The appeal by the Ontario Energy Board (the “Board”) from a decision of the Divisional Court declaring that it had exceeded its jurisdiction when it imposed, as a condition in its 2006 rate decision, a duty on the Toronto Hydro-Electric System Ltd. to obtain approval of the majority of its independent directors before declaring any future dividends payable to its affiliates was allowed where the court found that the Board had expressed concern about the level of dividend payments given that increased capital spending was required to address aging plant and to maintain system reliability and this was a reasonable explanation for imposing the condition

Administrative law – Decisions of administrative tribunals – Utility and Review Board – Natural resources – Electricity rates – Board of Directors – Judicial review – Jurisdiction – Standard of review – Reasonableness simpliciter

Toronto Hydro-Electric System Ltd. v. Ontario (Energy Board), [2010] O.J. No. 1594, 2010 ONCA 284, Ontario Court of Appeal, April 20, 2010, K.N. Feldman, S.E. Lang and J.L. MacFarland JJ.A.

The Toronto Hydro-Electric System Ltd. (“THESL”) is an electricity distributor licensed and regulated by the Board. THESL is a wholly-owned subsidiary of Toronto Hydro Corporation (“THC”). All of the shares of THC are owned by the City of Toronto. When THESL applied to the Board for approval of its distribution rates to be effective May 2006, the Board expressed concern about the level of dividend payments and the above-market rate of interest being paid by THESL. Evidence before the Board disclosed that the City anticipated a significant shortfall in its 2006 operating budget; that the City regarded THC as a “revenue source in the 2006 operating budget”; and the City demanded substantial increases in dividends from THC which, in turn, demanded increased dividends from THESL.

The Board is the regulator of Ontario’s electricity and is statutorily mandated to “protect the interests of consumers with respect to prices and the adequacy, reliability and quality of electricity service.”. The Board manages this mandate primarily by setting just and reasonable rates. In its initial decision, the Board disallowed as a regulatory expense any interest charges above market rates and required a majority of THESL’s independent directors to approve any future dividend payments. In reaching this decision, the Board noted that if a utility like THESL was to pay all of its retained earnings to its shareholders, this could adversely affect its credit rating, which in turn could harm ratepayer interests by causing higher costs and degradation in services. THESL appealed this decision.

In the Divisional Court, THESL argued that the Board had no jurisdiction to impose the condition concerning requiring a majority of the independent directors to approve any future dividend payments as such a condition represented an unwarranted and unlawful restriction on the authority of the Board of Directors to declare a dividend. This position was accepted by the Divisional Court. The Board appealed the decision.

The Court of Appeal confirmed that the Board is a highly specialized expert tribunal with broad authority to regulate the energy sector in Ontario and to balance competing interests, citing Natural Resource Gas Ltd. v. Ontario Energy Board (2006), 214 O.A.C. 236. The Board’s mandate is to balance the interests of ratepayers in terms of prices and service while at the same time ensuring a financially viable electricity industry that is both economically efficient and cost effective.

The court did not find that the decision of the Board was outside its jurisdiction, indicating that courts should hesitate to analyze the decisions of specialized tribunals through the lens of jurisdiction unless it is clear that the tribunal exceeded its statutory powers by entering into an area of inquiry outside of what the legislature intended. Provided the decision of the specialized tribunal aims to achieve a valid statutory purpose and the enabling statute includes a broad grant of open-ended power to achieve that purpose, the matter should be considered within the jurisdiction of the tribunal. In this case, the case law suggests that the Board’s power in respect of setting rates is to be interpreted broadly and extends well beyond the strict construction of that task.

The court held that the appropriate standard of review was reasonableness. Based upon the analysis in Dunsmuir v. New Brunswick, [2008] 1 SCR 190, the court set out the following two inquiries involved in assessing the reasonableness of a decision: (1) the existence of justification, transparency and intelligibility within the decision-making process; and (2) an inquiry concerned with whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of facts and law.

In reviewing the underlying decision, the court found that the Board had been concerned because THESL was paying THC very large dividends even though increased capital spending was going to be needed to maintain system reliability. THESL was either going to ignore its aging infrastructure or have to borrow funds to address it. Both courses of conduct would ultimately, as the Board explained, have adverse effects on the ratepayers. The condition with respect to requiring approval of independent directors for dividend payments was required to balance the interests of both the customer and the shareholder. The court agreed that the Board’s decision was reasonable in the circumstances.

THESL argued that the Board’s decision imposed a condition which violated corporate law and, consequently fell outside of the range of “possible, acceptable outcomes”. The court did not agree siding instead with the Board’s submission that the authority to approve dividends had not been taken away from the directors as the approval by the entire Board was still required before a dividend could be issued. The condition respecting independent directors was simply an additional check on the authority of the full Board. In the context of a regulated corporation, the Board crafted a reasonable and less intrusive remedy that balanced the interests of THESL’s shareholders and its ratepayers. In the result, the Board’s appeal was allowed.

To stay current with the new case law and emerging legal issues in this area, subscribe here.