COURT OF APPEAL FOR ONTARIO

DATE: 20241104 DOCKET: COA-24-CV-0548

Miller, Copeland and Gomery JJ.A.

BETWEEN

1797472 Ontario Inc. Applicant/Respondent by Counter-Application (Respondent)

and

Independent Electricity System Operator Respondent/Applicant by Counter-Application (Appellant)

AND BETWEEN

Independent Electricity System Operator Applicant/Respondent by Counter-Application (Appellant)

and

Solar Sky Farms Inc. Respondent/Applicant by Counter-Application (Respondent)

AND BETWEEN

2323953 Ontario Inc., BrightRoof Solar Limited Partnership, GS 2013 LP, MOM Solar Limited Partnership, MOM V Limited Partnership, OSPS (00227-3673 McBean) Limited Partnership, OSPS (002281-150 Abbeyhill) Limited Partnership, OSPS (002334-159 Lorry Greenberg) Limited Partnership, Potentia Solar 14 Limited Partnership, PRI RT Solar Limited Partnership, PSI Solar Finance 1 Limited Partnership, SE 2011 LP, SunE Newboro 4 LP and SunE Welland Ridge LP Applicants (Respondents)

and

Independent Electricity System Operator Respondent (Appellant)

Monique J. Jilesen, Andrea Wheeler, Jonathan McDaniel, and Bhreagh Ross, for the appellant, Independent Electricity System Operator Sandra Barton and Adam Bazak, for the respondents, 1797472 Ontario Inc. and Solar Sky Farms Inc. Luis Sarabia, William Brock, and Rui Gao, for the respondents, 2323953 Ontario Inc., BrightRoof Solar Limited Partnership, GS 2013 LP, MOM Solar Limited Partnership, MOM V Limited Partnership, OSPS (00227-3673 McBean) Limited Partnership, OSPS (002281-150 Abbeyhill) Limited Partnership, OSPS (002334-159 Lorry Greenberg) Limited Partnership, Potentia Solar 14 Limited Partnership, PRI RT Solar Limited Partnership, PSI Solar Finance 1 Limited Partnership, SE 2011 LP, SunE Newboro 4 LP and SunE Welland Ridge LP

Heard: September 16, 2024

On appeal from three orders of Justice Jessica Kimmel of the Superior Court of Justice, dated April 12, 2024, with reasons reported at 2024 ONSC 2130.

REASONS FOR DECISION

[1] The appellant, the Independent Electricity System Operator (“IESO”), appeals the application judge’s interpretation of terms of its contracts with the respondents. For the reasons that follow, we are not persuaded that the application judge made any reversible error.

Background

[2] In 2009, the IESO launched a “feed-in-tariff” or FIT program to encourage the construction of new renewable energy facilities in Ontario. [1] Under the FIT program, the IESO promised to pay guaranteed prices for energy delivered to the provincial grid by new suppliers of renewable energy over long-term contracts. The prices were set at an above-market rate to incentivize new suppliers.

[3] Beginning in 2011, the respondents applied for and obtained contracts (the “FIT 1 Contracts”) to deliver energy from solar panel facilities. As noted by the application judge the FIT 1 Contracts are “standard-form 20-year commercial contracts drafted by the IESO … developed in a generic form to be used for six different types of renewable energy, not just solar energy.” Each contract consists of standard terms common to all FIT 1 Contracts and a Contract Cover Page specific to each respondent. As-built diagrams of each facility and other exhibits were added after contract signature.

[4] The respondents’ solar panels collect direct current (“DC”) energy, quantified in DC watts, which is converted to alternating current (“AC”) energy, quantified in AC watts, before being delivered to the grid. The rate at which DC energy is converted to AC energy is known as the DC/AC ratio. Under the FIT 1 Contracts, the respondents receive a guaranteed price for each AC watt they deliver, subject to a cap over any given period. This cap is specified on the Contract Cover Page as the respondent’s “Contract Capacity” or “Gross Nameplate Capacity”. As stated by the application judge, “ These two capacity limits in the FIT 1 Contracts are based on the “AC Capacity” of the Facility, i.e., the maximum amount of converted “AC” energy that can be output from the Facility and fed into Ontario’s electrical grid.” A respondent’s DC capacity or a maximum DC/AC ratio is not set out on the Contract Cover Page.

[5] Solar power technology continued to advance after the FIT 1 Contracts were signed. Beginning in 2019, the respondents replaced their existing solar panels with more efficient panels or added additional panels. As a result of this so-called “optimization”, they increased their capacity to capture and convert DC energy, or DC/AC ratio. Although the respondents still cannot exceed the Contract Capacity or Gross Nameplate Capacity set out in their contracts, the quantity of AC watts that they can deliver to the provincial grid on any given day has increased. Their revenues under the FIT 1 Contracts have grown correspondingly.

[6] In 2020, the IESO informed the respondents that they had breached their FIT 1 Contracts as a result of their installation or addition of new, more efficient panels. It advised the respondents that it would pay the contract rate for AC energy only for the number of watts that each supplier would have produced pre-optimization, and a lower rate for any excess watts.

[7] The applications and cross-applications turned largely on the interpretation of s. 2.1(b) of the FIT 1 Contracts, which begins as follows:

The Supplier shall at no time after the date of this Agreement modify, vary or amend in any material respect any of the features or specifications of the Contract Facility or the Facility as outlined in the Application or the FIT Contract Cover Page (including for greater certainty, the Site) or make any change as to the Facility’s status as a Registered Facility (a “Contract Facility Amendment”), without first notifying the OPA in writing and obtaining the OPA’s consent in writing, which consent shall not be unreasonably withheld.

[8] The application judge’s key conclusions were that:

1. Pursuant to s. 2.1(b) of their FIT 1 Contracts, the IESO’s consent is required only for changes to features or specifications set out in the application submitted by each respondent for a FIT 1 Contract (the "Application") or on the FIT 1 Contract Cover Page;

2. The respondents’ capacity to produce DC energy and their DC/AC ratio was not a feature or specification outlined in the Application or the Cover Page, and therefore did not fall within a category of change triggering the need for the IESO’s prior consent;

3. Had the application judge concluded that the respondents’ DC capacity was a feature or specification captured by s. 2.1(b), she would have found that the respondents’ optimizations materially changed it, and that the IESO’s approval was not unreasonably withheld;

4. None of the parties had acted in bad faith and they accordingly were not entitled to a remedy premised on it; and

5. A change in the type and number of solar panels or the DC Capacity of certain respondents who were required to submit Metering Plans (known as the “Potentia Suppliers”) did not breach s. 2.2(d) of their FIT 1 Contracts, which prohibited any material changes to such Plans without prior IESO approval.

[9] Based on these findings, the application judge held that the respondents were not required to give notice to the IESO or obtain its consent prior to optimizing their facilities, and that they were entitled to a declaratory order to this effect.

Issues on Appeal

[10] The appellant contends that the application judge erred:

1. in interpreting s. 2.1(b) of the FIT 1 Contracts to find that the respondents’ capacity to produce DC energy and increase their DC/AC ratio was not a feature or specification outlined in the Application or the Cover Page, and therefore did not fall within a category of change triggering the need for the IESO’s prior consent; and

2. in finding that the replacement or addition of solar panels by the Potentia suppliers did not constitute a material change to their Metering Plans requiring pre-approval by the IESO under s. 2.2(d) of the FIT 1 Contracts.

The Interpretation of s. 2.1(b)

[11] The correctness standard applies in the of review of the application judge’s interpretation of s. 2.1(b) of standard form FIT 1 Contracts: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at para. 4.

[12] The appellant says that the application judge re-wrote s. 2.1(b) by reading words into it; that she ignored the difference between a Contract Facility and a Facility; that she interpreted the provision in a manner that undermines its purpose, and she failed to interpret the provision and the contract as a whole and with adequate consideration of the factual matrix. We disagree.

[13] The application judge set out the relevant principles of contract interpretation in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 47-48; Prism Resources Inc. v. Detour Gold Corporation, 2022 ONCA 326, 162 O.R. (3d) 200, at para. 16; Ledcor Construction, at paras. 31-32; and EPCOR Electricity Distribution Ontario Inc. v. Municipal Electric Association Reciprocal Insurance Exchange, 2022 ONCA 514, at para. 55. She noted that the contractual provisions at issue must not be read in isolation but considered “in harmony with the rest of the contract in light of its purposes and commercial context.” As she correctly observed, the “relevant surrounding context is generally considered to be that which was present at the time the contract was made, not subsequently”: Prism Resources, at para. 16(iii).

[14] Based on these principles, the application judge identified the relevant provisions of the FIT 1 Contracts. She correctly held that, given the nature of the FIT 1 Contracts, “the factual matrix is predominantly derived from the legislative context that created and supported them, and statements made by the government and in the legislature about them and their intended purposes and objectives.” She accordingly reviewed the history of the FIT program and its objectives as set out in the Green Energy and Green Economy Act, 2009, S.O. 2009, c. 12, the Electricity Act, S.O. 1998, c. 15, pursuant to amendments made in 2009, a directive by the Ontario Deputy Premier to the OPA at the time, and statements by the Ministry of Energy reproduced in the 2011 Annual Report of the Office of the Auditor General. She also reviewed amendments to the FIT program after its roll-out and the interactions between the parties.

[15] The application judge’s interpretation of s. 2.1(b) of the FIT 1 Contracts was consistent with its terms as well as the FIT 1 Contracts as a whole and the parties’ objective intent based on the factual matrix she described. She held the provision establishes two categories of Contract Facility Amendments that the IESO must pre-approve:

1. Those that “modify, vary or amend in any material respect any of the features or specifications of the Contract Facility or the Facility as outlined in the Application or the FIT Contract Cover Page (including for greater certainty, the Site)”; and

2. Those that “make any change as to the Facility’s status as a Registered Facility”.

[16] The application judge considered and rejected the IESO’s argument that s. 2.1(b) should be read to distinguish between modifications to a Contract Facility and a Facility, such that three categories of changes required its pre-approval:

1. Changes that “modify, vary or amend in any material respect any of the features or specifications of the Contract Facility”;

2. Changes that “modify, vary or amend in any material respect any of the features or specifications of … the Facility as outlined in the Application or the FIT Contract Cover Page (including, for greater certainty, the Site)”; and

3. Changes that “make any changes to the Facility’s status as a Registered Facility”.

[17] In our view, the application judge’s reading was grounded in the plain text of s. 2.1(b) and the IESO’s proposed interpretation is, as she found, “strained and awkward”. Read in a straightforward way, the phrase “Contract Facility or the Facility” is modified both by the preceding phrase (“any of the features or specifications”) and the subsequent phrase (“as outlined in the Application or the FIT Contract Cover Page”). The IESO’s proposed interpretation requires the words “modify, vary and amend in any material respect the features and specifications” to be read in, as follows:

The Supplier shall at no time after the date of this Agreement modify, vary or amend in any material respect any of the features or specifications of the Contract Facility or [modify, vary or amend in any material respect the features and specifications of] the Facility as outlined in the Application or the FIT Contract Cover Page (including for greater certainty, the Site] or make any changes as to the Facility’s status as a Registered Facility….

[18] The appellant relies on the “last antecedent rule” to argue that the legislator’s failure to insert a comma before the phrase “as outlined in the Application or the FIT Contract Cover Page” dictates that this phrase qualifies “Facility” and not a “Contract Facility”. It relies particularly on this court’s decision in Austin v. Bell, 2020 ONCA 142, 150 O.R. (3d) 21.

[19] Allowing the omission of a single punctuation mark to dominate the interpretation of a contractual provision would, in this instance, undermine the Supreme Court of Canada’s direction in Sattva, at para. 47, to adopt a “practical, common sense approach not dominated by technical rules of construction” that considers the contract as a whole in the context of the relevant factual matrix. As aptly stated in Adam v. Insurance Corporation of British Columbia, 2018 BCCA 482, 8 B.C.L.R. (6th) 347, at para. 40, citing a much earlier precedent from this court:

The strict grammatical rule of construction whereby the restrictive clause is limited to modifying the immediate antecedent may give way when the context requires a deviation from the rule: Rex v. Stronach, [1928] 3 D.L.R. 216 at 218 (Ont. C.A.). According to Ruth Sullivan in Sullivan on the Construction of Statutes, 6th ed. (Markham: LexisNexis Canada, 2014) at 470, Canadian courts are “rightly cautious of attaching too much significance to a single punctuation mark”. The Supreme Court of Canada has said, “[a] debate on punctuation cannot take the place of an interpretation based on the legislative context and ordinary meaning of words”: Laurentide Motels Ltd. v. Beauport (City), [1989] 1 S.C.R. 705 at 755.

[20] In Austin, the central issue was the meaning of the term “Pension Index” in a pension plan. It was defined as “the annual percentage increase of the Consumer Price Index, as determined by Statistics Canada”. This court upheld the motion judge’s use of the last antecedent rule whereby he found that the comma in this phrase supported an interpretation that “as determined by Statistics Canada” applied to both “the annual percentage increase” and to “the Consumer Price Index”. The court did not consider the interpretation of a clause where no comma appears before qualifying words. In cases involving this situation, courts have not been bound by the last antecedent rule: see e.g., Beaudin v. Travelers Indemnity Insurance Company of Canada, 2021 ONSC 1389, 10 C.C.L.I. (6th) 251 (Div. Ct.), at paras. 40-49, aff’d 2022 ONCA 806, leave to appeal refused, [2023] S.C.C.A. No. 40568; and Joaquim v. Intact Insurance Company, 2023 ONSC 5120, 37 C.C.L.I. (6th) 201 (Div. Ct.), at paras. 19-24.

[21] Moreover, the court in Austin did not rely solely or even predominantly on grammatical convention to interpret the provision at issue. It held that the provision must be read in the context of the pension plan as a whole; “the meaning of a particular clause should be considered in conjunction with other relevant clauses”: Austin, at para. 22.

[22] This is what the application judge did in interpreting s. 2.1(b). Having reviewed the standard terms of the FIT 1 Contracts as a whole, she found that they “clearly contemplate the features or specifications outlined in the Contract Cover Page applying to both the Contract Facility and the Facility.” We adopt her reasoning, which takes into account, among other things, the purpose of s. 2.1(b), the nature and structure of the FIT Contracts, all relevant defined terms, and how such terms are otherwise used in the Contracts.

[23] The appellant contends that the application judge erred in finding that the Application and the FIT Contract Cover Page do not contain “any description of the specifications or details about the solar panels, such as the make, model or capacity of the particular solar panels to be used”, nor the DC capacity of a supplier’s facilities, nor “any general reference to the amount of renewable energy source generation”. The appellant argues that each respondent’s DC capacity is set out in or can be calculated based on as-built drawings and other documents that suppliers were required to deliver prior to commencing commercial operations, which are reflected in Exhibits F and G to the Contracts.

[24] The application judge rejected this argument as follows:

The detailed description of the solar panels, that would in turn enable the determination of DC Capacity and a DC/AC ratio, is found in documents that are contemplated to be delivered in the future in advance of the completion of the Certificates that are Exhibits to the Cover Page of the FIT 1 Contract. These features or specifications are not described on the FIT 1 Contract Cover Page or the Exhibits themselves.

Detailed descriptions provided in other documents contemplated to be delivered in the future cannot be equated with outlining them as a feature or specification on the Application or Cover Page. Nor does the fact that the FIT Contract Cover Page outlines the type of renewable fuel (in the case of the Suppliers, to be Solar PV Rooftop) translate into the make, model, type, capacity and number of solar panels becoming features or specifications when that is not part of what is outlined on the FIT Contract application or Cover Page.

[25] The IESO says that the application judge erred in stating that the respondents’ DC capacity is “not described … in the Exhibits themselves”, pointing out that some documents forming part of Exhibit G do specify DC capacity. Even if this was an error, it would not undermine the application judge’s overarching point in this section of her analysis. Section 2.6(a)(iii) of FIT 1 Contract refers to a requirement for a “single line drawing” as part of Exhibit G. As admitted during the cross-examination of IESO’s representative, there is no requirement that the line drawing must specify a DC capacity or DC/AC ratio. The fact that the drawings may or do refer to “the make, model, type, capacity and number of solar panels” does not give the IESO the right to pre-approve any modification of this equipment or capacity through the operation of s. 2.1(b). In the application judge’s words, it is “too far removed”.

[26] Finally, in interpreting s. 2.1(b), the application judge considered the factual matrix. At the time the FIT 1 Contracts were signed, the Ministry of Energy identified the three policy objectives of the FIT Program to be: reducing the environmental footprint by bringing more renewable energy online; protecting Ontarians from harmful emissions; and creating green energy jobs and attracting investment capital amidst a global recession. As the application judge found, the “overarching purpose and commercial context of these FIT 1 Contracts was to kick start local green energy development and production.”

[27] We are not persuaded that the application judge failed to consider evidence regarding the IESO’s expectations about the cost of the FIT Program. The evidence amply supports the application judge’s finding that s. 2.1(b) of the FIT 1 Contracts does not address cost containment, except insofar as it guarantees that the preferential FIT 1 Contract price is paid only for AC energy generated by the Contract Facility. The prices set by the IESO for the respondents’ energy were intended to provide them with “reasonable profits”, but this term was neither defined nor capped. As acknowledged by former IESO employees who testified, “there was no budgeting or modelling done for cost containment purposes.”

[28] As the application judge observed, courts cannot adopt a strained contractual interpretation to assist a party in getting out of what it perceives, in hindsight, to be a bad bargain. She concluded that the objective intentions of the parties, as evidenced by the purposes of the Contracts and context in which they were concluded, did not support the IESO’s suggested interpretation:

Reading clause 2.1(b) harmoniously with the entirety of the FIT 1 Contract and its purposes and the context in which the FIT Program was created from a policy perspective, I am not persuaded by the IESO’s submission that the objective intention of the parties at the time these Suppliers entered into their FIT 1 Contracts was to differentiate between Contract Facilities and Facilities when determining when the Suppliers were required to give notice of, and obtain consent from, the IESO for any material change.

A contextual and harmonious reading, consistent with the trilemma of interests being balanced at the time the form of FIT 1 Contracts were created (economics, environment and stability/reliability) leads me to conclude that IESO notice and consent is only required for a material change to the features or specifications outlined in the Application or the FIT 1 Contract Cover Page in either a Contract Facility or a Facility.

[29] We find no reviewable error in the application judge’s reasoning or conclusion with respect to the interpretation of s. 2.1(b). This ground of appeal fails.

The Impact of the Optimizations on the Potentia Suppliers

[30] The IESO argues that the application judge made a palpable and overriding error in finding that the optimization of facilities by the Potentia Suppliers did not trigger a pre-approval requirement under s. 2.2(d) of the FIT 1 Contracts.

[31] Unlike other suppliers, the Potentia Suppliers were required to submit metering plans to the IESO. Pursuant to s. 2.2(d) of the FIT 1 Contracts, a supplier “shall not make any material changes to [their] Metering Plan following approval by the OPA … without the prior written approval of the OPA, acting reasonably.”

[32] Interpreting this provision in light of the definition of “Metering Plan” in the FIT 1 Contract, the application judge found that:

A change in the type and number of solar panels or the DC Capacity of the Facility does not change the Metering Plan itself, which measures and monitors the AC Capacity or output. The Metering Plan sets out how Hourly Delivered Electricity that is sent out of a Facility and into the electricity grid will be measured, validated, adjusted and calculated for the purpose of the FIT Contract. The Metering Plan, or the manner in which the electricity output is measured and monitored, is unaffected by the solar panel Optimizations and corresponding increased DC Capacity. The IESO did not tender any evidence about Metering Plans to suggest otherwise.

[33] We see no palpable or overriding error in this reasoning. This ground of appeal also fails.

Disposition

[34] The appeal is dismissed. The parties have indicated that they have come to an agreement on costs.

“B.W. Miller J.A.”

“J. Copeland J.A.”

“S. Gomery J.A.”

[1] At the time, the IESO functioned as the Ontario Power Authority or OPA. For convenience, I will refer to both entities as the IESO.