The Appellant energy board appealed from an order of the Divisional Court setting aside the Board’s order on an application for a rate increase brought by the Respondent gas distributor. The Court allowed the appeal, finding that the Board had properly applied the “prudence” inquiry which was required on an application for a rate increase.

Administrative law – Decisions of administrative tribunals – Energy and Utilities Board – Rate increases – Prudence inquiry – Judicial review – Appeals

Enbridge Gas Distribution Inc. v. Ontario (Energy Board), [2006] O.J. No. 1355, Ontario Court of Appeal, April 7, 2006, D.H. Doherty, M.J. Moldaver and E.E. Gillese JJ.A.

The Ontario Energy Board appealed an order of the Divisional Court which had set aside the Board’s order on a Respondent’s application for a rate increase. The Respondent was a gas distributor and seller of gas to consumers in Ontario. The Board was charged with the responsibility of fixing the rate that the Respondent could charge consumers for its gas.

In 1996, the Respondent entered into a series of agreements providing for the transportation of gas along a pipeline system from Alberta to Chicago to southwestern Ontario. In doing so, the Respondent abandoned its prior practice of transporting gas from western Canada to Ontario along the TransCanada pipeline system. The new routes, which became operational in 2000, proved more costly than the TransCanada pipeline route. The Respondent applied to the Board for an increase in its rate, which was said to reflect, in part, the added costs attributable to the new contract.

Pursuant to section 36 of the Ontario Energy Board Act, 1998, S.O. 1998, c. 15, the Board was required to decide whether the rate increase sought by the Respondent was “just and reasonable”. In making that decision, the Board was required to balance the competing interests of the Respondent and its consumers. That balancing process is achieved by the application of what is known as the “prudence” test. The Respondent was required to recover its cost by way of a rate increase only if those costs were “prudently” incurred. The Board had concluded that the added costs associated with two of the contracts entered into by the Respondent were not prudently incurred and therefore could not be recovered by way of a rate increase.

The “prudence” inquiry described by the Board has two stages. First, the Respondent’s decision is presumed to have been prudently made, unless those challenging the decision demonstrate reasonable grounds to question the prudence of that decision. Second, if the presumption of prudence is overcome, the Respondent must show that its business decision was reasonable under the circumstances that were known, or ought to have been known, to it at the time the decision was made. In its reasons, the Board expressly alluded to the limited role played by hindsight, which cannot be used at the second stage of the prudence inquiry to determine the ultimate question of whether the decision was prudent. Those facts could, however, be taken into account at the first stage in determining whether the presumption of prudence had been rebutted.

The Divisional Court had concluded that the Board had improperly used hindsight gained by reference to a “notional deferral account”. The Court of Appeal overturned this finding, and held that the Board’s decision (while not deciding on the proper standard of review) cleared the correctness standard.

The Divisional Court had erred by reading the words “prudence review” as referrable only to the second part of the “prudence” inquiry. The Board’s reasons, read as a whole, indicate that the Board was well aware of a distinction which had to be drawn between the use of hindsight in the first and second stages of the inquiry. A reviewing court is required to review reasons as a whole. Where different parts of the same reasons can reasonably be read so as to maintain consistency within the reasons, that reading must be preferred over one which sends the reasons careening off in different directions and creates an error in law.

Finally, the Court addressed the Board’s standing to appeal. The Court found that the Board had standing, as a party to the Respondent’s appeal in Divisional Court, to seek leave to appeal to the Court of Appeal. The standing flowed from the Courts of Justice Act, R.S.O. 1990, c. C.43. The Court also rejected the Respondent’s submission that the participation of the Board in this appeal could harm the appearance of the Board’s impartiality in any future proceedings involving the Respondent. The appeal came down to a very narrow point, and each application in the future would be decided on its own merits by the Board.

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