense and its related tax credit.

2. The Original Decision

24On September 28, 2017, the Original Panel disposed of the application in the Original Decision, as subsequently revised by it on October 11 and November 1, 2017.

25The Original Panel rejected HONI’s position with respect to the Future Tax Savings. It determined that they should not be allocated in their entirety to HONI’s shareholders, but instead be divided between its shareholders and ratepayers, with the ratepayer portion being applied to reduce HONI’s transmission revenue requirements for 2017 and 2018 (the “Future Tax Savings Determination”).

26The Original Panel reached this conclusion upon finding that HONI was entitled to the second, or more favourable, of the following two methodologies:

(a) one by which HONI’s shareholders would receive 52.5% of the Future Tax Savings, which represented amounts that could be considered recapture of amounts credited to ratepayers in prior rate applications, leaving ratepayers 47.5% (the “Recapture Methodology”); and

(b) one by which HONI’s shareholders would receive 62% of the Future Tax Savings, representing the part of the PILs Departure Tax that contributed to increasing the FMV of the HOL shares subsequently sold on the IPO, leaving ratepayers 38% (the “Actual FMV Sales and Payments Methodology”).

27The crux of the Original Panel’s reasoning was its finding that the PILs Departure Tax was not a real cost to HONI, because it was variable at the Province’s discretion and was funded by a payment from Ontario to HONI for the purchase of additional shares.

28As a result of this finding, the Original Panel declined to apply the benefits follow costs and stand-alone utility principles adopted in HONI’s proposed methodology. Under that methodology, 100% of the Future Tax Savings would have been allocated to HONI’s shareholders, because they were a benefit for which HONI paid the entirety of the cost via the PILs Departure Tax, and this cost was not related to HONI’s provision of regulated service, nor recovered by it from ratepayers.

29In declining to apply HONI’s proposed methodology, the Original Panel referred to its Distribution Rate Handbook Report (the “2005 Report”). There, the OEB allocated to ratepayers the tax savings that arose when Ontario utilities received an increase in the tax value of their assets through a deemed sale arising from a mandatory directive by Ontario’s Minister of Finance. As the Original Panel noted, however, the 2005 Report reached this conclusion only because the utilities in that case incurred no costs to receive the tax benefit:

[In the 2005 Report] [t]he OEB concluded that, where no costs relating to an actual sale at FMV had been incurred, the CCA tax benefits associated with the FMV Bump should be allocated, in their entirety, to utility ratepayers.

…[T]ax benefits related to increases in the prevailing tax values of utility assets to FMV that are “costless” are allocated to ratepayers...⁵

30Based on this, because the Original Panel found that the PILS Departure Tax was not a real cost to HONI, it concluded that “the Benefits follow Costs principle does not apply to the proportion of the FMV Bump that remains attributable to the ‘deemed’ sale”.

3. The Review Procedural Order

31On October 18, 2017, HONI filed a motion with the OEB to review and vary the Original Decision under Rules 40 and 42 of the OEB’s Rules of Practice and Procedure (the “OEB Rules”), including with respect to the Future Tax Savings Determination. These OEB Rules implement the review and variance jurisdiction conferred upon the OEB by ss. 21.2(1) and 25.1(1) of Ontario’s Statutory Powers Procedure Act (the “SPPA”).⁶

32On December 19, 2017, the OEB made an order (the “Review Procedural Order”) finding that HONI’s motion “met the threshold for review as defined in section 43 of the OEB’s Rules” and that it would “hear the motion on its merits”.⁷ OEB Rule 43.01 allows the OEB to determine, in respect of motions to review and vary, the “threshold question of whether the matter should be reviewed before conducting any review on the merits”.

4. The Review Decision

33On August 31, 2018, the OEB disposed of the review and variance motion through the Review Decision. In it, the Review Panel concluded that the Original Decision suffered from four interrelated errors with respect to the Future Tax Savings Determination.

34First, the Original Decision was contrary to the stand-alone utility principle:

1. The Decision does not follow the stand-alone utility principle and is inconsistent with prior OEB applications of the stand-alone utility principle.

In EB-2007-0905… the OEB found that a utility would have no greater or lesser rights and obligations simply because it is government owned.

The Decision treated Hydro One Networks differently because its shareholder is the Province. The OEB agrees with Hydro One Networks submission at the Motion hearing that:

If the shareholder, who had provided the equity and [in]fusion for shares, had been anybody other than the province, it could have been any third party, then…you can infer from the decision that the cost would not have been treated as variable or anything less than the full true cost… The determination of a cost should not turn on who provides the equity…

This finding in the Decision, which considered the PILs departure tax from the Province’s perspective and not from the utility’s stand-alone perspective, led to an inappropriate allocation of the future tax savings…

35Second, the Original Panel erred in finding the PILs Departure Tax was “variable” and could have been waived by the Province:

2. The Decision found that the PILs departure tax was “variable”.

The PILs departure tax and the PILs payments paid by Hydro One Networks were established by the PILs legislation. All municipally and provincially owned regulated utilities (including Hydro One Networks and OPG) pay PILs on the same basis and recover those payments from ratepayers.

There has never been any question on whether Hydro One Networks should be allowed to recover its ongoing PILs payments from ratepayers, even though its shareholder and taxing authority, the Province, has the power to amend the PILs legislation to allow it to waive the PILs payments.

There was no evidence presented to the OEB that suggested that the PILs departure tax should be treated any differently than PILs payments and that the Province ever contemplated amending the PILs legislation to waive the departure tax for Hydro One Networks, which it did not do.

The Decision erred in speculating or assuming that the Province could have or should have made changes to the PILs legislation. The evidence should have been considered only in the context of the legislation that was and is in effect.

36Third, the Original Panel erred in finding the PILs Departure Tax was not a real cost to HONI but a payment by the Province to itself:

3. The Decision did not accept that Hydro One Networks paid the departure tax in substance and that it was a real cost to the utility.

The Decision finding that the departure tax was a “payment from itself to itself” by the Province is inconsistent with the evidence on the record. The testimony… show[s] how the departure tax liability and the future tax savings, which has been dedicated to the Trillium Trust, have been recorded.

The Decision considered the payment of the departure tax from the perspective of the Province, not the utility’s stand-alone perspective. The Decision inappropriately considered potential transactions involving the shareholder, beyond the regulated business.

37Fourth, both allocation methodologies considered in the Original Decision were flawed, including the Actual FMV Sales and Payments Methodology ultimately used by the Original Panel to allocate 38% of the Future Tax Savings to ratepayers:

4. The two allocation methodologies used in the Decision appear to be inappropriate. In particular:

a. Recapture Ratio methodology – did not recognize the real cost of the departure tax liability paid by Hydro One Networks.

b. Actual FMV Sales and Payment methodology – treats shares of Hydro One Networks that continue to be owned by the Province differently than those owned by other shareholders, even though Hydro One Networks has only one class of shares. This methodology is also inconsistent with other findings in the Decision (e.g. making allowance for departure tax payment by the Province even though the Decision found that this departure tax was not a real cost to the utility).

c. None of the parties, including Hydro One Networks, had the opportunity to consider the applicability of these methodologies, review the calculations or make submissions on whether or how they should be applied.

38Finally, the Review Panel found the Future Tax Savings were a benefit that followed directly from the PILs Departure Tax, which, as noted above, it held was a real cost to HONI:

The OEB does not accept the argument by some of the intervenors that the departure tax payment and the future tax savings are unrelated. They both arise as a result of the same transaction. PILs are payable because the ITA does not apply to municipally and provincially owned entities. It is only because of the change in Hydro One Network’s tax status as a result of shares being sold that any of these payments and savings occur.

39Given all the foregoing, the Review Panel ordered that the Original Decision be returned to the Original Panel so that it could be “reconsider[ed] in light of these findings and all the evidence and argument the original panel and the reviewing panel heard”.

5. The Rehearing Decision

40On March 7, 2019, the OEB purported to reconsider the Original Decision in the Rehearing Decision. The Rehearing Panel consisted of two members of the Original Panel and one member of the Review Panel.

41In a procedural order released on November 6, 2018 (the “Rehearing Procedural Order”),⁸ the OEB held that the Review Panel had applied only the first step of its threshold “NGEIR Decision”⁹ test for determining if a review and variance proceeding should be heard (i.e., the Original Decision contained an error), and not the second step as well (i.e., that the error was material to the Original Decision’s outcome), thereby misstating the Review Panel’s actual finding at paragraph 34 above that the Original Decision produced “an inappropriate allocation of the future tax savings”:

… What is unique about the current proceeding is that, in the OEB’s view, the threshold test is being applied in two stages with only the first stage having been performed by the Review Panel. The Review Panel determined that errors were made but did not determine whether these errors, if corrected, would change the outcome of the Original Decision. The reconsideration of the Original Decision by the Original Panel in view of the identified errors, in the OEB’s view, represents the second stage of the threshold test as articulated by the NGEIR decision. … … In response to the Review Panel’s direction and in alignment with the threshold test first articulated in the NGEIR Motion Decision, the OEB will consider, in addition to all previously filed pertinent evidence and arguments, submissions on the following question:

If the errors identified by the Review Panel are accepted, and with due consideration given to the May 2005 Report and any other matters argued in the original case, would the Original Decision be reasonable regarding the allocation of future tax savings between shareholders and ratepayers? If not, what is the appropriate outcome?

42The Rehearing Panel therefore applied this second step of its threshold test in the Rehearing Decision itself, without acknowledging that the same test had already been applied in the Review Procedural Order. The result was that the Rehearing Panel fettered its reconsideration discretion and applied only a standard of “reasonableness” to the Original Decision, as if on appeal or judicial review:

…[T]he original decision making panel is entitled to deference, and… the appropriate standard of review is what is known before the courts as “reasonableness”.

…[T]he review is being conducted in two stages with only the first stage having been performed by the Review Panel. The Review Panel determined that errors were made but did not determine whether these errors, if corrected, would change the outcome of the Original Decision. The reconsideration of the Original Decision by the current panel in view of the identified errors, in the OEB’s view, represents the second stage of the review. In PO#1, the OEB found the following determinations of the NGEIR decision to be relevant to this proceeding.

43In applying this test, the Rehearing Panel accepted that the Original Panel erred in not treating the PILs Departure Tax as a real cost to HONI:

The Review Panel found that the Decision of the Original Panel did not follow the standalone principle and was inconsistent with prior OEB applications of the stand-alone principle. …

This finding of error in treating Hydro One differently because its shareholder is the Province is intrinsically related to the determination that the Original Panel erred in finding that the payment was from itself to itself. The two errors, if corrected, would have the payment be recognized as a true cost to Hydro One.

The correction of the error that the departure tax was variable and that the Province could have or should have changed the PILs legislation also results in the payment being recognized as a real cost to Hydro One.

44However, the Rehearing Panel held that the Original Decision should continue to stand. In gave no meaningful reasons for this conclusion. Instead, it simply recited the submissions of the parties and then baldly concluded that the Original Decision was “reasonable”. It did so even though the only argument put against HONI was that the SEC’s submission that the PILs Departure Tax is not recoverable from ratepayers, which argument supports HONI’s claim to the benefit of the Future Tax Savings that followed from this cost:

Hydro One has argued that 100% of the Future Tax Savings should be allocated to shareholders. The OEB sees merit in this argument based on Hydro One’s assertions that it should get the benefit of the Future Tax Savings resulting from the IPO transaction because it paid for it through the Departure Tax.

SEC has argued that based on the just and reasonable principle, 100% of the Future Tax Savings should be allocated to customers. The OEB sees merit in this argument based on SEC’s assertions that costs caused by non-regulated activities (i.e. Departure Tax resulting from the IPO) are not recoverable from customers in regulated rates. Although SEC submits that the Review Panel did not discuss how this rule should be applied, SEC argues that this outcome would still be consistent with the findings of the Review Panel.

As stated earlier, the current panel has retained the determination made by the Original Panel with respect to the wide level of discretion available to the OEB in making its determination with respect to the treatment of the Future Tax Savings. In consideration of all the above, the OEB finds that the Original Decision results in an allocation of the Future Tax Savings (62% to shareholders and 38% to the ratepayers) that is within the realm of reasonable outcomes.

45The Rehearing Panel did not identify the allocation methodology it used to reach this result. Despite accepting that both methodologies in the Original Decision were flawed – including the Actual FMV Sales and Payments Methodology that produced the very 68/32% split which the Rehearing Panel confirmed – it found it unnecessary to consider the matter once it held the 68/32% “outcome” to be “reasonable”:

The Review Panel had determined that both allocation methodologies used by the Original Panel “appeared to be inappropriate” for reasons related to errors that had been identified. … The OEB has determined that, given its balance of interest approach and the range of reasonableness of outcomes that stems from the application of the principles contained in 2005 Report, it need not pursue the identification of a more appropriate allocation methodology. Further, the consideration of the appropriateness of one method over the other is not required if both would result in a reasonable outcome. The purpose of this exercise is as stated earlier, to consider the reasonableness of the outcome of the Original Decision in view of the Review Panel’s determinations. The OEB considers the outcome of the Original Decision to be reasonable. The motion is dismissed and the original decision upheld.

46In the result, a nearly $900 million issue was decided in a handful of paragraphs based on a recitation of the parties’ arguments followed by the bald conclusion that the Original Decision was reasonable, despite the errors that the Review Panel identified in the Original Decision. There was no assessment of the merits and no application of expertise; the Rehearing Panel did not identify or rationalize a methodology supporting the allocation of some of the Future Tax Savings to the ratepayers and some to HONI’s shareholders.

PART III: LEGAL ISSUES

1. Court’s Jurisdiction

47Pursuant to ss. 33(1)(a) and 33(2) of the Ontario Energy Board Act, 1998, S.O. 1998, c. 15, Sched. B, [“the OEB Act”] an appeal lies to the Divisional Court from an order of the Board, but only on a question of law or jurisdiction. According to ss. 33(4) of the same act, “The Divisional Court shall certify its opinion to the Board and the Board shall make an order in accordance with the opinion, but the order shall not be retroactive in its effect.”

48HONI argues that the OEB erred in law by applying the wrong legal test to the Original Decision. After identifying the errors made by the Original Panel, the Review Panel ordered that its decision be remitted back to it so that it could be “reconsider[ed] in light of these findings and all the evidence and argument the original panel and the reviewing panel heard”. The Rehearing Panel did not do so. Rather than reconsidering the issue as directed by the Review Panel, the Rehearing Panel held that the reconsideration motion required it to determine only whether the Original Decision would be “reasonable” if the errors found by the Review Panel were accepted. It thus asked itself the wrong question and fettered its statutory discretion to vary the Original Decision without deference to the Original Panel.

49The OEB submits that the issues raised in this appeal are not properly viewed as errors of law or of jurisdiction. I disagree. The issue of whether the Rehearing Panel applied the correct legal test presents a clear question of law.¹⁰

2. The Standard of Review

50As the Legislature has granted a right to appeal on a question of law or jurisdiction, the standard of review in this case is correctness: Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 at para. 37.

3. Was the Decision of the Rehearing Panel Correct?

51The Rehearing Panel was directed to reconsider the Original Decision in light of the findings of the Review Panel and all the evidence and argument the original panel and the reviewing panel heard. The Rehearing Panel did not do so. It instead applied a standard of reasonableness to the Original Decision. This was central to its conclusion that the original decision was “within the realm of reasonable outcomes.” A failure to apply the correct legal test is clearly an error in law. Therefore the decision of the Rehearing Panel was not correct, and it must be quashed.

52I would note that, even if the standard of review was the more deferential reasonableness standard, the decision of Rehearing Panel could not be upheld. Vavilov emphasizes the importance of the justification of an administrative decision. At para 15 the Chief Justice stated:

In conducting a reasonableness review, a court must consider the outcome of the administrative decision in light of its underlying rationale in order to ensure that the decision as a whole is transparent, intelligible and justified. [Emphasis added.]

The Chief Justice continued at paras 85, 95, 102 and 103:

a reasonable decision is one that is based on an internally coherent and rational chain of analysis and that is justified in relation to the facts and law that constrain the decision maker.

the exercise of public power must be justified, intelligible and transparent, not in the abstract, but to the individuals subject to it. It would therefore be unacceptable for an administrative decision maker to provide an affected party formal reasons that fail to justify its decision

To be reasonable, a decision must be based on reasoning that is both rational and logical. It follows that a failure in this respect may lead a reviewing court to conclude that a decision must be set aside. … However, the reviewing court must be able to trace the decision maker's reasoning without encountering any fatal flaws in its overarching logic, and it must be satisfied that "there is [a] line of analysis within the given reasons that could reasonably lead the tribunal from the evidence before it to the conclusion at which it arrived.

a decision will be unreasonable if the reasons for it, read holistically, fail to reveal a rational chain of analysis or if they reveal that the decision was based on an irrational chain of analysis … A decision will also be unreasonable where the conclusion reached cannot follow from the analysis undertaken … or if the reasons read in conjunction with the record do not make it possible to understand the decision maker's reasoning on a critical point [Emphases added.]

53The Rehearing Panel wrongly stated that the Review Panel did not conclude that the errors it identified “would change the outcome of the Original Decision.” It also failed to address any of the four significant errors identified by the Review Panel and simply concluded that the Original Decision fell “within the realm of reasonable outcomes.” The Rehearing Panel’s decision lacks an internally coherent and rational chain of analysis that leads from the evidence to the conclusion it reached. Indeed, given the brevity of the reasons, one cannot say whether the panel’s reasoning is logical or rational.

54In sum, the decision cannot be said to be transparent, intelligible, and justified. It therefore cannot be found to be reasonable.

4. What is The Appropriate Remedy?

55Pursuant to s. 33(4) of the OEB Act on the hearing of an appeal under the Act, “The Divisional Court shall certify its opinion to the Board and the Board shall make an order in accordance with the opinion, but the order shall not be retroactive in its effect.”

56HONI submits that the proper remedy in this case is for the court to substitute for the decision of the Rehearing Panel an order that none of the Future Tax Savings will be applied to reduce HONI’s transmission revenue requirements for 2017 and 2018. In this regard, HONI relies on s. 134(1)(a) of the Courts of Justice Act which makes clear that the Court’s opinion to the OEB can be in substitution for the one given in the Rehearing Decision:

134 (1) Unless otherwise provided, a court to which an appeal is taken may, (a) make any order or decision that ought to or could have been made by the court or tribunal appealed from;

HONI submits that this is the appropriate remedy as this is the only reasonable decision that was available on the evidence, given the findings of the Review Panel.

57In the alternative, HONI submits that this court should remit the matter back to the OEB with the directions that: (a) the OEB shall consider and make an appropriate order varying the tax savings allocation in Original Decision by correcting the errors identified in it by the Review Panel; and (b) in doing so, the OEB shall apply and give effect to the findings in the Review Decision and each of the errors it identified in the Original Decision, including in respect of the applicable ratemaking principles.

58The OEB submits that s. 33(4) of the OEB Act does not confer on the court a statutory right to substitute its decision in place of the decision of the Rehearing Panel. The OEB submits that 134(1)(a) of the Courts of Justice Act does not apply in this appeal, because s. 33(4) of the OEB Act “provides otherwise” by limiting the available remedy to the certification of the Divisional Court’s opinion. The OEB points out that there are no cases where the Divisional Court has simply substituted its own decision for the OEB’s decision under appeal.

59In the alternative, the OEB submits that this court should not substitute its opinion for that of the Board since that should only be done in “exceptional circumstances” which do not exist here. The OEB argues that remitting the case to the Board would not be pointless and that this is not a case where there is only one reasonable outcome that can be reached if the matter is sent back. Rather the OEB submits that this Court should certify its opinion about any errors of law or jurisdiction so that the Board can reconsider the matter in view of that opinion, applying its expertise and experience to that task.

60I agree that s. 33(4) of the OEB Act precludes us from simply issuing the ruling that we think the Rehearing Panel should have issued. Rather we must certify our opinion to the Board. But I also agree with the submissions of HONI that no portion of the Future Tax Savings should be allocated to ratepayers when the evidence is clear that HONI paid all of its costs under the stand-alone utility principle. Therefore, under the long-established benefits follow costs principle, no part of the benefit of the Future Tax Savings is allocable to ratepayers and should instead be paid to the shareholders in its entirety. The application of this principle is not affected by the Board’s mandate to approve “just and reasonable rates” or to achieve a reasonable balance between the interests of utility ratepayers and the interests of shareholders.

PART IV: FINAL ORDER

61The Court therefore orders that the matter be remitted back to the Board and (a) a new panel of the OEB shall consider and make an appropriate order varying the tax savings allocation in Original Decision by correcting the errors identified in it by the Review Panel; and (b) in doing so, the OEB shall apply and give effect to the findings of the Review Decision and each of the errors it identified in the Original Decision, including in respect of the applicable ratemaking principles.

Ducharme J.

I agree: ______________________

D.L. Corbett J.

I agree: ______________________

Gomery J.

Footnotes

1. 1The Court also considered written argument provided by the parties in March 2020 in light of the decision of the Supreme Court of Canada in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65.
2. 2The $2.595 billion figure represents the book value of the Future Tax Savings, but the present value of the Future Tax Savings (taking into account the time value of money over the approximately 20-year period when HONI can use them, by using an average weighted cost of capital of 9% and average annual tax depreciation of 5.5% on a declining balance) is only $1.2 billion. The PILS Departure Tax paid by HONI was therefore materially greater than the amounts it may recover back by the Future Tax Savings over time.
3. 3Ontario (Energy Board) v. Ontario Power Generation Inc., 2015 SCC 44 at paras. 1, 15-20 and 76.
4. 4ATCO Gas and Pipelines Ltd. v. Alberta (Utilities Commission), 2015 SCC 45, at para. 3.
5. 5Original Decision, pp. 87, 11-12, 86, 95, 168 and p.92-93, 167, 176.
6. 6Review Decision, pp. 1-2, 28-29.
7. 7Procedural Order No. 1, December 19, 2017, EB-2017-0336, p. 2.
8. 8Procedural Order No. 1, November 6, 2018, EB-2018-0269, p. 1, 22.
9. 9EB-2006-0322/EB-2006-0338/EB-2006-0340, Decision With Reasons: Motions To Review The Natural Gas Electricity Interface Review Decision, May 22, 2007.
10. 10Németh v. Canada (Justice), 2010 SCC 56 at paras. 10 and 115.