CITATION: Halton Hills Hydro Inc. v. Ontario Energy Board, 2020 ONSC 6085
DIVISIONAL COURT FILE NO.: 248/19
DATE: 20201006
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
D.L. Corbett, Lederer and Sutherland JJ.
B E T W E E N:
HALTON HILLS HYDRO INC.
Richard King, Jennifer Fairfax and Swetha
Popuri, for the Appellant
Appellant
- and -
ONTARIO ENERGY BOARD and
Ian Richler, for Ontario Energy Board
SCHOOL ENERGY COALITION
Mark Rubenstein, for School Energy Coalition
Respondents
Heard at Toronto: February 7, 2020
REASONS FOR DECISION
D.L. Corbett J.
[1] Halton Hills Hydro (“HHH”) appeals the decision of the Ontario Energy Board (the “OEB” or the “Board”) refusing a rate adjustment for operation, maintenance and administration costs (“OM&A”) of a new transformer station.[^1]
[2] HHH’s hydro rates are set at five-year intervals. Rate adjustments may be sought between five-year rate-setting decisions in limited circumstances. In this case, the Board granted a discretionary rate increase related to capital cost recovery for the new transformer station, but denied a discretionary increase for OM&A. The OEB decision does not preclude HHH from seeking approval for rates that account for OM&A costs of the new transformer station in the next five-year rates, to be set in 2021, though it does preclude HHH from recovering these costs for the period prior to new rates coming into effect.
[3] I see no reversible error in the Board’s decision and for the following reasons I would dismiss the appeal.
Jurisdiction and Standard of Review
[4] An appeal lies to the Divisional Court from an order of the Ontario Energy Board “only upon a question of law or jurisdiction”.[^2]
[5] Questions of law are reviewed on a standard of correctness.[^3] Questions of mixed fact and law are not questions of law unless there is an “extricable error of law”.[^4] There is no jurisdiction in this court to hear an appeal from the OEB on a question of mixed fact and law unless there is an “extricable error of law”.
[6] The appeal concerns a decision respecting the rates that HHH may charge its customers. Setting electricity rates is a discretionary exercise. As this court has held previously, “an arguably unreasonable exercise of a discretion is not an error of law or jurisdiction.”[^5] Indeed, rate-setting “is a good example of a wide discretion”.[^6]
Threshold Jurisdiction
[7] The OEB argues that this case does not raise an issue of law or jurisdiction and thus the appeal fails before any consideration of the merits of the issues raised by HHH.[^7]
[8] Some of the arguments made by HHH are precluded on this basis: for example, the OEB’s determination that HHH’s OM&A claim is not sufficiently material to raise an exception to general policy is a finding of fact, based on the record, that is not subject to review in this court. However, two of the arguments made by HHH are framed as questions of law that may be reviewed in this court and the adequacy of the Board’s reasons may, itself, be a question of law.[^8]
Background
(a) Regulatory Framework
[9] The appellant (“HHH”) distributes electricity in the Town of Halton Hills.
[10] The Board regulates the electricity sector in Ontario and sets rates that a distributor can charge customers for delivery of electricity to residences and businesses.[^9]
[11] Distributors are prohibited from charging for distribution services except in accordance with the OEBA.[^10] Distributors like HHH obtain rate orders from the OEB by filing a Cost of Service Rate Application (a “CSR Application”) to seek approval of an annual “revenue requirement” – the total revenue required to recoup the costs of running a reliable electricity distribution network plus a fair return on equity. The burden of proof is on the distributor to show that proposed rates are “just and reasonable”. Rates are set for five year periods, subject to discretionary incremental adjustments.
[12] In assessing what is “just and reasonable”, the OEB has regard to the objectives for regulating electricity set out in s.1(1) of the OEBA, including:
To protect the interests of consumers with respect to prices and the adequacy, reliability and quality of electricity service.
To promote economic efficiency and effectiveness in the generation, transmission, distribution, sale and demand management of electricity and to facilitate the maintenance of a financially viable electricity industry.
[13] Distributors may seek rate adjustments between CSR Applications, including “ICM” applications to accommodate significant capital projects between CSR Applications.[^11]
[14] A successful ICM Application allows a distributor to begin to defray costs of capital projects by increases to a distributor’s annual revenue requirement, permitting the distributor to increase its rates before the next five-year CSR decision. In an ICM application, the distributor must demonstrate that the capital project meets the eligibility requirements of materiality, need and prudence.
[15] As a matter of policy, the Board restricts ICM Applications to adjustments on account of capital. The Board has never granted an adjustment for OM&A as part of an ICM Application, but, as described in more detail below, in obiter dicta in one decision, the Board has not foreclosed making such an award as an exception to general policy.
(b) The New Transformer Station
[16] In 2007, HHH first identified a need to expand its infrastructure in the Town of Halton Hills and developed a plan to construct a new transformer station. In 2015, HHH filed a “Distribution System Plan” with the Board as part of its 2016 CSR Application. In that application, HHH said that it would file a separate ICM Application in connection with the new transformer station.
[17] On December 3, 2018, HHH filed an ICM Application for recovery of associated incremental costs, and specifically, to recover a revenue requirement associated with:
a. Slightly less than $23.5 million in capital costs to build the transformer station; and
b. $131,515 in annual OM&A costs for the new station after construction.
[18] In the alternative to b., HHH asked for approval of a “deferral and variance account” permitting it to track OM&A costs for its next CSR Application in 2021.
(c) The OEB Decision
[19] The OEB approved HHH’s application for revenue recovery respecting capital costs of the generating station. The OEB refused HHH’s request to recover OM&A costs and refused HHH’s alternative request for a deferral and variance account. The Board stated:
The OEB denies [HHH]’s request for an exception to the ICM policy to recover incremental OM&A arising from the operation of the new [transformer station]. The OEB acknowledges that the new [transformer station] will cause an increase to [HHH]’s OM&A costs in the amount of $131,515. However, the OEB expects HHH to be able to manage this incremental amount within its approved revenue requirement and the incremental revenue approved to collection through distribution rate riders for the construction of the new [transformer station].
The OEB will not approve a new 1508 sub-account for a new deferral and variance account for incremental OM&A for the reasons laid out in the ICM section above.[^12]
[20] These reasons, though brief, followed a discussion of the position of the parties on the issue and the OEB’s assessment of the overall factual context of the request. Further, these reasons were provided in a context where the underlying rate-setting practices, policies and jurisprudence are known to the parties and the OEB. They must be read in that context in order to be understood. In sum, the Board concluded that incremental OM&A for the new transformer station is not so material to justify departure from the OEB’s policy that incremental OM&A will not be authorized in ICM applications.
Issues on Appeal
[21] HHH argues the following points:
a. The OEB erred in law by failing to set rates that are “just and reasonable”.
b. The OEB erred by arbitrarily applying past practice to deny HHH’s request respecting OM&A costs.
c. The OEB erred in failing to provide reasons for its decision respecting OM&A costs.
[22] The primary focus of the OEB’s decision was in respect to the capital costs of constructing the transmission station, an issue in respect to which HHH was successful. The Board concluded that capital cost recovery should commence before the next general five-year rate-setting in 2021. It concluded that recovery of OM&A for the same transmission station should not commence until the next general rate-setting. HHH argued before us that these conclusions are fundamentally inconsistent.
[23] We do not see the inconsistency. In effect, the OEB found that the claim for a rate adjustment respecting capital costs was material and that the claim for an adjustment for OM&A was not. It found that Board policy respecting ICM adjustments should be followed. These are factual findings at their core, grounded in the record and in OEB policy.
Issue #1: Failure to Set Rates that are “Just and Reasonable”
[24] The test for an ICM Application is whether a capital project claim meets the three-part test of materiality, need and prudence. In concluding that HHH can cover OM&A for the new transformer station without an interim rate adjustment, given its new revenue stream and the quantum of new OM&A costs, the OEB implicitly concluded that the new OM&A costs were not sufficiently material to justify a price adjustment between CSR Applications. That finding was sufficient to dispose of the issue.
[25] We do not agree that the OEB was required to inquire into whether overall rates were “fair and reasonable” to decide whether the OM&A claim should be allowed. The rates decided under the previous CSR Application had been found to be “fair and reasonable”. The OEB concluded that the additional OM&A was not material. These two findings, together, lead to the conclusion that rates without an adjustment for OM&A are “fair and reasonable”. The materiality criteria in an ICM Application does not require that a fresh analysis of whether overall utility rates are “fair and reasonable”. That is an analysis done every five years. In between, to obtain a rate increase, the utility must show that the basis for the requested increase is material. That is where the analysis begins, not on the broad question of what rates are “fair and reasonable”.[^13]
[26] The approach taken by the OEB on this issue was consistent with the test for an ICM Application, and the OEB did not err by failing to undertake an overall inquiry into whether rates were “fair and reasonable”: that analysis inheres in the Board’s overall rate-setting process.
[27] For these reasons the first ground of appeal cannot succeed.
Issue #2: “Arbitrarily Following Past Practice”
[28] Current Board policy is rooted in the OEB Framework for incentive-based pricing, introduced in 2012. This model shifts rate-setting away from pure cost-recovery towards a model providing incentives to reduce costs and create efficiencies. Under this model, rates are set for five-year periods, subject only to defined adjustments. As described above, one of the adjustments that can be made is under an ICM Application based on capital expenditures. Up until 2015, rate adjustments pursuant to ICM Applications did not include an adjustment to rates on account of increased OM&A. However, in a decision in 2015 (“Festival Hydro”), the Board stated that such an adjustment could be sought in an ICM application.[^14]
[29] The case at bar was the first time that a utility sought adjustment to OM&A in an ICM Application. The Board advises that such a request has only be made in one other case since, in an application by Enbridge Gas, which was denied for the following reasons:
The ICM policy is designed to address the treatment of incremental capital investments. It does not contemplate approval of incremental O&M expenses associated with the new asset. Just as the ICM policy does not take into account any potential O&M savings as a result of replacement of an aging asset, it does not provide for recovery of incremental O&M expenses. These costs were denied in the Halton Hills proceeding. The OEB has never made an exception to the ICM policy for O&M or property taxes.[^15]
[30] Aside from the dicta in Festival Hydro, OEB policy does not contemplate incremental increases for OM&A costs in an ICM Application between five-year rate-setting decisions. The dicta in Festival Hydro arose in a particular context and is, in fact, obiter dicta. In that case the utility did not make an ICM application. Rather, in a CSR Application it sought to recover its OM&A for two prior years for a new transformer station that had been approved previously for ICM funding. The OEB denied the prior OM&A costs on the basis that they were “out of period” and thus would amount to retroactive ratemaking, but the Board noted that the utility could have applied for these costs, as an exception to ICM policy, in its ICM application.[^16] The OEB did not indicate what circumstances might lead the Board to make an exception to ICM policy to permit an incremental increase to OM&A in an ICM Application.
[31] Adherence to policy is not arbitrary. Rather, it is for HHH to show that, for some reason, a policy of general application, from which the OEB has never departed, should not apply to it in this case. Indeed, HHH’s argument is, at its core, that failure to follow an obiter dicta comment in a footnote in one OEB decision, which finds no support in other OEB jurisprudence, required the OEB to depart from general policy in this case or to explain in more detail why it declined to do so.
[32] HHH’s arguments before us do not establish the materiality of the requested OM&A costs. HHH provided an analysis of the potential impact on HHH’s return on equity, and then related this potential impact on HHH’s record as an efficient distributor. These statistics, however, do not address either the reasons provided by the OEB or the materiality threshold in the ICM policy. Having reviewed the record carefully, I am not satisfied that HHH’s financial position will be materially affected to such an extent that there is a basis for this court to intervene. HHH received 93% of its requested overall increase. The additional OM&A is only 2% of its overall OM&A budget. HHH’s revenue stream should increase, and its OM&A costs for other assets should decrease, as it starts to use the new transformer station. I accept that HHH’s return on equity had been relatively low, for the industry, for three years, but that followed two years when it had been significantly higher. These sorts of ups and downs are a normal part of the incentive rate model used by the Board. The requested OM&A was not so material as to put HHH’s anticipated performance more then 300 basis points outside forecast returns, a basis on which the Board could be asked to intervene. All of which is to say, I am not persuaded that the Board’s finding is unreasonable that HHH can cover the increased OM&A from its revenue until five-year rates are set in 2021. Further, this is also to note that the points reviewed in this paragraph are questions of fact and are not appealable to this court in any event.
Issue #3: Sufficiency of Reasons
[33] The reasons on this issue are brief but sufficient. The Board did not need to state the history of this issue in the Board’s jurisprudence in the way that I have done in these reasons. A specialized tribunal providing reasons to experienced participants in the Board’s processes need not explain things that are well known to the parties. Reasons are instrumental, and these reasons conveyed to the parties the basis of the Board’s decision.[^17]
[34] The Board declined to get into a policy consideration of the scope of the exception to Board policy proposed in a footnote in Festival Hydro. That choice was open to the Board: where the Board sees no basis to make an exception in any event, it is not necessary for the Board to undertake a policy analysis in its reasons.
[35] This is not a case where the court has “no idea what prompted the decision”.[^18] To paraphrase from the Court of Appeal: “[t]he… reasons … need not be lengthy. They need not be complex. But, as the Divisional Court observed, they must at least answer the question “Why?”.[^19] The OEB’s decision answers the question “why”. The reasons are sufficient.
Conclusion
[36] For these reasons the appeal is dismissed, without costs as the parties agreed.
D.L. Corbett J.
I agree _______________________________
Lederer J.
I agree _______________________________
Sutherland J.
Released: October 6, 2020
CITATION: Halton Hills Hydro v. Ontario Energy Board, 2020 ONSC 6085
DIVISIONAL COURT FILE NO.: 248/19
DATE: 20201006
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
D.L. Corbett, Lederer and Sutherland JJ.
BETWEEN:
Halton Hills Hydro Inc.
Appellant
– and –
Ontario Energy Board and School Energy Coalition
Respondents
REASONS FOR DECISION
D.L. Corbett J.
Date of Release: October 6, 2020
[^1]: OEB Decision and Order, Halton Hills Hydro, April 4, 2019, EB-2018-0328 (the “Decision”).
[^2]: Ontario Energy Board Act, 1998, SO 1998, s.15, Sched. B (the “OEBA”), s.33(2).
[^3]: Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, para. 37; Housen v. Nikolaisan, 2002 SCC 33, para. 8.
[^4]: Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32.
[^5]: Natural Resource Gas Limited v. Ontario Energy Board, 2012 ONSC 3520; Conserve Our Rural Environment v. Dufferin Wind Power, 2013 ONSC 7303.
[^6]: Transalta Utilities Corp. v. Alberta (Public Utilities Board), 1986 ABCA 64, para. 22.
[^7]: Natural Resource Gas Limited v. Ontario Energy Board, 2012 ONSC 3520, para. 8; Conserve Our Rural Environment v. Dufferin Wind Power Inc., 2013 ONSC 7307, para. 13.
[^8]: The OEB states in its factum, para. 4, that “it is well established that arguments about the adequacy of reasons do not themselves amount to a question of law or jurisdiction.” I agree that adequacy of reasons is not generally viewed as a matter of jurisdiction (though the nature of the reasons may be a basis for drawing inferences about the jurisdiction a tribunal was purporting to exercise). However, reasons that are inadequate can raise a reviewable question of law in this court. See: Vavilov, paras. 2, 14, 79 and 99, R. v. R.E.M., 2008 SCC 51, para. 52, R. v. Sheppard, 2002 SCC 26, para. 28, Bruno v. Dacosta, 2020 ONCA 602.
[^9]: OEBA, s. 78(3).
[^10]: OEBA, s. 78(2).
[^11]: The OEB’s “Incremental Capital Module (‘ICM’)” is set out in two reports: New Policy Options for the Funding of Capital Investments: The Advanced Capital Module (September 18, 2014) and New Policy Options for Funding of Capital Investments: Supplemental Report (January 22, 2016).
[^12]: Decision, pp 9, 11, Appeal Record, pp 22, 24.
[^13]: There are other mechanisms for reviewing rates if a distributor’s financial performance falls outside an expected range – whether by over-performance or under-performance. As explained in the OEB’s factum, paras. 19-21, either the distributor or the OEB may seek “re-basing” if earnings “drift” more than 300 basis point from the approved return on equity in a five-year CSR decision.
[^14]: OEB Decision and Order, Festival Hydro, April 30, 2015 (EB-2014-0073).
[^15]: OEB Decision and Order, Enbridge Gas, September 12, 2019, EB-2018-0305, pp. 30-31.
[^16]: OEB Decision and Order, Festival Hydro April 30, 2015 (EB-2014-0073), p.21, n.15.
[^17]: Rogers Communications Partnership v. Ontario Energy Board, 2016 ONSC 7810, para. 25 (Div. Ct.).
[^18]: Wall v. Independent Police Review Director, 2013 ONSC 3312, para. 64, aff’d 2014 ONCA 884.
[^19]: Wall v. Independent Police Review Director, 2014 ONCA 884, para. 62.