COURT OF APPEAL FOR ONTARIO

CITATION: Iroquois Falls Power Corporation v. Ontario Electricity Financial Corporation, 2016 ONCA 271

DATE: 20160419

DOCKET: C60286, C60287, C60288, C60289, C60290, C60291

Doherty, van Rensburg and Miller JJ.A.

BETWEEN

C60286

Iroquois Falls Power Corporation

C60287

Cochrane Power Corporation

C60288

N-R Power and Energy Corporation, Algonquin Power (Long Sault) Partnership and N-R Power Partnership

C60289

Kirkland Lake Power Corporation

C60290

Lake Superior Power Limited Partnership, Beaver Power Corporation, Carmichael Limited Partnership and Algonquin Power (Nagamami) Limited Partnership

C60291

Cardinal Power of Canada, L.P. and MPT Hydro L.P.

Applicants (Respondents in Appeal)

and

Ontario Electricity Financial Corporation

Respondent (Appellant)

J.D. Timothy Pinos, Emily Larose and Stephanie Voudouris, for the appellant

James D.G. Douglas and Heather K. Pessione, for the respondents Iroquois Falls Power Corporation, Cochrane Power Corporation, N-R Power and Energy Corporation, Algonquin Power (Long Sault) Partnership and N-R Power Partnership and Kirkland Lake Power Corporation

Crawford Smith and Nick Kennedy, for the respondents Lake Superior Power Limited Partnership, Beaver Power Corporation, Carmichael Limited Partnership and Algonquin Power (Nagamami) Limited Partnership

Glenn Zacher, for the respondents Cardinal Power of Canada, L.P. and MPT Hydro L.P.

Heard: December 14 and 15, 2015

On appeal from the judgment of Justice Wilton-Siegel of the Superior Court of Justice dated March 12, 2015, with reasons reported at 2015 ONSC 1641.

Doherty J.A.:

I

OVERVIEW

[1] These appeals are from judgments rendered in six applications heard together over several days. The applications arose from a dispute over the calculation of amounts payable to the respondents by the appellant under long-term contracts for the purchase of electricity generated by the respondents and distributed by the appellant to Ontario consumers. The contracts, or more specifically certain amendments to the contracts, contained a price adjustment index to be derived from the aggregate of several specific costs referred to cumulatively as total market costs ("TMC"). The price adjustment index was applied annually as part of the formula used to fix payments to the respondents under the contracts.[^1]

[2] The respondents claimed that effective January 1, 2011, the appellant unilaterally changed the calculation of the Global Adjustment Mechanism ("GA"), one component of TMC, in a manner that was inconsistent with the definition of TMC. This change substantially reduced amounts payable to the respondents. The respondents argued that the change in the definition of the GA, which was effected by a new regulation, had nothing to do with the costs of producing or distributing electricity. Instead, it was designed by the government to provide a subsidy to large consumers of electricity to promote various government policies. The respondents further argued that by incorporating the new definition of the GA into TMC, the appellant contravened the agreements and effectively passed the costs of the government subsidy on to the respondents.

[3] The appellant argued that TMC was intended to reflect the price of electricity to certain consumers. It maintained that the revised definition of the GA effected no change in the manner in which TMC was calculated. Instead, it altered the manner in which the GA component of TMC was calculated. The appellant argued that this kind of change to one or more of the components of TMC occurred throughout the contractual relationship. The appellant further submitted that the change was mandated by the government regulation over which the appellant had no control. Finally, the appellant acknowledged that the means of calculating the GA under the new regulation had reduced the amounts payable to the respondents under the agreements. The appellant submitted, however, that the negative impact of the calculation of the GA from the respondents' perspective was irrelevant to whether the calculation of the GA under the new regulation resulted in a breach of those agreements.

[4] The application judge found for the respondents. He directed that the GA component of TMC should be calculated as it had been before the new regulation came into effect. He also directed that the respondents were entitled to a recalculation as of January 1, 2011 of the amounts owing to them under the agreements.

[5] The appellant raises several grounds of appeal. For my purposes, I will organize them into three categories. First, counsel submits that the application judge decided the applications on a fundamentally different basis than that advanced by the respondents on the applications and argued by the parties at the hearing. Counsel argues that the basis upon which the application judge decided the applications in favour of the respondents appeared for the first time, fully grown, in his reasons for judgment. Counsel contends that the appellant was denied due process in that it had no chance to meet the case as ultimately framed and decided by the application judge.

[6] Second, counsel attacks several findings of fact made by the application judge, arguing that the findings are unsupported by the evidence, or based on a misapprehension of the evidence.[^2] Counsel argues that many of the factual errors are a direct consequence of the application judge deciding the applications on an issue not raised by the parties. Counsel contends that this is not surprising given that the parties prepared the record on an understanding that the applications turned on an entirely different substantive issue. Apart from the alleged factual errors said to arise because the application judge decided the case on the basis of an issue not argued, counsel also submits the application judge made several other findings of fact that were unsupported by the evidence or were based on a misapprehension of the evidence.

[7] The third category of argument alleges several errors by the application judge in his interpretation of the relevant provisions of the agreements.

[8] The appellant asks the court to receive evidence on appeal in support of arguments that fall in the first two categories outlined above. Counsel submits that the "fresh" evidence demonstrates both that the application judge decided the case on a basis not argued by the parties, and that several of his findings of fact were both unsupported by the record before him, and inaccurate.

[9] The respondents argue that the appeals should be dismissed. Alternatively, should this court agree with the appellant's contention that the application judge erred in his interpretation of the agreements, three of the respondents cross-appeal. They allege that the change in the manner in which the GA was calculated triggered the "material change" clauses in their agreements. Those clauses provided that material changes to the description of TMC could only be made with the agreement of both the appellant and these respondents.

[10] For the reasons that follow, I would not admit the fresh evidence and would dismiss the appeals. The fresh evidence is inadmissible because it is not relevant to the resolution of the grounds of appeal in respect of which it is offered. The application judge did not decide the applications on an issue not raised by the respondents. His material findings were supported by the evidence and his findings reveal no material misapprehension of the evidence. The application judge's interpretation of the relevant provisions of the contracts is not tainted by any legal error and was reasonably open to him on the record.

[11] I do not reach the cross-appeals.

II

THE FACTS

[12] The dispute between the appellant and the respondents can only be understood in the context of the changes in the manner in which electricity has been produced and sold to consumers in Ontario over the last 30 years. The application judge reviewed that history in his reasons, at paras. 5-64. I have borrowed heavily from those reasons in my summary.

[13] Prior to 1999, Ontario Hydro ("Hydro") operated as a publicly owned vertically integrated monopoly supplying electricity to virtually all consumers in Ontario. Those consumers included municipal electric distribution utilities who distributed power to retail consumers in the municipality, rural retail customers, and about a hundred large industrial customers who received electricity directly from Hydro's transmission lines. These customers were referred to as Direct Industrial Customers.

[14] Hydro's statutory mandate required it to supply power to its municipal customers and Direct Industrial Customers. The rates charged by Hydro represented the "all in" costs to Hydro incurred in the generation and delivery of electricity to those consumers. The "all in" costs included charges determined by volume of use (energy charges) and charges based on the peak demand placed on the system by the consumers' electricity needs in a given period (demand charges). Hydro fixed its rates after review by the Ontario Energy Board.

[15] In the late 1980s, Hydro looked to the private sector to assist in the construction of new power generation facilities needed to service Ontario's increasing power demands. Several private entities, including the respondents, agreed to build power generation facilities and entered into long-term contracts (20 to 50 years) with Hydro for the sale of power generated by those new facilities. These private entities are referred to as non-utility generators ("NUGs") and the agreements as power purchase agreements ("PPAs").

[16] When Hydro and the NUGs entered into the PPAs, it was intended that the NUGs would supply the power at no greater cost than Hydro would have incurred had it chosen to construct and operate the new facilities on its own. The parties also understood that the PPAs were intended to provide an uninterrupted long-term income stream to the NUGs, sufficient to allow them to finance the construction and operation of the power generation facilities without recourse against any asset other than the income stream produced by the power facilities.

[17] When the appellant and the NUGs entered into the PPAs, they understood that costs associated with the generation, transmission and supply of electricity would increase over the long timespan of the contracts. The agreements contained an annual price adjustment index intended to protect the NUGs from the inevitable cost increases. The price adjustment index increased the amounts payable to the NUGs under the PPAs as costs increased.

[18] The original price adjustment index was referred to as the Direct Customer Rate ("DCR"). It was based on rates listed in the rates schedule and charged to Hydro's Direct Industrial Customers. Variations in those rates were reflected in the price adjustment index used to calculate the amounts payable to the NUGs under the PPAs on an annual basis.

[19] Different PPAs defined DCR in slightly different ways. However, all of the definitions were premised on a notional customer ("proxy customer") with certain fixed characteristics that related both to volume of energy used and the demand placed upon the electrical grid by the user. The proxy customer was assumed:

• To have a "100% load factor", that is a fixed and consistent demand throughout the entire relevant period;
• To purchase the most reliable kind of power (firm); and
• To purchase power at a specified connection of voltage.

[20] The DCR was expressed in terms of dollars per kilowatt hour. It represented the "all in" price that the proxy customer would have paid for power used by that customer based upon Hydro's Direct Industrial Customer rate schedule. When Hydro enjoyed its monopoly, the DCR represented both Hydro's direct and indirect costs of producing and delivering the power to the proxy customer, and the price paid by the proxy customer for the power.

[21] Between 1988 and 1993, Hydro increased its rates to its Direct Industrial Customers. Those increases were reflected in the DCR, which in turn led to an increase in the amounts paid to the NUGs under the PPAs. The government imposed a five-year rate freeze between 1994 and 2000. Consequently, the DCR remained static and there were no increases in the payments to the NUGs, even though their costs increased during that five-year time period.

[22] In the late 1990s, the government restructured Hydro and opened the wholesale Ontario electricity market to competition. Hydro was split into different entities, each responsible for a facet of Hydro's activities. Ontario Power Generation ("OPG") owned and operated the majority of Hydro's generation facilities, Hydro One owned and operated Hydro's transmission and distribution assets, and the Independent Market Operator ("IMO"), later renamed the Independent Electricity System Operator ("IESO"), administered the wholesale electricity market. The appellant became the legal successor to Hydro and assumed its rights and obligations under the PPAs.

[23] The wholesale electricity market opened under the auspices of the IESO in May 2002. In this new market, rates were unbundled and were determined through a mix of market, regulatory and government mechanisms. For example, the Hourly Ontario Energy Price ("HOEP") paid by connected consumers was determined through the competitive marketplace overseen by IESO. Transmission rates were fixed by the Ontario Energy Board and costs associated with debt retirement were fixed by the government.

[24] The new reality of the marketplace rendered the DCR extinct. There was no longer a bundled rate fixed by Hydro and charged to its Direct Industrial Customers upon which to base the price adjustment index.

[25] The various stakeholders, including the appellant and the NUGs, set out to find an appropriate replacement for the DCR. They produced a Working Paper in June 2002. Among other things, the Working Paper set out the shared expectations of the appellant and the NUGs with respect to the development of a price adjustment index to replace the DCR. Fundamental to the consensus was the view that:

[T]he replacement for the DCR should replicate, to the extent possible, the nature and behaviour of the DCR as it currently exists. Furthermore, any such replacement should not afford any benefits or cause any detriment to either OEFC or each NUG contract holder that did not exist within the original DCR.

[26] The Working Paper proposed that the new price adjustment index be based on TMC. TMC was the aggregate of several individual costs associated with the production, delivery and use of electricity by the described hypothetical customer. Those costs included the HOEP fixed by IESO, and transmission rates fixed by the Ontario Energy Board. As the individual costs varied, TMC would vary. As TMC varied, the price adjustment index, calculated based on TMC, would change. As the price adjustment index changed, the amounts payable to the NUGs under the PPAs changed.

[27] The appellant and the NUGs agreed to incorporate the concept of TMC into the PPAs and did so in a series of amendments referred to as "Term Sheets". TMC was defined in the Term Sheets as:

[The] cost per kWh of electricity delivered on a 100% load factor firm basis to a Wholesale Market Participant load customer connected at the relevant voltage for the year P.

[28] The new price adjustment index calculated using TMC as defined in the Term Sheets came into effect in 2003 (for the 2002 year). There were two indices derived from TMC, one for PPAs that did not contain a minimum price increase provision and the other for PPAs that had a minimum price increase provision. For present purposes, there is no need to distinguish between the two. The new price adjustment index is referred to as the DCR_new.

[29] The DCR_new resembled the DCR in many ways. The "Wholesale Market Participant load customer" referred to in the definition of TMC described a customer who took electricity directly from the IESO controlled grid for its own consumption or sale. In this respect, the Wholesale Market Participant resembled the Direct Industrial Customer used to create the proxy customer for the purposes of the DCR. The DCR_new, like the DCR, had both an energy (volumetric) and demand component. Again, like the DCR, the demand component in the DCR_new was converted from a dollar per kilowatt number to a dollar per kilowatt hour number by the assumption that electricity was delivered on a 100% load factor, that is, a constant and consistent per hour energy demand throughout the year.

[30] In 2005, the Ontario government introduced by regulation the GA, a means by which certain out-of-market indirect electricity costs payable by government agencies could be passed on to consumers of electricity. As described by one of the affiants for the appellant, the GA represented:

[T]he difference between the regulated or contract rates paid to regulated or contracted generators and the amount these generators earn via HOEP from the sale of electricity into the Ontario electricity market…. [T]he GA changes in response to changes in HOEP. All other things being equal, the GA increases in months when HOEP is low because regulated and contracted generators will have earned relatively less of their regulated or contract rates through the sale of electricity into the Ontario electricity market. Conversely, the GA decreases in months when HOEP is high. For some months, HOEP was sufficiently high relative to the regulated or contracted rates that the GA was, in fact, negative and a rebate to customers.

[31] The total GA for the Ontario market was calculated on a monthly basis and reported as a dollar per megawatt hour figure. All consumers were charged an amount for the GA in proportion to the amount that their electricity use bore to the total consumption during the relevant period.

[32] As out-of-market electricity costs payable by government agencies increased, the GA increased. For example, unanticipated costs associated with the construction of new generating plants increased the total GA. Similarly, as the HOEP decreased, the GA increased. Initially, the GA provided a credit against electricity costs and served to reduce the overall TMC. However, the total annual GA increased significantly between 2005 and 2010. By 2010, the GA represented about two-thirds of the cost charged to the consumer and in total represented a $3.85 billion charge against costs in calculating TMC.

[33] The parties agreed that the GA as constituted in 2005 represented a cost of providing existing and new electricity generation for the benefit of Ontario electricity consumers and that it was properly incorporated into the bundle of costs (or credits) making up TMC. Consequently, the GA impacted on the DCR_new and, hence, the amounts payable to the NUGs under the PPAs.

[34] As outlined above, TMC was an aggregate of numerous individual costs. The components of TMC varied from time to time. The introduction of the GA in 2005 provides an example of a new component introduced into the calculation of TMC. As new components were introduced or old components were altered, TMC and ultimately the DCR_new would change. The appellant retained Navigant Consulting Ltd. ("Navigant") to calculate and publish DCR_new on an annual basis. The NUGs accepted those calculations until 2011.

[35] In 2010, for policy reasons unrelated to the direct or indirect costs of electricity, the government decided that it would change the way it allocated the GA among electricity consumers. The change made by regulation became effective January 1, 2011 (the "Reallocation Regulation") and effectively shifted the burden of the GA away from large industrial users and on to smaller consumers of electricity.

[36] The Reallocation Regulation established two classes of customers for the purposes of allocating the GA charge. One group, Class A customers, consisted of the large industrial energy users whose average monthly demands exceeded five megawatts. The second group, Class B customers, consisted of all other customers, and those customers who fell within the Class A definition but chose to be Class B customers.

[37] Under the Reallocation Regulation, the total GA remained unchanged. However, the percentage of total GA that Class A customers had to pay was determined based on the electricity consumption of Class A customers during the five peak demand hours in the previous year. The remainder of the total GA was allocated among Class B customers on the volumetric basis previously used to determine the GA for all customers. In other words, Class B customers continued to be charged the GA in proportion to the amount that their electricity use bore to the total consumption during the relevant period.

[38] Under the formula provided in the Reallocation Regulation, Class A customers could reduce their portion of the total GA costs by reducing electricity consumption during the five peak hours. Any reduction in the GA achieved by Class A customers became an increase in the GA costs payable by the Class B customers.

[39] The Reallocation Regulation had nothing to do with the costs of generating and distributing electricity. It also had nothing to do with any change in the total indirect out-of-market costs reflected by the total GA. The Reallocation Regulation simply reallocated those charges as between two identified groups of customers.

[40] The reallocation was done principally to reduce prices charged to large industrial customers in the hope of encouraging those customers to maintain manufacturing facilities within Ontario. The reallocation was also intended to encourage effective demand management and energy conservation among Class A customers by giving those customers an incentive to shift consumption to off-peak hours.

[41] In the face of the Reallocation Regulation, Navigant changed the formula for calculating the GA portion of TMC. The new formula, in effect, calculated the GA portion of TMC based only on the average critical peak demand of Class A customers during the five peak hours, as opposed to the actual total system demand. The approach taken by Navigant after the Reallocation Regulation assumed that the proxy customer was a Class A customer under that regulation. That customer would have benefitted from the reapportionment of the GA affected by the Reallocation Regulation. In fact, some Class A customers could potentially reduce their GA costs to zero or near zero by avoiding electricity use during the peak five hours.

[42] As indicated above, the Reallocation Regulation did not reflect any real change in the cost, direct or indirect, associated with the production and delivery of electricity by the NUGs. The decision to use the formula in the Reallocation Regulation did, however, have a significant downward impact on the calculation of the GA amount to be included in TMC. That reduction rippled through to a reduction in the DCR_new and an ultimate reduction in the amounts payable to the NUGs under the PPAs. The respondents estimated that the change in the formula for calculating the GA portion of TMC made after the Reallocation Regulation came into effect would cost the respondents in excess of $530 million over the lifetime of the PPAs.

III

Reasons of the Application Judge

[43] After setting out the respective positions of the parties, the application judge framed the issue in the following terms:

[74] Although the parties have proceeded on the basis that the framework for analysis of the issues on this application is whether TMC is a cost-index or a price-index, the substantive issue on this application is whether the definition of TMC requires that costs of generating and supplying electricity that are aggregated and then allocated to purchasers of electricity must be allocated on a basis pro rata to consumption of electricity or can be allocated on another basis – in this case, on a basis which is explicitly intended to subsidize a particular class of purchasers.

[44] He ultimately concluded:

[124] Based on the foregoing, I conclude that it is implicit in the definition of TMC that costs that are not by their nature capable of being passed on directly to purchasers of electricity must be aggregated and allocated to purchasers pro rata based on purchases or consumption of electricity relative to purchases or consumption by all customers …

[126] The definition of TMC mandates an aggregation of costs of generating and supplying electricity that is delivered to the Proxy Customer. The cost of GA is a permissible cost as it reflects, or constitutes, a cost of electricity generation. However, the cost of GA to Class A Customers, as calculated by Navigant, is determined on the basis of an allocation that is not pro rata according to electricity purchases as required by the definition of TMC. As such, TMC, as calculated by Navigant, reflects a reallocation of GA costs as between Class A Customers and Class B Customers, rather than an allocation of the underlying costs of generation in a manner that is required by the definition of TMC. [Emphasis added.]

[45] As I read the application judge's reasons, he held that while the government was free to reapportion the GA as it saw fit to promote government policies, the appellant, as a party to the PPAs and the Term Sheets, was contractually obligated to calculate TMC in a manner that reflected actual changes in the costs, direct or indirect, of the production and delivery of electricity to consumers in the Ontario market. On the application judge's analysis, the government's decision to reallocate the GA among different categories of consumer did not reflect any real change in the costs, direct or indirect, of producing or delivering electricity. The government's reallocation could not, therefore, provide a basis upon which Navigant, on behalf of the appellant, could recalculate the GA for the purposes of determining TMC.

[46] In arriving at his conclusion, the application judge considered:

• i. The plain, ordinary meaning of TMC as defined in the Term Sheets (paras. 97-104);
• ii. The shared understanding and goals of the parties when, in reaction to the fundamental changes in the Ontario energy market, they engaged in a prolonged consultative process that ultimately led to the incorporation of TMC as a defined term in the Term Sheets that amended the PPAs (paras. 105-13);
• iii. Other provisions in the Term Sheets introduced at the same time as TMC (paras. 114-15);
• iv. The compatibility of the terms of the Reallocation Regulation with the identification of the common features of the proxy customer for the purposes of calculating the GA (paras. 116-21); and
• v. The non-cost related nature of some of the components of TMC as identified in the Terms Sheets (paras. 122-23).

[47] On my reading of the application judge's reasons, the first two factors, the plain and ordinary meaning and the circumstances surrounding the incorporation of the TMC definition into the Term Sheets, played the paramount role in his analysis.

IV

The Admissibility of the Evidence Tendered on Appeal

[48] The appellant asks the court to admit three affidavits on appeal:

• The affidavit of Kenneth Russell, legal counsel for Ontario Financing Authority, who in that capacity provides legal services to the appellant;
• The affidavit of William Harper, a former Hydro employee responsible for rate setting policies; and
• The affidavit of Todd Williams, an employee of Navigant who is responsible for TMC calculations.[^3]

[49] This court can receive evidence on appeal: Courts of Justice Act, R.S.O. 1990, c. C.43, s. 134(4)(b). Most often, evidence offered on appeal seeks to place different facts before the appeal court than were considered by the court of first instance. In the typical case, the appellant asks the appeal court to consider the new evidence in combination with the evidence adduced in the lower court, and to arrive at different factual findings based on the enhanced evidentiary record. In essence, the appellant asks for a reconsideration of the facts based on evidence not adduced in the court below. Finality concerns, especially important in civil proceedings, demand a restrictive approach to the admissibility of evidence on appeal. The due diligence inquiry, an important consideration in determining whether to admit fresh evidence on appeal, reflects the restrictive approach taken to the admission of fresh evidence on appeal.

[50] This is not the typical kind of "fresh" evidence application. The appellant does not ask the court to receive evidence not adduced on the application and to decide anew the factual issues determined on the application based on the new evidence. Instead, the appellant offers evidence on appeal to support the arguments that the application judge decided the applications on a basis not argued by the parties, and that he made factual findings unsupported by the evidence adduced before him. Counsel submits that the evidence offered on appeal demonstrates the merits of both arguments. Given the grounds of appeal to which the evidence proffered on appeal is directed, the admissibility of that evidence must turn on whether the evidence can provide any assistance to the court in deciding the merits of either or both of those arguments. If the evidence cannot assist, it is not relevant to the appeals.

[51] Mr. Russell's affidavit begins by setting out the material that was before the application judge, including communications between counsel and the application judge. All of this material is part of the appeal record. Mr. Russell offers this opinion:

At no time did counsel or Justice Wilton-Siegel refer to what he refers to as the "substantive issue" in the quote above [in para. 74 of the application judge's reasons].

[52] Mr. Russell goes on to identify various "factual" findings made by the application judge. He states: "at no time did counsel or Justice Wilton-Siegel refer to any of these facts" during the hearing of the applications.

[53] Mr. Russell's affidavit concludes with the assertion that had the appellant had any forewarning of the issue on which the application judge would decide the case, or of the facts on which the application judge would base his decision, the appellant would have addressed that issue and those facts in its evidence and argument.

[54] The affidavits of Mr. Harper and Mr. Williams go into considerable detail, some of which refers to factual matters addressed in the affidavits they filed on the applications. Their affidavits also contain some information which the affiants describe as responsive to the "new" issue raised by the application judge in his reasons.

[55] The affidavits of Mr. Harper and Mr. Williams are intended to show not only that the application judge made findings of fact unsupported by the evidence, but that those findings are demonstrably inaccurate when considered in light of the additional information provided in the affidavits. Put bluntly, the affidavits of Mr. Harper and Mr. Williams are a detailed and vigorous attack on the application judge's analysis of the evidence and the accuracy of his findings of fact. They read more like arguments than evidence.

[56] With respect, the "fresh" evidence motion is misconceived. Nothing in the affidavits filed by the appellant can assist this court in deciding either whether the application judge decided the applications on an issue not raised by the parties, or made findings of fact unsupported by the evidentiary record before him. To address and decide the merits of those allegations, the court must focus on the record before the application judge. It is only by examining that record that this court can decide if what the appellant describes as the "new issue" identified by the application judge was indeed raised by the parties on the applications.[^4] Similarly, the court can only decide whether the application judge made material findings of fact unsupported by the evidence by examining the evidence that was before the application judge. The affiants' opinions that an issue was or was not raised on the application, just like their opinions as to whether there was any evidence to support the application judge's findings of fact, are of no assistance to this court in deciding those questions.

[57] Mr. Williams' and Mr. Harper's opinions about the accuracy of the application judge's findings of fact and the evidence they provide in relation to those facts are equally irrelevant. It is important to recall that the appellant does not offer the affidavits of Mr. Williams and Mr. Harper on the basis that the court should consider those affidavits in conjunction with the evidence heard on the application and reconsider the application judge's factual determinations. The affidavits are offered on the basis that they demonstrate errors made by the application judge, both in respect of his framing of the substantive issue raised on the applications, and his analysis of the evidence before him.

[58] The fact-finding stage of this process is over. The ultimate accuracy of the application judge's factual findings is not relevant to an argument that his findings are unsupported by the evidence that was before him. The questions raised on appeal will be decided, not by assessing the ultimate accuracy of the application judge's factual findings having regard to information that was not before him, but rather by determining whether the facts as found by the application judge survive appellate review based on the palpable and overriding error standard to be applied to those findings. The affiants' assertions that the application judge's findings are inaccurate, especially when those assertions are based in part on material never seen by the application judge, simply offer no assistance to this court in deciding whether the findings made by the application judge reveal palpable and overriding error.

[59] Counsel for the appellant argues that the affidavits of Mr. Williams and Mr. Harper are important because by demonstrating the inaccuracy of the application judge's findings, they establish the prejudice suffered by the appellant when the application judge decided the applications on an issue not raised by the parties and made findings unsupported by the evidence. "Fresh" evidence may be admissible on appeal to demonstrate prejudice caused to the appellant by an error made in the proceedings under review: see Prince Edward County Field Naturalists v. Ostrander Point GP Inc., 2015 ONCA 269, at para. 84.

[60] However, this argument does not assist the appellant for two reasons. First, if the appellant can show, based on the record before the application judge, that the application judge decided the case on an issue not argued, the prejudice flowing to the appellant from those errors is self-evident without resort to any of the affidavits filed on appeal. Second, the prejudice inquiry becomes germane only if the appellant can first establish, based on the record before the application judge, either that he decided the case on an issue not raised, or that he made findings unsupported by the evidence. For the reasons that follow, the appellant has failed to make out either of those errors.

[61] The interests of justice would not be served by admitting the evidence offered by the appellant on appeal.

V

Grounds of Appeal

A. Did the application judge decide the case on a basis not raised or argued by the parties?

[62] A judgment based on a claim not made or a theory not advanced and argued cannot stand. The fairness and reliability of the adversarial process demand that each side have notice of the other's claims and a full opportunity to respond to those claims: see Labatt Brewing Company Limited v. NHL Enterprises Canada, L.P. (2011), 2011 ONCA 511, 106 O.R. (3d) 677 (C.A.), at para. 6; Rodaro v. Royal Bank of Canada (2002), 2002 CanLII 41834 (ON CA), 59 O.R. (3d) 74 (C.A.), at paras. 58-62.

[63] Not surprisingly, counsel do not quarrel with the proposition set out above. They part company over the characterization of the reasons of the application judge. The appellant contends that the application judge expressly indicated that he saw the outcome of the applications as turning on an entirely different issue than had been advanced and litigated by the parties on the application. The respondents submit that the application judge decided the applications on exactly the basis on which they were argued and chose to accept the respondents' position. They argue that what the appellant refers to as the "new issue" is nothing more than a description, in slightly different words, of the position taken by the respondents throughout the litigation.

[64] Counsel for the appellant relies heavily on the passage from the application judge's reasons, quoted above at para. 43. For convenience, I repeat that passage here:

[74] Although the parties have proceeded on the basis that the framework for analysis of the issues on this application is whether TMC is a cost-index or a price-index, the substantive issue on this application is whether the definition of TMC requires that costs of generating and supplying electricity that are aggregated and then allocated to purchasers of electricity must be allocated on a basis pro rata to consumption of electricity or can be allocated on another basis – in this case, on a basis which is explicitly intended to subsidize a particular class of purchasers. [Emphasis added.]

[65] I think counsel for the appellant makes too much of the language used by the application judge in para. 74. The battle lines were clearly drawn before the application judge. The respondents saw TMC as a reflection of the costs associated with the production and distribution of electricity. TMC provided the basis for the calculation of the price adjustment index (DCR_new). That index would ensure that amounts paid to the respondents under the PPAs kept pace with increases in the costs of production and distribution of electricity. The new allocation of the GA as defined in the Reallocation Regulation would, if carried through to the calculation of TMC, effectively detach the price adjustment index from the actual costs of generating and transmitting electricity.

[66] The appellant saw TMC as a reflection of the price paid for the delivery of electricity by the proxy customer. Variations in the price, whether imposed by marketplace or government regulation, were properly taken into account. The Reallocation Regulation changed the portion of the GA paid by the proxy customer for the purchase of electricity. The appellant was, therefore, required to use the GA as calculated under the Reallocation Regulation as a component of TMC.

[67] Nothing in para. 74 suggests to me that the application judge did not appreciate the positions of the parties, or that he saw the essentials of their dispute differently than did the parties. Indeed, only four paragraphs earlier, the application judge drew a direct connection between what he called the "substantive issue" in para. 74 and the positions of the parties.

[70] By way of overview, OEFC argues that TMC constitutes the aggregate price paid by the proxy customer for electricity delivered to it in the relevant period. On the basis of this approach, the definition of TMC has been satisfied. The [NUGs] argue that TMC represents the aggregate of all costs of generating and supplying electricity to a proxy customer. They accept that the GA qualifies as a cost component of TMC. However, the [NUGs] argue that the GA cost attributable to a proxy customer must be determined on a volumetric basis pro rata to the consumption by all purchasers of electricity – that is, in the manner that it was determined prior to the enactment of the Reallocation Regulation. [Emphasis in original].

[68] The application judge's reference to "the substantive issue on this application", in para. 74, describes the essential difference in the approach taken to the indirect or out-of-market costs, like the GA, depending on whether the goal of the process is to reflect costs of production and distribution of electricity or the purchase price of electricity to certain identified consumers.

[69] In my view, the application judge did not identify a new issue in para. 74, but instead focused on the manner in which indirect out-of-market costs, like the GA, had to be allocated if TMC was, as the application judge found, intended to reflect the costs of generating and supplying electricity and not the costs incurred by the proxy customer in purchasing electricity. This distinction tracked the competing positions of the parties.

B. Did the application judge make palpable and overriding factual errors?

[70] A court of appeal will interfere with the findings of fact of a trial judge only if a finding is shown to be the product of "palpable and overriding error". A factual finding unsupported by any evidence is inevitably a "palpable" error. That error will also be "overriding" if it is shown to have affected the result: H.L. v. Canada (Attorney General), 2005 SCC 25, [2005] 1 S.C.R. 401, at paras. 53-56; Waxman v. Waxman (2004), 2004 CanLII 39040 (ON CA), 44 B.L.R. (3d) 165 (Ont. C.A.), at paras. 292-96, 335, leave to appeal refused, [2004] S.C.C.A. No. 291.

[71] Counsel for the appellant, both in his written and oral argument, provided a helpful, detailed and careful analysis of the application judge's fact-finding. He alleges many factual errors.[^5] I propose to begin by grouping some of the factual errors and addressing them together. I will then address the remaining alleged factual errors one by one.

[72] Some of counsel's submissions alleging factual errors do not, on closer examination, allege errors based on the evidence produced in the application record. Instead, they allege errors based on evidence contained in the affidavits of Mr. Williams and Mr. Harper. I would place the alleged factual errors in paras. 110 to 112 of the application judge's reasons in this group.

[73] As explained above, the evidence contained in the affidavits of Mr. Williams and Mr. Harper filed on appeal cannot assist in deciding whether the application judge made palpable and overriding factual errors based on the record that was before him. Submissions that the application judge fell into fatal error in his processing of the evidence cannot possibly succeed when based on evidence that was not before the application judge.

[74] The appellant also alleges factual errors in paras. 107 and 109 of the reasons of the application judge. In my view, those submissions are more accurately described as quarrels with the application judge's interpretation of TMC in the Term Sheets. For example, counsel argues that the application judge misapprehended the effect of the Reallocation Regulation on TMC in para. 107 of his reasons. The argument does not point to any factual error by the application judge, but instead repeats the claim, made before the application judge, that the application of the Reallocation Regulation is not inconsistent with TMC as defined in the Term Sheets. This is a contractual interpretation argument and should be addressed in that context.

[75] I turn next to the remaining six specific alleged factual errors. I begin with para. 9 of the application judge's reasons:

The rates charged to Direct Industrial Customers were published in a schedule provided by Ontario Hydro and charged uniformly to Direct Industrial Customers according to their individual consumption in each hour of the relevant period.

[76] The appellant takes issue with the application judge's description of the rates in that it does not take account of the demand charge component of the rate. The demand charge was not tied to consumption, but rather to peak demand.

[77] Reasons must be considered as a whole. A review of the entirety of the application judge's reasons (for example, at paras. 15-16, 26) makes it abundantly clear that the application judge understood that there was a demand component in the charge and the manner in which that component was calculated and factored into the rates charged.

[78] The next alleged factual error is found in para. 78 of the application judge's reasons. In describing the electricity market as it existed when the PPAs were entered into, the application judge said:

Under the regime in existence at the time of execution of the PPAs those amounts [cost of electricity and price of electricity] were the same and the concepts essentially two sides of the same coin.

[79] Counsel for the appellant submits that this finding is premised on a misunderstanding of s. 92 of the Power Corporation Act, which required that Hydro supply "power at cost" only to municipalities and not to Direct Industrial Customers.

[80] I do not read the impugned paragraph as a reference to the provisions of the Power Corporation Act. It is a description of the electricity market as it existed when the PPAs were first entered into and, in particular, a description of the relationship of the cost of electricity to the price of electricity in that market. The application judge's description is fully supported by the record, including observations in the Macdonald Commission Report, the government-sponsored White Paper that in part led to the restructuring of the electricity market.

[81] Counsel also submits that para. 79 of the application judge's reasons demonstrates a material factual error. In para. 79, the application judge described the positions of the parties. He does not make any factual finding. The application judge refers to the respondents' position as based on a certain assumption. On appeal, counsel submits that "the assumption is incorrect". That is not an argument about the application judge's fact-finding, but is instead an argument challenging the merits of the respondents' position. The argument also echoes the appellant's position before the application judge.

[82] The next alleged unsupported finding of fact appears in para. 106:

First, as set out above, an important general principle articulated in the Working Paper is that the DCR was selected as an index reflecting over time the impact of changes in Ontario Hydro's cost of doing business. Such costs were incurred in one of two forms – direct costs that were allocated directly to the customer and other costs that were aggregated into a demand charge that was then allocated in accordance with the Proxy Customer assumptions.

[83] The appellant accepts that the application judge properly described the general principle from the Working Paper in the first sentence quoted above. Counsel argues, however, that the remainder of the paragraph misstates the manner in which Hydro classified its costs, and the manner in which it aggregated and allocated those costs to customers.

[84] In my view, for the purposes of the issue before application judge, the first sentence was the important one. The judge looked to the principle articulated in the Working Paper as an important surrounding circumstance in his interpretation of the definition of TMC contained in the PPAs. The rest of the paragraph strikes me as a fair description, although perhaps less detailed than the appellant might like, of Hydro's costs and the allocation of those costs.

[85] The next alleged factual error appears in para. 113 of the application judge's reasons:

Under the regulated market system, Ontario Hydro in effect charged a blended rate that incorporated the varying costs of generation of electricity from different sources on a volumetric basis based on a pro rata consumption.

[86] The appellant submits that Hydro never charged its Direct Industrial Customers a blended rate. It always charged a separate demand and energy charge. Counsel contends that the factual error in the description of the nature of Hydro's charging is significant because it carried through to the application judge's interpretation of TMC as defined in the Term Sheets.

[87] The appellant's submissions ignore the words "in effect" in the passage quoted from para. 113 of the application judge's reasons. The application judge was not describing how Hydro actually charged any of its customers, but rather was describing the effect of rates that contained an energy and a demand component. Perhaps, the application judge's language could have been more precise. However, I see no factual error.

[88] The last alleged factual error appears in para. 123 of the application judge's reasons:

As a conceptual matter, therefore, TMC is understood to comprise all energy-related costs that are intended to be recovered from electricity customers, including but not limited to all of the costs associated with the generation and supply of electricity, just as the DCR included all such costs prior to the market opening.

[89] The appellant submits that the trial judge wrongly described TMC as referable only to energy-related costs. The appellant contends that TMC relates to both energy and capacity-related costs.

[90] I do not understand the application judge to have used the phrase "energy-related costs", in para. 123, in the narrow sense advanced by the appellant. I think he simply meant all costs related, directly or indirectly, to the production and supply of electricity. Read in that way, the paragraph finds ample support in the evidence and is consistent with the position advanced by the respondents on the applications.

[91] Counsel for the appellant spent most of the appeal carefully analyzing the findings of fact made by the application judge. This approach reflected the nature of the applications. The factual minutiae were important. Despite his forceful submissions, counsel did not demonstrate that the application judge made any palpable and overriding factual error.

C. Did the application judge err in the interpretation of TMC?

(i) Standard of review

[92] Although the evidentiary record before the application judge was dense, almost to the point of being impenetrable in some respects, the outcome of the applications turned on a single question of contractual interpretation – is the calculation of the GA as provided for in the Reallocation Regulation consistent with the definition of TMC contained in the various Term Sheets?

[93] The appellant alleges multiple errors by the application judge in his interpretation of TMC. Counsel submits that all of the alleged errors raised questions of law and are therefore reviewable on a correctness standard. As explained in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 42-55, contractual interpretation can raise questions of law alone reviewable on a correctness standard or questions fact or mixed fact and law reviewable on a palpable and overriding error standard: see also Holland v. Hostopia.com Inc., 2015 ONCA 762, 392 D.L.R. (4th) 650 at paras. 40-43; Martenfeld v. Collins Barrow Toronto LLP, 2014 ONCA 625, 122 O.R. (3d) 568, at paras. 41-42.

[94] Before Sattva, many courts treated most questions pertaining to the interpretation of contracts as questions of law alone. Sattva identified two reasons for rejecting this traditional position.

[95] First, the goal of contemporary contractual interpretation is to discern the objective intention of the parties through a reading of the agreement as a whole in the context of the surrounding circumstances as known by the parties when they entered into the agreement: Sattva, paras. 46-48; A. Swan & J. Adamski, Canadian Contract Law, 3rd ed. (Markham: LexisNexis, 2012), at ch. 8. This approach to contractual interpretation almost inevitably raises factual questions. The answers to those questions are not found by a formalistic application of prefabricated technical rules, but rather through a careful assessment of often conflicting evidence. The trial venue, unlike the appeal venue, is particularly well-suited for this kind of assessment.

[96] Second, present day contractual interpretation is by its nature a fact-specific inquiry that yields fact-specific results. The interpretation of an agreement will often require a consideration of a unique constellation of specific words used in a specific context and in specific circumstances. The court's interpretation of the contract will usually have no precedential value beyond the litigation. Questions that generate answers that have no value beyond the specific litigation in which they arise are inevitably characterized as questions of fact or mixed fact and law: Sattva, paras. 51-53. As explained in Sattva, there is little to be gained and much to be lost by the re-litigation of these kinds of question at the appellate level.

[97] The twin rationales for treating most aspects of contractual interpretation as involving questions of mixed fact and law identified in Sattva will not apply to all contracts: e.g. see MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842, 127 O.R. (3d) 663, at paras. 31-41, leave to appeal to S.C.C. requested. They, however, apply with full force to the contracts at the centre of this litigation.

[98] The PPAs and the subsequent amendments to the PPAs, including the definition of TMC, were the product of extensive and careful negotiations and consultations among sophisticated commercial entities. They were, in the truest sense of the word, negotiated agreements designed by the parties to address a very specific ongoing business relationship. The parties to the agreements had a longstanding and ongoing relationship in a unique marketplace. Both were very familiar with that marketplace and sought to preserve their mutually beneficial relationship as the marketplace changed in response to new government policies. In particular, the parties fully appreciated the far-reaching effects on their relationship of the profound changes to the electricity marketplace brought about in 2002. They set out, through a lengthy, formalized and detailed series of consultations and negotiations, to adjust the PPAs to the realities of the new marketplace. Together, they fashioned a contractual response to that new reality. The definition of TMC was at the heart of that joint response.

[99] The meaning of TMC can only be properly understood through an examination of the language used in the definition considered in the context of the extensive and detailed discussions and negotiations that produced the definition. It is difficult to imagine an exercise in contractual interpretation that would be more fact-specific than the one called for here. Similarly, it is difficult to imagine a product of that interpretative process that could have less precedential value.

[100] The fact-specific nature of the interpretative process engaged on these applications makes applicable the caution sounded in Sattva, at para. 54, against too readily turning questions of contractual interpretation into questions of law. That of course does not mean that there are no questions of law raised in the interpretative process. Interpreting a contract almost inevitably engages questions of law. Sattva, at paras. 53-54, provides several examples.

[101] The two very different standards of review potentially applicable, depending on the nature of the ground of appeal, require that a distinction be drawn between arguments that raise a question of law and arguments which raise either a question of fact alone or a question of mixed fact and law. The distinction is not drawn by counsel's characterization of an issue as raising a question of law alone. The distinction is determined by reference to the substance of the arguments made in support of a specific ground of appeal. While the appellant describes its challenges to the application judge's interpretation of TMC as raising questions of law, an examination of the arguments in support of those grounds of appeal leads me to conclude that apart from the argument that the application judge improperly implied a term into the definition of TMC, the arguments advanced on behalf of the appellant all raise questions of fact or questions of mixed fact and law.

[102] Counsel for the appellant submits that the application judge failed to apply the principle of contractual interpretation that requires that a contract be read as a whole and that the words of the agreement be given their ordinary and grammatical meaning. Counsel correctly identifies this as a legal principle of contractual interpretation. The failure to apply that principle would be an error in law.

[103] However, counsel's argument is not in substance about the failure of the application judge to apply that principle. He clearly did (see paras. 64-65, 97-104). Counsel's argument is that the application judge wrongly applied that legal principle. For example, he maintains that the application judge wrongly defined the word "cost", misapplied applicable rules of grammar, and incorrectly parsed the sentences defining TMC. These arguments are not the stuff from which questions of law are made. They raise questions of mixed fact and law, if not pure questions of fact. One example makes my point. The appellant submits that while the word "cost" may refer to cost to the seller or cost to the purchaser, the phrase "market cost" must refer to cost to the purchaser. Clearly, there is no "extricable" question of law in this argument.

[104] The appellant's other principal attack on the application judge's interpretation of TMC is also framed as raising a question of law alone. Counsel argues that the application judge failed to consider the surrounding circumstances when interpreting TMC. Once again, counsel identifies a legal principle. Once again, his argument is not directed at the application judge's failure to apply the principle. He clearly did (see paras. 105-11). The appellant takes issue with the way the application judge considered the surrounding circumstances. For example, the application judge properly looked to the 2002 Working Paper as part of the surrounding circumstances. He viewed the Working Paper as identifying the shared principles guiding the parties in their formulation of the amendments to the PPAs, including the definition of TMC (see paras. 81-82). The appellant argues that the application judge should have relied on the specific wording used in various parts of the Working Paper. The application judge considered and rejected this argument. In my view, this submission comes down to an argument that the application judge should have given more weight to the actual wording used in the Working Paper than he did. That is not a question of law.

[105] As counsel for the appellant framed the issues as questions of law, he did not attempt to demonstrate any palpable and overriding factual errors in the application judge's analysis. His well-framed arguments demonstrate that there was much to be said in favour of the appellant's interpretation of TMC. They provide no basis, however, upon which this court can set aside the application judge's different interpretation of TMC. The appellant asks this court to redo the exercise in contractual interpretation performed by the application judge. This court cannot do so, but must defer to the application judge's findings absent a finding of palpable and overriding error. No such finding can be made here. The appellant's arguments raising questions of fact and questions of mixed fact and law cannot succeed.

(ii) Did the application judge wrongly imply a term into the agreement?

[106] Counsel submits that the application judge wrongly implied a term into the agreements by requiring that TMC reflect costs as allocated on a basis pro rata to the consumption of energy. Counsel argues that case law binding on the application judge recognizes limited circumstances in which a court can add to the terms of an agreement by implying a term into the agreement. He submits that the application judge failed to consider this jurisprudence and that none of the criteria identified in the case law are met here. This argument raises a question of law alone to which the correctness standard applies.

[107] In M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., 1999 CanLII 677 (SCC), [1999] 1 S.C.R. 619, at para. 27, the court held:

[T]erms may be applied in a contract: (1) based on custom or usage; (2) as the legal incidents of a particular class or kind of contract; or (3) based on the presumed intention of the parties where the implied term must be necessary "to give business efficacy to a contract or as otherwise meeting the 'officious bystander' test as a term which the parties would say, if questioned, that they had obviously assumed." [Citations omitted.]

[108] The appellant submits that the application judge must have relied on the third category of implied term to read the further condition into the definition of TMC, requiring that it reflect costs as allocated on a basis pro rata to the consumption of energy. Counsel submits that the application judge did so without addressing the necessity requirement identified in the case law and in the absence of any evidence that could support that requirement.

[109] The respondents do not take issue with the legal principles controlling the implication of terms into a contract. They also accept that the application judge made no reference to these principles. They maintain that the application judge's failure to refer to these principles, in what is otherwise a careful and detailed set of reasons, is explained by the simple fact that the application judge did not purport to imply any term into the agreement. The respondents argue that the application judge did not add any term to the definition of TMC, but rather interpreted the words used in the definition as they applied to the new formula for calculation of the GA set out in the Reallocation Regulation.

[110] This ground of appeal raises two questions: Did the application judge imply a term into the agreement? If the answer is "yes", did he err in law in doing so? I accept the respondents' submission that the application judge did not imply a term into the definition of TMC and would reject this argument on that basis.

[111] Implying a term in an agreement and articulating the meaning of a term in an agreement are both a part of the interpretative process. As the construction of contracts turns more to an attempt to discern objective intent by reference, not only to the words used, but to the relevant context, the distinction between implying a term and interpreting a term can become somewhat blurred: see Attorney General of Belize and Ors v. Belize Telecom Ltd. and Anor, [2009] UKPC 10, [2009] 1 W.L.R. 1988, at paras. 17-21; B. Kain, "The Implication of Contractual Terms in the New Millennium", (2011) 51 Can. Bus. L.J. 170.

[112] There is, however, an essential difference between implying a term into an agreement, and interpreting a term in an agreement. Kain, at p. 172, makes a distinction in the course of his helpful summary of the judgment in Attorney General of Belize and Ors:

The question of implication arises where an instrument does not expressly provide for what is to happen when an event occurs. In most cases, the usual inference is that nothing is to happen, and the express provisions of the instrument continue to operate undisturbed. If the event causes loss to one of the parties, the loss lies where it falls.

Occasionally, the reasonable addressee of the instrument will conclude that the only meaning which the instrument can have is that something is to happen in response to the relevant event. In that case, the court is said to imply a term as to the response. [Emphasis in original.]

[113] The same distinction is drawn by G. Hall in Canadian Contractual Interpretation Law, 2nd ed. (Markham: LexisNexis, 2012), at p. 150:

While the principles governing the implication of terms into a contract are closely related to broader themes in contractual interpretation, implying a term into a contract is a separate process from simple interpretation of the contract. Interpretation gives meaning to the words used by the parties; implication fills gaps in those words. [Emphasis added.]

[114] Neither the relief claimed in the Notices of Application, nor the arguments made on the applications, suggested that a term should be implied into the meaning of TMC. The respondents argued that the calculation of the GA as required by the Reallocation Regulation was incompatible with the definition of TMC. The appellant argued that the GA had always been included in the calculation of TMC and that the Reallocation Regulation had no effect on the status quo. Both sides urged the application judge to interpret the words used in the definition of TMC in the context of the surrounding circumstances, especially the Working Paper and related documents. Neither side suggested that the outcome of the applications turned on whether the application judge was prepared to imply a term into the definition of TMC to fill a gap in that definition.

[115] The appellant points to two passages from the reasons of the application judge in support of the argument that he implied a term into the definition of TMC. At para. 111, the application judge said:

These three general principles regarding the intended operation of the replacement index for DCR collectively indicate or imply an intention that any costs to be aggregated and allocated to purchasers of electricity should be allocated on a basis that is pro rata to the purchases or consumption of electricity by all purchasers.

[116] This passage occurs in the course of the application judge's detailed consideration of the Working Paper as one of the surrounding circumstances to be considered in interpreting TMC (see paras. 105-111). In para. 111, the application judge is referring to his understanding of the general principles articulated in the Working Paper applicable to the selection of a price adjustment index to replace DCR. He is not referring to language used to define TMC in the agreement. Furthermore, I read the word "imply" in para. 111 as used as a synonym for "indicate", the other word used in the sentence. I do not understand the application judge to use the word "imply" in the more narrow legal sense of implying a term into a contract.

[117] The second passage relied on by the appellant appears at para. 124:

Based on the foregoing, I conclude that it is implicit in the definition of TMC that costs that are not by their nature capable of being passed on directly to purchasers of electricity must be aggregated and allocated to purchasers pro rata based on purchases or consumption of electricity relative to purchases or consumption by all customers.

[118] Paragraph 124 must be read in the context of the rest of the application judge's reasons. He spent some 60 paragraphs setting out the legal principles governing contractual interpretation and applying those principles to the massive record before him. At no point in that process did he allude to the principles governing the implying of terms into a contract or to any gap in the definition of TMC that called for a consideration of whether a term should be implied into that agreement. The application judge's entire analysis reflected an attempt to interpret the language contained in the definition of TMC in light of the context in which those words were used by the parties. The use of the word "implicit", in para. 124, is nothing more than a recognition that the language used to define TMC does not expressly capture the full meaning of TMC. In other words, the language had to be interpreted having regard to the context in which it was used.

[119] The application judge did not err in law in his interpretation of TMC. There are no grounds for appellate intervention.

VI

The Cross-Appeal

[120] As I would dismiss the appeals, I need not address the cross-appeals.

VII

Conclusion

[121] The appeals are dismissed. The cross-appeals are dismissed as moot. The parties have agreed on costs. The respondents, as the successful parties, are entitled to one set of costs fixed at $150,000 "all in".

Released: "DD" "APR 19 2016"

"Doherty J.A."

"I agree K. van Rensburg J.A."

"I agree Bradley W. Miller J.A."

Appendix A

DCR – Direct Customer Rate

DCR_new – Replacement index for DCR

GA – Global Adjustment Mechanism

HOEP – Hourly Ontario Energy Price

IESO – Independent Electricity System Operator

NUG – Non-utility Generator

OEFC – Ontario Electricity Financial Corporation

PPA – Power Purchase Agreement

TMC – Total Market Costs

[^1]: Unfortunately, the evidence, the reasons below and these reasons are full of acronyms. For convenience, the more common acronyms are set out in Appendix A ("App. A"). [^2]: I include in this category the appellant's submission based on an alleged misapplication of s. 92 of the Power Corporation Act, R.S.O. 1990, c. P.18. As I understand the submission, the appellant argues that the misunderstanding of s. 92 led to a misapprehension of the evidence by the application judge: see infra paras. 78-80. [^3]: The respondents cross-examined only Mr. Russell. [^4]: I acknowledge that there may be cases in which there are "gaps" in the record that may be filled by fresh evidence. For example, there may be correspondence between counsel and the judge which illuminates the nature of the issues to be litigated and which does not find its way into the record. None of this fresh evidence falls into that category. The correspondence referred to by Mr. Russell is already part of the record. [^5]: As indicated above in footnote 1, counsel alleged as a separate ground of appeal that the application judge "misapplied the Power Corporation Act". He further alleges that this misapplication led to a misapprehension of the evidence in para. 78 of the application judge's reasons. I therefore include that ground of appeal in this category. I address the alleged misapprehension of the evidence below, at paras. 78-80.