Enbridge Gas Distribution Inc. v. Ontario Energy Board

[Indexed as: Enbridge Distribution Inc. v. Ontario Energy Board]

75 O.R. (3d) 72 [2005] O.J. No. 756 Court File No. 40/03

Ontario Superior Court of Justice Divisional Court

Lane, Molloy and Power JJ.

March 2, 2005

Administrative law -- Boards and tribunals -- Appeals -- Standard of appellate review -- Ontario Energy Board setting rates for gas distributor -- Distributor applying to Board for rate increase -- Board purporting to apply test of whether gas distributor had prudently incurred expenses that it sought to pass on to consumers -- Board disallowing rate increase -- Distributor appealing to Divisional Court -- Appeal only upon question of law or jurisdiction -- Issue on appeal whether, in applying that prudently incurred test, Board took into account impermissible factor -- Standard of appellate review being one of correctness -- Board's decision quashed -- Board committing error of law by considering impermissible factor -- Ontario Energy Board Act, 1998, S.O. 1998, c. 15.

Enbridge Gas Distribution Inc. ("Enbridge") was a gas distributor and seller, with its rates regulated by the Ontario Energy Board ("OEB") under the Ontario Energy Board Act, 1998 (the "Act"). Between 1996 and 1999, Enbridge entered into four agreements to have some of its gas delivered through pipeline routes that replaced routes operated by TransCanada Pipeline Systems ("TransCanada"). The agreements were known as Alliance 1 and 2 and Vector 1 and 2. As evidenced by a notional account that compared the cost of the new routes to the former TransCanada routes, the new routes proved to be more expensive, and Enbridge applied to the OEB for an increase in rates to reflect the increase in supply costs.

The OEB applied the test that a utility is entitled to recover its "prudently incurred" costs. Under this test, decisions made by the utility's management should generally be presumed to be prudent unless challenged on reasonable grounds. To be prudent, a decision must have been reasonable under the circumstances that were known or ought to have been known at the time the decision was made. Hindsight should not be used in determining prudence, although consideration of the outcome of the decision may legitimately be used to overcome the presumption of prudence. Prudence must be determined in a retrospective factual inquiry, in that the evidence must be concerned with the time the decision was made and must be based on facts about the elements that could or did enter into the decision at the time. Purporting to apply this test, the OEB concluded that: the presumption of prudence has been overcome; there were reasonable grounds to inquire into the prudence of Enbridge's decisions; and Enbridge did not act prudently in incurring the Alliance 1 and 2 costs. In the result, Enbridge was not permitted to recover $11 million in costs.

Pursuant to s. 33(1) and (2) of the Act, which provides for an appeal "only upon a question of law or jurisdiction", Enbridge appealed to the Divisional Court. Enbridge submitted that although the OEB had articulated the correct legal test, it fell into error when it was influenced by the benefit of hindsight rather than confining itself to a consideration of prudence based solely on circumstances that existed at the time the decisions in question were made.

Held, the appeal should be allowed.

The issue on the appeal involved a pure question of law. The issue was whether, in applying that prudently incurred test, the OEB took into account an impermissible factor. This issue was not a situation of mixed fact and law, but rather an alleged error in applying the correct legal test. If the correct legal test requires the consideration of certain factors and prohibits the consideration of others, and the decision-maker considers a prohibited factor, that is an error of pure law. Given the right of appeal and the nature of the issue, the appropriate standard of appellate review was one of correctness. If, in considering prudence, the Board took into account factors involving the application of hindsight, then it committed legal error and its decision could not stand.

It is important to distinguish between things that the OEB may consider at the stage of deciding if the presumption of prudence has been rebutted, and things that it may consider as part of the prudence analysis. In considering the application of the presumption, it is acceptable to use the benefit of hindsight; however, hindsight may not be used as part of the prudence analysis. Notwithstanding the OEB's articulation of the proper use of hindsight, there were two clear references to matters of hindsight in its reasons dealing with the prudence of Enbridge's decisions, and these references could not be ignored. In this case, the Board described the test correctly, instructed itself not to use hindsight in evaluating prudence, but then slipped in its application of the test and did allow hindsight to creep into its consideration of prudence. That was a fundamental error of law. Enbridge was entitled to a decision based on the correct application of the legal test to the relevant facts. Accordingly, the Board's decision should be quashed insofar as it relates to the Alliance 1 and 2 contracts and the matter should be remitted back to the OEB for consideration by a differently constituted tribunal.

APPEAL from a decision of the Ontario Energy Board dated December 18, 2002.

Cases referred to ATCO Electric Ltd. v. Alberta (Energy and Utilities Board), [2004] A.J. No. 823, [2004] 11 W.W.R. 220, 2004 ABCA 215, 31 Alta. L.R. (4th) 16, 18 Admin. L.R. (4th) 243 (C.A.); ATCO Electric Ltd. v. Alberta (Energy and Utilities Board), [2004] A.J. No. 906, 2004 ABCA 254, 33 Alta. L.R. (4th) 207, 20 Admin. L.R. (4th) 1 (C.A.); British Columbia Electric Railway Co. v. British Columbia (Utilities Commission), 1960 (SCC), [1960] S.C.R. 837, 25 D.L.R. (2d) 689; Canada (Director of Investigation and Research, Competition Act) v. Southam Inc., 1997 (SCC), [1997] 1 S.C.R. 748, [1996] S.C.J. No. 116, 144 D.L.R. (4th) 1, 209 N.R. 20, 71 C.P.R. (3d) 417; Consumers' Gas Co. v. Ontario (Energy Board), [2001] O.J. No. 5024 (Div. Ct.); Dr. Q. v. College of Physicians and Surgeons of British Columbia, [2003] 1 S.C.R. 226, [2003] S.C.J. No. 18, 223 D.L.R. (4th) 599, 302 N.R. 34, [2003] 5 W.W.R. 1, 2003 SCC 19, 11 B.C.L.R. (4th) 1; Graywood Investments Ltd. v. Ontario (Energy Board), 2005 (ON SCDC), [2005] O.J. No. 342, 194 O.A.C. 241(Div. Ct.); Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 219 Sask. R. 1, 211 D.L.R. (4th) 577, 286 N.R. 1, 272 W.A.C. 1, [2002] 7 W.W.R. 1, 30 M.P.L.R. (3d) 1, 2002 SCC 33, 10 C.C.L.T. (3d) 157; Pushpanathan v. Canada (Minister of Citizenship and Immigration), 1998 (SCC), [1998] 1 S.C.R. 1222, [1998] S.C.J. No. 77, [1998] 1 S.C.R. 982, [1998] S.C.J. No. 46, 160 D.L.R. (4th) 193, 226 N.R. 201; Ryan v. Law Society of New Brunswick, [2003] 1 S.C.R. 247, [2003] S.C.J. No. 17, 257 N.B.R. (2d) 207, 223 D.L.R. (4th) 577, 302 N.R. 1, 674 A.P.R. 207, 2003 SCC 20, 31 C.P.C. (5th) 1; State of Missouri ex. rel. Southwestern Bell Telephone Co. v. Public Service Commission of Missouri, 262 U.S. 276, 43 S. Ct. 544 (1923); Transcanada Pipelines Ltd. v. Canada (National Energy Board), [2004] F.C.J. No. 654, 319 N.R. 171, 2004 FCA 149; Violet v. Federal Energy Regulatory Commission, 800 F. 2d 280 (1st Cir. 1986) West Ohio Gas Co. v. Public Utilities Commission of Ohio (No.1), 294 U.S. 63, 55 S. Ct. 316 (1935) Statutes referred to Ontario Energy Board Act, 1998, S.O. 1998, c. 15, Sch. B, s. 33 [as am.]

J. L. McDougall, Q.C., Jerry H. Farrell and Michael Schafler, for appellant. Kenneth T. Rosenberg and Richard P. Stephenson, for respondent.

MOLLOY J.:

A. Introduction

[1] Enbridge Gas Distribution ("Enbridge") appeals from a decision of the Ontario Energy Board (the "OEB" or the "Board") dated December 18, 2002.

[2] Enbridge is a gas distributor and a seller of gas to consumers, and as such is subject to regulation by the OEB under the Ontario Energy Board Act, 1998, S.O. 1998, c. 15, Sch. B (the "Act"). The rates Enbridge is permitted to charge to its customers are fixed by the OEB, based on what the OEB deems to be just and reasonable. The OEB must balance fairness to the consumer (in terms of a reasonable price for gas) and fairness to Enbridge and its shareholders (in terms of a reasonable rate of compensation and profit). Generally speaking, Enbridge would be permitted by the [OEB] to pass on its costs to the consumer, but only to the extent those costs were prudently incurred.

[3] Prior to 1996, Enbridge shipped its gas through the TransCanada Pipeline System (the "TransCanada"). Between 1996 and 1999, Enbridge entered into a series of four agreements with various entities to deliver some of its gas through alternate pipeline routes. These new routes became operational in 2000 and proved to be more costly than the TransCanada route. In mid-2000, Enbridge applied to the OEB for an increase in the rates it could charge to its customers in 2001 in order to reflect this increase in its supply costs. (The OEB referred to the four agreements as Alliance 1, Alliance 2, Vector 1 and Vector 2, and for ease of reference I will do the same.)

[4] The parties entered into a provisional settlement in 2000, which was conditional upon various contentious issues being deferred to be argued at a subsequent Enbridge rates hearing. As a term of the settlement, Enbridge agreed to set up a "Notional Deferral Account" to record, over a ten-month period, the differential between its actual costs for the Alliance/Vector lines and its hypothetical costs if it had used the TransCanada line.

[5] The next year, Enbridge applied for approval of its rates proposed for 2002. One of the contentious issues still remaining to be resolved was whether the costs incurred by Enbridge with respect to the Alliance and Vector lines were "prudently incurred". That issue proceeded to a full hearing before the Board in June 2002.

[6] The Board issued its decision on December 18, 2002. The Board found that Enbridge did not act prudently in incurring the Alliance 1 and Alliance 2 costs and was therefore not permitted to build those costs into the rates it charged. The Board found, however, that the Vector 1 costs were prudently incurred and could be passed on. The Board deferred its consideration of the Vector 2 costs. In the result, Enbridge was not permitted to recover $11 million in costs incurred in respect of Alliance 1 and 2.

[7] The Act provides for an appeal to this court from the decision of the Board, but "only upon a question of law or jurisdiction": s. 33(1) and (2). Enbridge argues on this appeal that the Board erred in law by failing to apply the correct legal test in determining whether Enbridge acted prudently at the time it entered into the two Alliance agreements. Specifically, Enbridge submits that although the Board articulated the correct legal test, it fell into error when it was influenced by the benefit of hindsight rather than confining itself to a consideration of prudence based solely on circumstances that existed at the time the decisions in question were made.

B. The Prudence Standard

[8] Essentially, a utility is entitled to recover its prudently incurred costs. The test of prudence was first developed in United States jurisprudence, but has since been widely accepted in Canada: State of Missouri ex. rel. Southwestern Bell Telephone Co. v. Public Service Commission of Missouri, 262 U.S. 276, 43 S. Ct. 544 (1923), at p. 289; British Columbia Electric Railway Co. v. British Columbia (Utilities Commission), 1960 (SCC), [1960] S.C.R. 837, 25 D.L.R. (2d) 689, at p. 854 S.C.R.; Transcanada Pipelines Ltd. v. Canada (National Energy Board), 2004 FCA 149, [2004] F.C.J. No. 654, 319 N.R. 171 (C.A.), at para. 32; West Ohio Gas Co. v. Public Utilities Commission of Ohio (No.1), 294 U.S. 63, 55 S. Ct. 316 (1935), at p. 68.

[9] Before us, and likewise before the Board, there was no dispute between the parties as to the applicability of the prudence standard and the nature of the test. Expenditures are deemed to be prudent, in the absence of some evidence suggesting the contrary. However, costs that are found to be dishonestly incurred, or which are negligent or wasteful losses, are excluded from the legitimate operating costs of the utility in determining rates that may be charged. The examination of whether an expenditure was prudent must be based on the particular circumstances at the time the decision to incur those costs was made. That is so even if in hindsight it is obvious the decision was a bad one. As was stated by the United States Court of Appeals (First Circuit) in Violet v. Federal Energy Regulatory Commission, 800 F. 2d 280 (1st Cir. 1986), at p. 282:

In an industry that combines long lead times for plant construction with wide fluctuations in supply and demand, constant changes in the regulatory environment, and unpredictability in the availability and price of alternative sources of fuel, some projects that seem prudent at the time when costs are incurred may appear, some years later, in hindsight, to have been unnecessary or inadvisable. The prudence of the investment must be judged by what a utility's management knew, or could have known, at the time the costs were incurred.

(Citations omitted)

[10] The parties also agree that the Board in this case correctly defined the prudence standard at para. 3.12.2 of its decision as follows:

-- Decisions made by the utility's management should generally be presumed to be prudent unless challenged on reasonable grounds.

-- To be prudent, a decision must have been reasonable under the circumstances that were known or ought to have been known to the utility at the time the decision was made.

-- Hindsight should not be used in determining prudence, although consideration of the outcome of the decision may legitimately be used to overcome the presumption of prudence.

-- Prudence must be determined in a retrospective factual inquiry, in that the evidence must be concerned with the time the decision was made and must be based on facts about the elements that could or did enter into the decision at the time.

C. The Decision of the Board

[11] The Reasons of the Board are extensive, covering 216 pages. For purposes of this appeal, it is unnecessary to review those Reasons in detail, as there is no real issue with respect to the facts. The portion of the Reasons dealing with the Alliance/Vector issues runs from pp. 27-72. However, the actual findings of the Board commence at p. 62. First, the prudence test is defined (see preceding paragraph). Next, the Board examined the presumption of prudence and whether it was rebutted. The Board noted the argument made by Enbridge that it was unnecessary to consider this aspect of the test as Enbridge conceded a prudence review was appropriate. However, the Board determined that it would nevertheless be useful to actually rule on the point.

[12] There was evidence before the Board that Enbridge's corporate parent, Enbridge Inc., held an equity interest in both the Alliance and Vector pipelines at the time Enbridge entered into the agreements in question. The Board found that the fact Enbridge Inc. may have profited as a result of Enbridge entering into these contracts was not sufficient evidence to establish that the arrangements were not therefore prudent. However, the Board noted that the interests of Enbridge Inc. and Enbridge might not completely coincide and found the evidence of this ownership interest was "sufficient to overcome the presumption of prudence and invite further inquiry by the Board": para. 3.12.11 of the Reasons.

[13] The Board noted that it is permissible to use hindsight in determining the threshold issue as to whether the presumption of prudence is rebutted. In this regard, the Board considered the balance in the Notional Deferral Account, which favoured the traditional TransCanada pipeline, and held this evidence would suggest that the prudence of Enbridge's decisions to use the Alliance and Vector routes should be examined.

[14] The Board then concluded (at para. 3.12.13) that "the presumption of prudence has been overcome and that there are reasonable grounds to inquire into the prudence of [Enbridge's] decisions to enter into long term transportation arrangements with the Alliance and Vector pipelines".

[15] The Board then proceeded (from pp. 65 to 69) to consider whether Enbridge made prudent decisions to enter into each of the four contracts, examining the circumstances of each decision under a separate subject heading. At this point, the onus would be on Enbridge to establish its prudence in entering into each of the four contracts.

[16] Under the heading "Alliance 1" (paras. 3.12.14 to 3.12.21), the Board considered the justifications advanced by Enbridge for its decision in 1996 to enter into this contract. The Board focused on what was referred to as the "Otsason Memo", based on Enbridge's testimony that the memo summarized all of the factors Enbridge took into account in making this decision. The Board described the Otsason Memo as a "rudimentary financial analysis". The Board then took issue with a number of conclusions in the Otsason Memo (the content of which is not relevant for purposes of this appeal) as well as noting Enbridge's failure to consider the full range of reasonable alternatives. The Board then concluded (at para. 3.12.23) that it was "not satisfied that [Enbridge's] decision to enter into the Alliance 1 contract in 1996 was prudent".

[17] For purposes of this appeal, Enbridge does not take issue with this portion of the Board's Reasons in respect of Alliance 1, except for the Board's reference in para. 3.12.20 to the fact that a risk identified in the Ostason Memo had in fact materialized. Mr. McDougall, for Enbridge, submits that this reference illustrates error by the Board in using hindsight to evaluate prudence. The relevant paragraph of the Reasons states:

3.12.20 One of the disadvantages identified in the Ostason Memo was the risk of in-service delays for the Alliance pipeline. This risk in fact materialized; the in-service date was delayed by over one year from November 1999 to December 2000.

(Emphasis added)

[18] Under the heading "Alliance 2", the Board held that all of its concerns with respect to Alliance 1 were equally applicable to the 1997 decision to enter into the Alliance 2 contract, and also noted two additional concerns. The Board then concluded (at para. 3.12.27) that it was not satisfied that Enbridge's 1997 decision to enter into the Alliance 2 contract was prudent.

[19] The Board next considered Vector 1 (paras. 3.12.28 to 3.12.31) and concluded that Enbridge's decision to enter into that contract in 1999 was in fact prudent.

[20] The last portion of the Board's consideration of prudence falls under the heading "Vector 2" (paras. 3.12.32 to 3.12.33). The Board started by noting that Enbridge had "advised" the Board that it entered into the Vector 2 contract in order to replace its expiring capacity on the TransCanada pipeline. The Board then found (at para. 3.12.32) that Enbridge "did not provide the Board with sufficient evidence and analysis, including alternatives, to justify this decision". The Board noted that the Vector 2 decision was independent from and unrelated to the Alliance 1 and 2 and Vector 1 contracts. The Board then stated, at paras. [3.12.33 to 3.12.34]:

[3.12.33] ... In addition, the Board notes that the costs consequences of the Vector 2 contract were not included in the calculation of the Notional Deferral Account, which is a key element of the Board's prudence review of the Alliance and Vector arrangements.

(Emphasis added)

[3.12.34] As a result, the Board is not prepared at this time to make a determination of the prudence of [Enbridge's] decision to enter into the Vector 2 contract.

[21] Mr. McDougall relies on this passage as a further illustration of the Board's improper use of hindsight in evaluating prudence.

[22] The balance of the Board's decision on Alliance and Vector is devoted to "Relief and Remedies" at pp. 70-71 of the Reasons and is not relevant for purposes of this appeal.

D. Standard of Review

[23] It is well recognized that the applicable standard of appellate review is to be determined on a "functional and pragmatic approach" based on consideration of four factors: (1) the existence or absence of a privative clause in the enabling statute of the administrative tribunal; (2) the expertise of the tribunal relative to the court; (3) the purpose of the legislation; and (4) the nature of the problem: Pushpanathan v. Canada (Minister of Citizenship and Immigration), 1998 (SCC), [1998] 1 S.C.R. 982, [1998] S.C.J. No. 46, 160 D.L.R. (4th) 193, at pp. 1003-12 S.C.R., pp. 208-15 D.L.R.; Ryan v. Law Society of New Brunswick, 2003 SCC 20, [2003] 1 S.C.R. 247, [2003] S.C.J. No. 17, 223 D.L.R. (4th) 577, at pp. 258-65 S.C.R., pp. 587-92 D.L.R., paras. 27-42; Dr. Q. v. College of Physicians and Surgeons of British Columbia, 2003 SCC 19, [2003] 1 S.C.R. 226, [2003] S.C.J. No. 18, 223 D.L.R. (4th) 599, at pp. 237-42 S.C.R., pp. 609-13 D.L.R.

[24] In this case, the expertise of the tribunal in regulatory matters is unquestioned. This is a highly specialized and technical area of expertise. It is also recognized that the legislation involves economic regulation of energy resources, including setting prices for energy which are fair to the distributors and suppliers, while at the same time are a reasonable cost for the consumer to pay. This will frequently engage the balancing of competing interests, as well as consideration of broad public policy. That is why courts have accorded considerable deference to the Board and applied standards of reasonableness simpliciter, or even patent unreasonableness when reviewing decisions which engage the Board's expertise: Consumers' Gas Co. v. Ontario (Energy Board), [2001] O.J. No. 5024 (Div. Ct.); Graywood Investments Ltd. v. Ontario (Energy Board), 2005 (ON SCDC), [2005] O.J. No. 345, 194 O.A.C. 241; ATCO Electric Ltd. v. Alberta (Energy and Utilities Board), 2004 ABCA 215, [2004] A.J. No. 823, 31 Alta. L.R. (4th) 16 (C.A.) ("ATCO No. 1"); ATCO Electric Ltd. v. Alberta (Energy and Utilities Board), 2004 ABCA 254, [2004] A.J. No. 906, 33 Alta. L.R. (4th) 207 (C.A.) ("ATCO No. 2").

[25] However, the case before us involves a pure question of law. There is an appeal as of right to this court on a question of law, and there is no applicable privative clause. Further, the nature of the legal issue involved does not engage the expertise of the tribunal, vis-à-vis the court. The test is well understood and was correctly defined by the Board. The only issue is whether, in applying that test, the Board took into account an impermissible factor. That is not a situation of mixed fact and law, but rather an alleged error in applying the correct legal test. In Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, at para. 27, the Supreme Court of Canada (referring to its own earlier decision in Canada (Director of Investigation and Research, Competition Act) v. Southam Inc., 1997 (SCC), [1997] 1 S.C.R. 748, [1996] S.C.J. No. 116) held as follows:

Once it has been determined that a matter being reviewed involves the application of a legal standard to a set of facts, and is thus a question of mixed fact and law, then the appropriate standard of review must be determined and applied. Given the different standards of review applicable to questions of law and questions of fact, it is often difficult to determine what the applicable standard of review is. In Southam, supra, at para. 39, this Court illustrated how an error on a question of mixed fact and law can amount to a pure error of law subject to the correctness standard:

... if a decision-maker says that the correct test requires him or her to consider A, B, C, and D, but in fact the decision-maker considers only A, B, and C, then the outcome is as if he or she had applied a law that required consideration of only A, B, and C. If the correct test requires him or her to consider D as well, then the decision-maker has in effect applied the wrong law, and so has made an error of law.

Therefore, what appears to be a question of mixed fact and law, upon further reflection, can actually be an error of pure law.

[26] The Supreme Court's illustration applies equally well in the reverse. If the correct test requires the consideration of A, B and C and prohibits the consideration of D, and the decision-maker considers D, that is an error of pure law.

[27] Given the right of appeal and the nature of the issue, in my opinion, the appropriate standard of review in this case is one of correctness. The Board was required to be correct on this point. If, in considering prudence, the Board took into account factors involving the application of hindsight, then it has committed legal error and its decision cannot stand.

E. Analysis

[28] It is important to distinguish between things that can be considered at the stage of deciding if the presumption of prudence is rebutted, and things that can be considered as part of the prudence analysis itself. In considering the application of the presumption, it is acceptable to use the benefit of hindsight. Thus, a decision which turned out to have a bad economic outcome will not be presumed to be prudent, but rather will be subject to an analysis of the surrounding circumstances to determine if it was in fact prudent. In this case, the Board had before it evidence from the Notional Deferral Account as to the extra cost incurred by Enbridge as a result of the Alliance and Vector contracts, over and above what would have been the cost if the TransCanada pipeline had been used. The Board was entitled to use that information in determining the threshold issue as to whether the presumption of prudence was rebutted. It was not entitled to use the information as part of its analysis as to whether the decisions at issue were, or were not, prudent at the time they were made.

[29] The Board in this case was well aware of that distinction. The Board held, at para. 3.12.36 of its decision:

3.12.36 The Notional Deferral Account was intended as a measure to ascertain whether the cost differential between the old and the new paths was substantial, such that it would raise the issue of whether the presumption of prudence had been overcome. It was not intended as a method of determining the cost consequences and any potential disallowance of costs if the Board were to find that entering into the Alliance and Vector agreements were not prudent.

[30] Notwithstanding the Board's articulation of the proper use of this information, there are two clear references to matters of hindsight in the portion of its reasons dealing with the prudence of Enbridge's decisions.

[31] The first such reference is at para. 3.12.20 of the Board's reasons in which the Board refers to delay which occurred from November 1999 to December 2000 in determining whether a decision in 1996 was prudent. The impact of this reference could, however, be minimized since it was made in the context of a risk which Enbridge had identified and took into account in 1996. The impact on the decision would obviously be worse if the Board had been pointing out a delay that had occurred after the fact and had not been predicted or considered back in 1996. Therefore, if the only hint of a hindsight type analysis was this one reference, I would not have serious concerns.

[32] However, the Board's reference to later events in its analysis of the Vector 2 contract (in para. 3.12.33) is more troublesome. The Board had already determined that Enbridge "failed to provide sufficient evidence and analysis, including alternatives, to justify this decision". Since the onus was on Enbridge to establish prudence, that would have been sufficient to support a finding by the Board that Enbridge had not discharged that onus and that the extra costs of that decision could therefore not be passed on to consumers. Obviously, the Board was not required to make such a finding, and it was perfectly open to the Board to defer the matter to give Enbridge an opportunity to file additional evidence. However, the reason cited by the Board for deferring the matter was that the cost consequences of the Vector 2 contract had not been included in the calculation of the Notional Deferral Account. The inescapable inference from this is that the Board felt unable, or was unwilling, to make a decision on prudence without this information. However, information as to what the actual costs of the decision turned out to be after the fact, is clearly an application of hindsight and is not permitted as part of the analysis of prudence.

[33] Counsel for the OEB submits that the reference to the Notional Deferral Account relates only to the rebuttal of the presumption of prudence and that the Board was not discussing the use of the financial information as part of its prudence analysis. Rather, he argues, the Board was simply stating it was unable to deal with whether the presumption of prudence applied without the missing information as to actual costs after the fact. I cannot accept that argument. The Board's decision is very logically laid out, as I have discussed above in paras. 11 to 22. The Board dealt first with the general test for relevance and then with whether the presumption of prudence was rebutted. It was only after finding the presumption was rebutted that the Board turned to a consideration of each of the four contracts and a determination of prudence in respect of each of them. When the decision is looked at as a whole, it is clear that in paras. 3.12.32 to 3.12.34, the Board was dealing with whether the prudence standard had been met for the Vector 2 contract. That is the context in which the Notional Deferral Account is mentioned, and it can only logically be interpreted as referring to the prudence standard.

[34] In any event, it was not necessary for the Board to have information from the Notional Deferral Account in order to deal with the presumption of prudence issue. For the Alliance 1, Alliance 2 and Vector 1 contracts, the Board had three bases upon which the presumption was rebutted:

(i) the concession by Enbridge that the presumption was rebutted and that a prudence review was warranted;

(ii) the potential for conflict of interest because of the ownership interest of Enbridges's parent in the Alliance and Vector pipelines; and

(iii) the substantial extra costs actually incurred as demonstrated by the Notional Deferral Account.

[35] With respect to the Vector 2 contract, the Board did not have the information from the Notional Deferral Account, but it had already determined that the conflict of interest issue alone was sufficient to rebut the presumption and it had the concession from Enbridge that a review of prudence was appropriate in the circumstances. The Board did not need the Notional Deferral Account information to make its decision on the presumption, and indeed had already made that decision in respect of all four contracts at para. 3.12.13 of its Reasons.

[36] Counsel for the OEB further argues that since the Board made no decision with respect to Vector 2, its reasoning on Vector 2 is not the subject of this appeal and not relevant to our consideration of whether the Board erred in its analysis of the Alliance contracts. That might well be a valid point if the Board had confined its reasoning in para. 3.12.33 to the Vector 2 contract itself. However, the Board referred to the absence of the Deferral Account information for Vector 2 and then commented that this information was "a key element of the Board's prudence review of the Alliance and Vector arrangements". Given the context in which these words appear as well as the actual language used, it seems clear that the Board did in fact consider the actual costs incurred for Alliance as compared to the TransCanada pipeline to be a "key element" in its determination that the Enbridge decision to enter into the Alliance contracts was not prudent.

[37] The Board clearly articulated the correct test for the prudence review and appeared to understand that the prudence review must be based on circumstance that were known, or should reasonably have been known, by management making the decision at the time the decision was made. Because the test is so clearly stated by the Board, I have considered very carefully whether the Board's references to matters of hindsight in paras. 3.12.20 and 3.12.33 ought to be considered as innocuous, or related to some other analysis. I cannot reach that conclusion. In my view, the Board must be taken to have meant what it said. There are two clear references to a consideration of events which occurred after the decisions were made in the context of the Board's consideration of the prudence of the decisions. Reading the Board's comments any other way would, in my view, unduly strain the language used, particularly in the context in which those words appear.

[38] The retrospective application of the prudence test, ignoring the benefit of hindsight, is not an easy task for a decision-maker who is fully aware of the actual financial consequences of a decision. The decision-maker must shut out of his or her mind all knowledge of matters that are not permitted to be taken into account. This is something which is easier to describe than it is to carry out in practice. In this case, the Board described the test correctly, instructed itself not to use hindsight in evaluating prudence, but then slipped in its application of the test and did allow hindsight to creep into its consideration of prudence. That is a fundamental error of law.

F. Conclusions

[39] There was certainly evidence before the Board upon which it could have reasonably concluded that the Alliance contracts were not prudent. However, it is not possible to determine the extent to which an impermissible line of thinking clouded the Board's determination in this case. This is particularly problematic in that the hindsight considerations involved only the first ten months of contracts that were to run for a period of 15 years. The appellant is entitled to a decision based on the correct application of the legal test to the relevant facts. In the result, the Board's decision cannot stand and is therefore quashed insofar as it relates to the Alliance 1 and Alliance 2 contracts.

[40] The determination of prudence and the remedies flowing from a determination that a particular decision was or was not prudent are matters within the specialized expertise of the Board. Such determinations are intended under the Act to be the sole province of the OEB and ought not to be made by courts. Accordingly, this matter is remitted back to the OEB for consideration by a differently constituted tribunal.

[41] If the parties are unable to agree on the costs of this appeal, they may be addressed in writing. Counsel for Enbridge is requested to coordinate the timing of the costs submissions and to forward three copies of all of the submissions, preferably bound and indexed, to the Divisional Court office. Appeal allowed.