



COURT OF APPEAL FOR ONTARIO

CITATION: Iroquois Falls Power Corporation v. Ontario
    Electricity Financial Corporation, 2016 ONCA 271

DATE: 20160419

DOCKET: C60286, C60287, C60288, C60289, C60290, C60291

Doherty, van Rensburg and Miller JJ.A.

BETWEEN

C60286

Iroquois Falls Power Corporation

C60287

Cochrane Power
    Corporation

C60288

N-R Power and Energy
    Corporation, Algonquin Power (Long Sault) Partnership and N-R Power Partnership

C60289

Kirkland Lake Power
    Corporation

C60290

Lake Superior Power
    Limited Partnership, Beaver Power Corporation, Carmichael Limited Partnership
    and Algonquin Power (Nagamami) Limited Partnership

C60291

Cardinal Power of Canada,
    L.P. and MPT Hydro L.P.

Applicants (Respondents in Appeal)

and

Ontario Electricity Financial Corporation

Respondent (Appellant)

J.D. Timothy Pinos, Emily Larose and Stephanie Voudouris,
    for the appellant

James D.G. Douglas and Heather K. Pessione, for the respondents
    Iroquois Falls Power Corporation, Cochrane Power Corporation, N-R Power and
    Energy Corporation, Algonquin Power (Long Sault) Partnership and N-R Power
    Partnership and Kirkland Lake Power Corporation

Crawford Smith and Nick Kennedy, for the respondents Lake
    Superior Power Limited Partnership, Beaver Power Corporation, Carmichael
    Limited Partnership and Algonquin Power (Nagamami) Limited Partnership

Glenn Zacher, for the respondents Cardinal Power of
    Canada, L.P. and MPT Hydro L.P.

Heard: December 14 and 15, 2015

On appeal from the judgment of Justice Wilton-Siegel of
    the Superior Court of Justice dated March 12, 2015, with reasons reported at
    2015 ONSC 1641.

Doherty J.A.:


I



OVERVIEW

[1]

These appeals are from judgments rendered in six applications heard together
    over several days.  The applications arose from a dispute over the calculation
    of amounts payable to the respondents by the appellant under long-term contracts
    for the purchase of electricity generated by the respondents and distributed by
    the appellant to Ontario consumers. The contracts, or more specifically certain
    amendments to the contracts, contained a price adjustment index to be derived
    from the aggregate of several specific costs referred to cumulatively as total
    market costs (TMC).  The price adjustment index was applied annually as part
    of the formula used to fix payments to the respondents under the contracts.
[1]


[2]

The respondents claimed that effective January 1, 2011, the appellant
    unilaterally changed the calculation of the Global Adjustment Mechanism (GA),
    one component of TMC, in a manner that was inconsistent with the definition of
    TMC. This change substantially reduced amounts payable to the respondents.  The
    respondents argued that the change in the definition of the GA, which was
    effected by a new regulation, had nothing to do with the costs of producing or
    distributing electricity. Instead, it was designed by the government to provide
    a subsidy to large consumers of electricity to promote various government
    policies.  The respondents further argued that by incorporating the new definition
    of the GA into TMC, the appellant contravened the agreements and effectively passed
    the costs of the government subsidy on to the respondents.

[3]

The appellant argued that TMC was intended to reflect the price of
    electricity to certain consumers.  It maintained that the revised definition of
    the GA effected no change in the manner in which TMC was calculated.  Instead, it
    altered the manner in which the GA component of TMC was calculated.  The appellant
    argued that this kind of change to one or more of the components of TMC
    occurred throughout the contractual relationship.  The appellant further
    submitted that the change was mandated by the government regulation over which
    the appellant had no control.  Finally, the appellant acknowledged that the
    means of calculating the GA under the new regulation had reduced the amounts
    payable to the respondents under the agreements.  The appellant submitted,
    however, that the negative impact of the calculation of the GA from the
    respondents perspective was irrelevant to whether the calculation of the GA
    under the new regulation resulted in a breach of those agreements.

[4]

The application judge found for the respondents.  He directed that the
    GA component of TMC should be calculated as it had been before the new
    regulation came into effect.  He also directed that the respondents were
    entitled to a recalculation as of January 1, 2011 of the amounts owing to them
    under the agreements.

[5]

The appellant raises several grounds of appeal.  For my purposes, I will
    organize them into three categories.  First, counsel submits that the
    application judge decided the applications on a fundamentally different basis
    than that advanced by the respondents on the applications and argued by the
    parties at the hearing.  Counsel argues that the basis upon which the
    application judge decided the applications in favour of the respondents
    appeared for the first time, fully grown, in his reasons for judgment.  Counsel
    contends that the appellant was denied due process in that it had no chance to
    meet the case as ultimately framed and decided by the application judge.

[6]

Second, counsel attacks several findings of fact made by the application
    judge, arguing that the findings are unsupported by the evidence, or based on a
    misapprehension of the evidence.
[2]
Counsel argues that many of the factual errors are a direct consequence of the
    application judge deciding the applications on an issue not raised by the
    parties.  Counsel contends that this is not surprising given that the parties
    prepared the record on an understanding that the applications turned on an
    entirely different substantive issue.  Apart from the alleged factual errors
    said to arise because the application judge decided the case on the basis of an
    issue not argued, counsel also submits the application judge made several other
    findings of fact that were unsupported by the evidence or were based on a
    misapprehension of the evidence.

[7]

The third category of argument alleges several errors by the application
    judge in his interpretation of the relevant provisions of the agreements.

[8]

The appellant asks the court to receive evidence on appeal in support of
    arguments that fall in the first two categories outlined above.  Counsel
    submits that the fresh evidence demonstrates both that the application judge
    decided the case on a basis not argued by the parties, and that several of his
    findings of fact were both unsupported by the record before him, and inaccurate.

[9]

The respondents argue that the appeals should be dismissed. 
    Alternatively, should this court agree with the appellants contention that the
    application judge erred in his interpretation of the agreements, three of the
    respondents cross-appeal. They allege that the change in the manner in which
    the GA was calculated triggered the material change clauses in their
    agreements.  Those clauses provided that material changes to the description of
    TMC could only be made with the agreement of both the appellant and these
    respondents.

[10]

For
    the reasons that follow, I would not admit the fresh evidence and would dismiss
    the appeals. The fresh evidence is inadmissible because it is not relevant to
    the resolution of the grounds of appeal in respect of which it is offered.  The
    application judge did not decide the applications on an issue not raised by the
    respondents.  His material findings were supported by the evidence and his findings
    reveal no material misapprehension of the evidence.  The application judges interpretation
    of the relevant provisions of the contracts is not tainted by any legal error and
    was reasonably open to him on the record.

[11]

I
    do not reach the cross-appeals.


II



THE FACTS

[12]

The
    dispute between the appellant and the respondents can only be understood in the
    context of the changes in the manner in which electricity has been produced and
    sold to consumers in Ontario over the last 30 years.  The application judge reviewed
    that history in his reasons, at paras. 5-64. I have borrowed heavily from those
    reasons in my summary.

[13]

Prior
    to 1999, Ontario Hydro (Hydro) operated as a publicly owned vertically
    integrated monopoly supplying electricity to virtually all consumers in
    Ontario. Those consumers included municipal electric distribution utilities who
    distributed power to retail consumers in the municipality, rural retail
    customers, and about a hundred large industrial customers who received
    electricity directly from Hydros transmission lines. These customers were
    referred to as Direct Industrial Customers.

[14]

Hydros
    statutory mandate required it to supply power to its municipal customers and Direct
    Industrial Customers.  The rates charged by Hydro represented the all in costs
    to Hydro incurred in the generation and delivery of electricity to those
    consumers.  The all in costs included charges determined by volume of use
    (energy charges) and charges based on the peak demand placed on the system by
    the consumers electricity needs in a given period (demand charges).  Hydro
    fixed its rates after review by the Ontario Energy Board.

[15]

In
    the late 1980s, Hydro looked to the private sector to assist in the
    construction of new power generation facilities needed to service Ontarios increasing
    power demands.  Several private entities, including the respondents, agreed to
    build power generation facilities and entered into long-term contracts (20 to
    50 years) with Hydro for the sale of power generated by those new facilities. These
    private entities are referred to as non-utility generators (NUGs) and the
    agreements as power purchase agreements (PPAs).

[16]

When
    Hydro and the NUGs entered into the PPAs, it was intended that the NUGs would
    supply the power at no greater cost than Hydro would have incurred had it chosen
    to construct and operate the new facilities on its own.  The parties also
    understood that the PPAs were intended to provide an uninterrupted long-term
    income stream to the NUGs, sufficient to allow them to finance the construction
    and operation of the power generation facilities without recourse against any
    asset other than the income stream produced by the power facilities.

[17]

When
    the appellant and the NUGs entered into the PPAs, they understood that costs
    associated with the generation, transmission and supply of electricity would increase
    over the long timespan of the contracts.  The agreements contained an annual
    price adjustment index intended to protect the NUGs from the inevitable cost
    increases.  The price adjustment index increased the amounts payable to the
    NUGs under the PPAs as costs increased.

[18]

The
    original price adjustment index was referred to as the Direct Customer Rate
    (DCR).  It was based on rates listed in the rates schedule and charged to Hydros
    Direct Industrial Customers.  Variations in those rates were reflected in the
    price adjustment index used to calculate the amounts payable to the NUGs under
    the PPAs on an annual basis.

[19]

Different
    PPAs defined DCR in slightly different ways. However, all of the definitions
    were premised on a notional customer (proxy customer) with certain fixed
    characteristics that related both to volume of energy used and the demand
    placed upon the electrical grid by the user. The proxy customer was assumed:

·

To have a 100% load factor, that is a fixed and consistent
    demand throughout the entire relevant period;

·

To purchase the most reliable kind of power (firm); and

·

To purchase power at a specified connection of voltage.

[20]

The
    DCR was expressed in terms of dollars per kilowatt hour.  It represented the all
    in price that the proxy customer would have paid for power used by that
    customer based upon Hydros Direct Industrial Customer rate schedule.  When
    Hydro enjoyed its monopoly, the DCR represented both Hydros direct and
    indirect costs of producing and delivering the power to the proxy customer, and
    the price paid by the proxy customer for the power.

[21]

Between
    1988 and 1993, Hydro increased its rates to its Direct Industrial Customers. 
    Those increases were reflected in the DCR, which in turn led to an increase in
    the amounts paid to the NUGs under the PPAs.  The government imposed a five-year
    rate freeze between 1994 and 2000.  Consequently, the DCR remained static and
    there were no increases in the payments to the NUGs, even though their costs
    increased during that five-year time period.

[22]

In
    the late 1990s, the government restructured Hydro and opened the wholesale
    Ontario electricity market to competition.  Hydro was split into different
    entities, each responsible for a facet of Hydros activities.  Ontario Power
    Generation (OPG) owned and operated the majority of Hydros generation
    facilities, Hydro One owned and operated Hydros transmission and distribution
    assets, and the Independent Market Operator (IMO), later renamed the
    Independent Electricity System Operator (IESO), administered the wholesale
    electricity market.  The appellant became the legal successor to Hydro and
    assumed its rights and obligations under the PPAs.

[23]

The
    wholesale electricity market opened under the auspices of the IESO in May
    2002.  In this new market, rates were unbundled and were determined through a
    mix of market, regulatory and government mechanisms.  For example, the Hourly
    Ontario Energy Price (HOEP) paid by connected consumers was determined through
    the competitive marketplace overseen by IESO.  Transmission rates were fixed by
    the Ontario Energy Board and costs associated with debt retirement were fixed
    by the government.

[24]

The
    new reality of the marketplace rendered the DCR extinct.  There was no longer a
    bundled rate fixed by Hydro and charged to its Direct Industrial Customers upon
    which to base the price adjustment index.

[25]

The
    various stakeholders, including the appellant and the NUGs, set out to find an
    appropriate replacement for the DCR.  They produced a Working Paper in June
    2002.  Among other things, the Working Paper set out the shared expectations of
    the appellant and the NUGs with respect to the development of a price
    adjustment index to replace the DCR.  Fundamental to the consensus was the view
    that:

[T]he replacement for the DCR should replicate, to the extent
    possible, the nature and behaviour of the DCR as it currently exists.
    Furthermore, any such replacement should not afford any benefits or cause any
    detriment to either OEFC or each NUG contract holder that did not exist within
    the original DCR.

[26]

The
    Working Paper proposed that the new price adjustment index be based on TMC. 
    TMC was the aggregate of several individual costs associated with the
    production, delivery and use of electricity by the described hypothetical
    customer. Those costs included the HOEP fixed by IESO, and transmission rates
    fixed by the Ontario Energy Board.  As the individual costs varied, TMC would
    vary.  As TMC varied, the price adjustment index, calculated based on TMC, would
    change.  As the price adjustment index changed, the amounts payable to the NUGs
    under the PPAs changed.

[27]

The
    appellant and the NUGs agreed to incorporate the concept of TMC into the PPAs
    and did so in a series of amendments referred to as Term Sheets.  TMC was
    defined in the Term Sheets as:

[The] cost per kWh of electricity delivered on a 100% load
    factor firm basis to a Wholesale Market Participant load customer connected at
    the relevant voltage for the year P.

[28]

The
    new price adjustment index calculated using TMC as defined in the Term Sheets
    came into effect in 2003 (for the 2002 year).  There were two indices derived
    from TMC, one for PPAs that did not contain a minimum price increase provision
    and the other for PPAs that had a minimum price increase provision. For present
    purposes, there is no need to distinguish between the two.  The new price
    adjustment index is referred to as the DCR
new
.

[29]

The
    DCR
new
resembled the DCR in many ways.  The Wholesale Market
    Participant load customer referred to in the definition of TMC described a
    customer who took electricity directly from the IESO controlled grid for its
    own consumption or sale.  In this respect, the Wholesale Market Participant
    resembled the Direct Industrial Customer used to create the proxy customer for
    the purposes of the DCR.  The DCR
new
, like the DCR, had both an
    energy (volumetric) and demand component.  Again, like the DCR, the demand
    component in the DCR
new
was converted from a dollar per kilowatt
    number to a dollar per kilowatt hour number by the assumption that electricity
    was delivered on a 100% load factor, that is, a constant and consistent per
    hour energy demand throughout the year.

[30]

In
    2005, the Ontario government introduced by regulation the GA, a means by which
    certain out-of-market indirect electricity costs payable by government agencies
    could be passed on to consumers of electricity.  As described by one of the
    affiants for the appellant, the GA represented:

[T]he difference between the regulated or contract rates paid
    to regulated or contracted generators and the amount these generators earn via
    HOEP from the sale of electricity into the Ontario electricity market. [T]he GA
    changes in response to changes in HOEP.  All other things being equal, the GA
    increases in months when HOEP is low because regulated and contracted
    generators will have earned relatively less of their regulated or contract
    rates through the sale of electricity into the Ontario electricity market. 
    Conversely, the GA decreases in months when HOEP is high.  For some months, HOEP
    was sufficiently high relative to the regulated or contracted rates that the GA
    was, in fact, negative and a rebate to customers.

[31]

The
    total GA for the Ontario market was calculated on a monthly basis and reported
    as a dollar per megawatt hour figure.  All consumers were charged an amount for
    the GA in proportion to the amount that their electricity use bore to the total
    consumption during the relevant period.

[32]

As
    out-of-market electricity costs payable by government agencies increased, the
    GA increased.  For example, unanticipated costs associated with the
    construction of new generating plants increased the total GA.  Similarly, as
    the HOEP decreased, the GA increased.  Initially, the GA provided a credit
    against electricity costs and served to reduce the overall TMC.  However, the
    total annual GA increased significantly between 2005 and 2010.  By 2010, the GA
    represented about two-thirds of the cost charged to the consumer and in total
    represented a $3.85 billion charge against costs in calculating TMC.

[33]

The
    parties agreed that the GA as constituted in 2005 represented a cost of
    providing existing and new electricity generation for the benefit of Ontario
    electricity consumers and that it was properly incorporated into the bundle of
    costs (or credits) making up TMC.  Consequently, the GA impacted on the DCR
new
and, hence, the amounts payable to the NUGs under the PPAs.

[34]

As
    outlined above, TMC was an aggregate of numerous individual costs.  The
    components of TMC varied from time to time.  The introduction of the GA in 2005
    provides an example of a new component introduced into the calculation of TMC. 
    As new components were introduced or old components were altered, TMC and
    ultimately the DCR
new
would change.  The appellant retained Navigant
    Consulting Ltd. (Navigant) to calculate and publish DCR
new
on an
    annual basis.  The NUGs accepted those calculations until 2011.

[35]

In
    2010, for policy reasons unrelated to the direct or indirect costs of
    electricity, the government decided that it would change the way it allocated the
    GA among electricity consumers.  The change made by regulation became effective
    January 1, 2011 (the Reallocation Regulation) and effectively shifted the
    burden of the GA away from large industrial users and on to smaller consumers
    of electricity.

[36]

The
    Reallocation Regulation established two classes of customers for the purposes
    of allocating the GA charge.  One group, Class A customers, consisted of the
    large industrial energy users whose average monthly demands exceeded five megawatts. 
    The second group, Class B customers, consisted of all other customers, and
    those customers who fell within the Class A definition but chose to be Class B
    customers.

[37]

Under
    the Reallocation Regulation, the total GA remained unchanged.  However, the
    percentage of total GA that Class A customers had to pay was determined based on
    the electricity consumption of Class A customers during the five peak demand
    hours in the previous year.  The remainder of the total GA was allocated among
    Class B customers on the volumetric basis previously used to determine the GA
    for all customers.  In other words, Class B customers continued to be charged the
    GA in proportion to the amount that their electricity use bore to the total
    consumption during the relevant period.

[38]

Under
    the formula provided in the Reallocation Regulation, Class A customers could
    reduce their portion of the total GA costs by reducing electricity consumption
    during the five peak hours.  Any reduction in the GA achieved by Class A
    customers became an increase in the GA costs payable by the Class B customers.

[39]

The
    Reallocation Regulation had nothing to do with the costs of generating and
    distributing electricity.  It also had nothing to do with any change in the
    total indirect out-of-market costs reflected by the total GA.  The Reallocation
    Regulation simply reallocated those charges as between two identified groups of
    customers.

[40]

The
    reallocation was done principally to reduce prices charged to large industrial
    customers in the hope of encouraging those customers to maintain manufacturing facilities
    within Ontario.  The reallocation was also intended to encourage effective demand
    management and energy conservation among Class A customers by giving those
    customers an incentive to shift consumption to off-peak hours.

[41]

In
    the face of the Reallocation Regulation, Navigant changed the formula for
    calculating the GA portion of TMC.  The new formula, in effect, calculated the
    GA portion of TMC based only on the average critical peak demand of Class A
    customers during the five peak hours, as opposed to the actual total system demand. 
    The approach taken by Navigant after the Reallocation Regulation assumed that
    the proxy customer was a Class A customer under that regulation.  That customer
    would have benefitted from the reapportionment of the GA affected by the
    Reallocation Regulation.  In fact, some Class A customers could potentially
    reduce their GA costs to zero or near zero by avoiding electricity use during
    the peak five hours.

[42]

As
    indicated above, the Reallocation Regulation did not reflect any real change in
    the cost, direct or indirect, associated with the production and delivery of
    electricity by the NUGs.  The decision to use the formula in the Reallocation
    Regulation did, however, have a significant downward impact on the calculation
    of the GA amount to be included in TMC.  That reduction rippled through to a
    reduction in the DCR
new
and an ultimate reduction in the amounts
    payable to the NUGs under the PPAs.  The respondents estimated that the change
    in the formula for calculating the GA portion of TMC made after the Reallocation
    Regulation came into effect would cost the respondents in excess of $530
    million over the lifetime of the PPAs.


III



reasons of the application judge

[43]

After
    setting out the respective positions of the parties, the application judge
    framed the issue in the following terms:

[74]  Although the parties have proceeded on the basis that the
    framework for analysis of the issues on this application is whether TMC is a
    cost-index or a price-index, the substantive issue on this application is
    whether the definition of TMC requires that costs of generating and supplying
    electricity that are aggregated and then allocated to purchasers of electricity
    must be allocated on a basis
pro rata
to consumption of electricity or
    can be allocated on another basis  in this case, on a basis which is
    explicitly intended to subsidize a particular class of purchasers.

[44]

He
    ultimately concluded:

[124] Based on the foregoing, I conclude that it is implicit in
    the definition of TMC that costs that are not by their nature capable of being
    passed on directly to purchasers of electricity must be aggregated and
    allocated to purchasers
pro rata
based on purchases or consumption of
    electricity relative to purchases or consumption by all customers

[126] The definition of TMC mandates an aggregation of costs of
    generating and supplying electricity that is delivered to the Proxy Customer. 
    The cost of GA is a permissible cost as it reflects, or constitutes, a cost of
    electricity generation.  However, the cost of GA to Class A Customers, as
    calculated by Navigant, is determined on the basis of an allocation that is not
pro rata
according to electricity purchases as required by the
    definition of TMC.
As such, TMC, as
    calculated by Navigant, reflects a reallocation of GA costs as between Class A Customers
    and Class B Customers, rather than an allocation of the underlying costs of
    generation in a manner that is required by the definition of TMC.
[Emphasis added.]

[45]

As
    I read the application judges reasons, he held that while the government was
    free to reapportion the GA as it saw fit to promote government policies, the
    appellant, as a party to the PPAs and the Term Sheets, was contractually
    obligated to calculate TMC in a manner that reflected actual changes in the
    costs, direct or indirect, of the production and delivery of electricity to
    consumers in the Ontario market.  On the application judges analysis, the
    governments decision to reallocate the GA among different categories of consumer
    did not reflect any real change in the costs, direct or indirect, of producing
    or delivering electricity. The governments reallocation could not, therefore, provide
    a basis upon which Navigant, on behalf of the appellant, could recalculate the GA
    for the purposes of determining TMC.

[46]

In
    arriving at his conclusion, the application judge considered:


i.

The plain, ordinary meaning of TMC as defined in the Term Sheets (paras.
    97-104);


ii.

The shared understanding and goals of the parties when, in reaction to
    the fundamental changes in the Ontario energy market, they engaged in a
    prolonged consultative process that ultimately led to the incorporation of TMC
    as a defined term in the Term Sheets that amended the PPAs (paras. 105-13);


iii.

Other provisions in the Term Sheets introduced at the same time as TMC
    (paras. 114-15);


iv.

The compatibility of the terms of the Reallocation Regulation with the
    identification of the common features of the proxy customer for the purposes of
    calculating the GA (paras. 116-21); and


v.

The non-cost related nature of some of the components of TMC as identified
    in the Terms Sheets (paras. 122-23).

[47]

On
    my reading of the application judges reasons, the first two factors, the plain
    and ordinary meaning and the circumstances surrounding the incorporation of the
    TMC definition into the Term Sheets, played the paramount role in his
    analysis.


IV



The Admissibility of the Evidence Tendered on Appeal

[48]

The
    appellant asks the court to admit three affidavits on appeal:

·

The affidavit of Kenneth Russell, legal counsel for Ontario
    Financing Authority, who in that capacity provides legal services to the
    appellant;

·

The affidavit of William Harper, a former Hydro employee
    responsible for rate setting policies; and

·

The affidavit of Todd Williams, an employee of Navigant who is responsible
    for TMC calculations.
[3]

[49]

This
    court can receive evidence on appeal:
Courts of Justice Act,
R.S.O. 1990, c. C.43
, s. 134(4)(b). 
    Most often, evidence offered on appeal seeks to place different facts before
    the appeal court than were considered by the court of first instance.  In the
    typical case, the appellant asks the appeal court to consider the new evidence in
    combination with the evidence adduced in the lower court, and to arrive at
    different factual findings based on the enhanced evidentiary record.  In
    essence, the appellant asks for a reconsideration of the facts based on evidence
    not adduced in the court below.  Finality concerns, especially important in
    civil proceedings, demand a restrictive approach to the admissibility of
    evidence on appeal.  The due diligence inquiry, an important consideration in
    determining whether to admit fresh evidence on appeal, reflects the restrictive
    approach taken to the admission of fresh evidence on appeal.

[50]

This
    is not the typical kind of fresh evidence application. The appellant does not
    ask the court to receive evidence not adduced on the application and to decide
    anew the factual issues determined on the application based on the new
    evidence.  Instead, the appellant offers evidence on appeal to support the
    arguments that the application judge decided the applications on a basis not
    argued by the parties, and that he made factual findings unsupported by the evidence
    adduced before him.  Counsel submits that the evidence offered on appeal
    demonstrates the merits of both arguments.  Given the grounds of appeal to
    which the evidence proffered on appeal is directed, the admissibility of that
    evidence must turn on whether the evidence can provide any assistance to the
    court in deciding the merits of either or both of those arguments.  If the
    evidence cannot assist, it is not relevant to the appeals.

[51]

Mr.
    Russells affidavit begins by setting out the material that was before the
    application judge, including communications between counsel and the application
    judge.  All of this material is part of the appeal record.  Mr. Russell offers
    this opinion:

At no time did counsel or Justice Wilton-Siegel refer to what
    he refers to as the substantive issue in the quote above [in para. 74 of the
    application judges reasons].

[52]

Mr.
    Russell goes on to identify various factual findings made by the application
    judge.  He states: at no time did counsel or Justice Wilton-Siegel refer to
    any of these facts during the hearing of the applications.

[53]

Mr.
    Russells affidavit concludes with the assertion that had the appellant had any
    forewarning of the issue on which the application judge would decide the case,
    or of the facts on which the application judge would base his decision, the
    appellant would have addressed that issue and those facts in its evidence and
    argument.

[54]

The
    affidavits of Mr. Harper and Mr. Williams go into considerable detail, some of
    which refers to factual matters addressed in the affidavits they filed on the
    applications.  Their affidavits also contain some information which the
    affiants describe as responsive to the new issue raised by the application
    judge in his reasons.

[55]

The
    affidavits of Mr. Harper and Mr. Williams are intended to show not only that
    the application judge made findings of fact unsupported by the evidence, but
    that those findings are demonstrably inaccurate when considered in light of the
    additional information provided in the affidavits.  Put bluntly, the affidavits
    of Mr. Harper and Mr. Williams are a detailed and vigorous attack on the
    application judges analysis of the evidence and the accuracy of his findings
    of fact.  They read more like arguments than evidence.

[56]

With
    respect, the fresh evidence motion is misconceived.  Nothing in the
    affidavits filed by the appellant can assist this court in deciding either whether
    the application judge decided the applications on an issue not raised by the
    parties, or made findings of fact unsupported by the evidentiary record before
    him.  To address and decide the merits of those allegations, the court must
    focus on the record before the application judge.  It is only by examining that
    record that this court can decide if what the appellant describes as the new
    issue identified by the application judge was indeed raised by the parties on
    the applications.
[4]
Similarly, the court can only decide whether the application judge made
    material findings of fact unsupported by the evidence by examining the evidence
    that was before the application judge.  The affiants opinions that an issue
    was or was not raised on the application, just like their opinions as to
    whether there was any evidence to support the application judges findings of
    fact, are of no assistance to this court in deciding those questions.

[57]

Mr.
    Williams and Mr. Harpers opinions about the accuracy of the application
    judges findings of fact and the evidence they provide in relation to those
    facts are equally irrelevant.  It is important to recall that the appellant
    does not offer the affidavits of Mr. Williams and Mr. Harper on the basis that
    the court should consider those affidavits in conjunction with the evidence
    heard on the application and reconsider the application judges factual
    determinations.  The affidavits are offered on the basis that they demonstrate
    errors made by the application judge, both in respect of his framing of the
    substantive issue raised on the applications, and his analysis of the evidence
    before him.

[58]

The
    fact-finding stage of this process is over. The ultimate accuracy of the
    application judges factual findings is not relevant to an argument that his
    findings are unsupported by the evidence that was before him.  The questions raised
    on appeal will be decided, not by assessing the ultimate accuracy of the
    application judges factual findings having regard to information that was not
    before him, but rather by determining whether the facts as found by the
    application judge survive appellate review based on the palpable and overriding
    error standard to be applied to those findings.  The affiants assertions that the
    application judges findings are inaccurate, especially when those assertions
    are based in part on material never seen by the application judge, simply offer
    no assistance to this court in deciding whether the findings made by the
    application judge reveal palpable and overriding error.

[59]

Counsel
    for the appellant argues that the affidavits of Mr. Williams and Mr. Harper are
    important because by demonstrating the inaccuracy of the application judges
    findings, they establish the prejudice suffered by the appellant when the
    application judge decided the applications on an issue not raised by the
    parties and made findings unsupported by the evidence.  Fresh evidence may be
    admissible on appeal to demonstrate prejudice caused to the appellant by an
    error made in the proceedings under review:  see
Prince Edward County Field
    Naturalists v. Ostrander Point GP Inc.
, 2015 ONCA 269, at para. 84.

[60]

However,
    this argument does not assist the appellant for two reasons.  First, if the
    appellant can show, based on the record before the application judge, that the
    application judge decided the case on an issue not argued, the prejudice flowing
    to the appellant from those errors is self-evident without resort to any of the
    affidavits filed on appeal.  Second, the prejudice inquiry becomes germane only
    if the appellant can first establish, based on the record before the
    application judge, either that he decided the case on an issue not raised, or
    that he made findings unsupported by the evidence.  For the reasons that
    follow, the appellant has failed to make out either of those errors.

[61]

The
    interests of justice would not be served by admitting the evidence offered by
    the appellant on appeal.


V



grounds of appeal

A.
    Did the application judge decide the case on a basis not raised or argued by
    the parties?

[62]

A
    judgment based on a claim not made or a theory not advanced and argued cannot
    stand.  The fairness and reliability of the adversarial process demand that
    each side have notice of the others claims and a full opportunity to respond
    to those claims:  see
Labatt Brewing Company Limited v. NHL Enterprises
    Canada, L.P.
(2011), 106 O.R. (3d) 677 (C.A.), at para. 6;
Rodaro v.
    Royal Bank of Canada
(2002), 59 O.R. (3d) 74 (C.A.), at paras. 58-62.

[63]

Not
    surprisingly, counsel do not quarrel with the proposition set out above.  They
    part company over the characterization of the reasons of the application
    judge.  The appellant contends that the application judge expressly indicated
    that he saw the outcome of the applications as turning on an entirely different
    issue than had been advanced and litigated by the parties on the application.  The
    respondents submit that the application judge decided the applications on
    exactly the basis on which they were argued and chose to accept the respondents
    position.  They argue that what the appellant refers to as the new issue is
    nothing more than a description, in slightly different words, of the position
    taken by the respondents throughout the litigation.

[64]

Counsel
    for the appellant relies heavily on the passage from the application judges
    reasons, quoted above at para. 43.  For convenience, I repeat that passage here:

[74]  Although the parties have proceeded on the basis that the
    framework for analysis of the issues on this application is whether TMC is a
    cost-index or a price-index,
the
    substantive issue on this application is whether the definition of TMC requires
    that costs of generating and supplying electricity that are aggregated and then
    allocated to purchasers of electricity must be allocated on a basis pro rata to
    consumption of electricity or can be allocated on another basis
 in this case, on a basis which is explicitly intended to subsidize a
    particular class of purchasers.  [Emphasis added.]

[65]

I
    think counsel for the appellant makes too much of the language used by the
    application judge in para. 74.  The battle lines were clearly drawn before the
    application judge.  The respondents saw TMC as a reflection of the costs
    associated with the production and distribution of electricity.  TMC provided
    the basis for the calculation of the price adjustment index (DCR
new
). 
    That index would ensure that amounts paid to the respondents under the PPAs
    kept pace with increases in the costs of production and distribution of
    electricity.  The new allocation of the GA as defined in the Reallocation
    Regulation would, if carried through to the calculation of TMC, effectively detach
    the price adjustment index from the actual costs of generating and transmitting
    electricity.

[66]

The
    appellant saw TMC as a reflection of the price paid for the delivery of
    electricity by the proxy customer.  Variations in the price, whether imposed by
    marketplace or government regulation, were properly taken into account.  The
    Reallocation Regulation changed the portion of the GA paid by the proxy
    customer for the purchase of electricity.  The appellant was, therefore,
    required to use the GA as calculated under the Reallocation Regulation as a
    component of TMC.

[67]

Nothing
    in para. 74 suggests to me that the application judge did not appreciate the
    positions of the parties, or that he saw the essentials of their dispute differently
    than did the parties.  Indeed, only four paragraphs earlier, the application
    judge drew a direct connection between what he called the substantive issue
    in para. 74 and the positions of the parties.

[70] By way of overview, OEFC argues that TMC constitutes the
    aggregate
price
paid by the proxy customer for electricity delivered to
    it in the relevant period.  On the basis of this approach, the definition of
    TMC has been satisfied. The [NUGs] argue that TMC represents the aggregate of
    all
costs
of generating and supplying electricity to a proxy customer.  They
    accept that the GA qualifies as a cost component of TMC.  However, the [NUGs] argue
    that the GA cost attributable to a proxy customer must be determined on a
    volumetric basis pro rata to the consumption by all purchasers of electricity 
    that is, in the manner that it was determined prior to the enactment of the
    Reallocation Regulation. [Emphasis in original].

[68]

The
    application judges reference to the substantive issue on this application,
    in para. 74, describes the essential difference in the approach taken to the
    indirect or out-of-market costs, like the GA, depending on whether the goal of
    the process is to reflect costs of production and distribution of electricity
    or the purchase price of electricity to certain identified consumers.

[69]

In
    my view, the application judge did not identify a new issue in para. 74, but
    instead focused on the manner in which indirect out-of-market costs, like the GA,
    had to be allocated if TMC was, as the application judge found, intended to
    reflect the costs of generating and supplying electricity and not the costs incurred
    by the proxy customer in purchasing electricity.  This distinction tracked the
    competing positions of the parties.

B. Did the
    application judge make palpable and overriding factual errors?

[70]

A
    court of appeal will interfere with the findings of fact of a trial judge only
    if a finding is shown to be the product of palpable and overriding error.  A
    factual finding unsupported by any evidence is inevitably a palpable error.  That
    error will also be overriding if it is shown to have affected the result:
H.L.
    v. Canada (Attorney General)
, 2005 SCC 25, [2005] 1 S.C.R. 401, at paras.
    53-56;
Waxman v. Waxman
(2004), 44 B.L.R. (3d) 165 (Ont. C.A.), at
    paras. 292-96, 335, leave to appeal refused, [2004] S.C.C.A. No. 291.

[71]

Counsel
    for the appellant, both in his written and oral argument, provided a helpful, detailed
    and careful analysis of the application judges fact-finding.  He alleges many factual
    errors.
[5]
I propose to begin by grouping some of the factual errors and addressing them
    together.  I will then address the remaining alleged factual errors one by
    one.

[72]

Some
    of counsels submissions alleging factual errors do not, on closer examination,
    allege errors based on the evidence produced in the application record.  Instead,
    they allege errors based on evidence contained in the affidavits of Mr. Williams
    and Mr. Harper.  I would place the alleged factual errors in paras. 110 to 112
    of the application judges reasons in this group.

[73]

As
    explained above, the evidence contained in the affidavits of Mr. Williams and
    Mr. Harper filed on appeal cannot assist in deciding whether the application judge
    made palpable and overriding factual errors based on the record that was before
    him.  Submissions that the application judge fell into fatal error in his
    processing of the evidence cannot possibly succeed when based on evidence that
    was not before the application judge.

[74]

The
    appellant also alleges factual errors in paras. 107 and 109 of the reasons of
    the application judge.  In my view, those submissions are more accurately
    described as quarrels with the application judges interpretation of TMC in the
    Term Sheets.  For example, counsel argues that the application judge
    misapprehended the effect of the Reallocation Regulation on TMC in para. 107 of
    his reasons.  The argument does not point to any factual error by the application
    judge, but instead repeats the claim, made before the application judge, that
    the application of the Reallocation Regulation is not inconsistent with TMC as
    defined in the Term Sheets.  This is a contractual interpretation argument and
    should be addressed in that context.

[75]

I
    turn next to the remaining six specific alleged factual errors.  I begin with
    para. 9 of the application judges reasons:

The rates charged to Direct Industrial Customers were published
    in a schedule provided by Ontario Hydro and charged uniformly to Direct Industrial
    Customers according to their individual consumption in each hour of the
    relevant period.

[76]

The
    appellant takes issue with the application judges description of the rates in
    that it does not take account of the demand charge component of the rate.  The
    demand charge was not tied to consumption, but rather to peak demand.

[77]

Reasons
    must be considered as a whole.  A review of the entirety of the application
    judges reasons (for example, at paras. 15-16, 26) makes it abundantly clear
    that the application judge understood that there was a demand component in the
    charge and the manner in which that component was calculated and factored into
    the rates charged.

[78]

The
    next alleged factual error is found in para. 78 of the application judges
    reasons.  In describing the electricity market as it existed when the PPAs were
    entered into, the application judge said:

Under the regime in existence at the time of execution of the
    PPAs those amounts [cost of electricity and price of electricity] were the same
    and the concepts essentially two sides of the same coin.

[79]

Counsel
    for the appellant submits that this finding is premised on a misunderstanding of
    s. 92 of the
Power Corporation Act
, which required that Hydro supply
    power at cost only to municipalities and not to Direct Industrial Customers.

[80]

I
    do not read the impugned paragraph as a reference to the provisions of the
Power
    Corporation Act
.  It is a description of the electricity market as it
    existed when the PPAs were first entered into and, in particular, a description
    of the relationship of the cost of electricity to the price of electricity in
    that market.  The application judges description is fully supported by the
    record, including observations in the Macdonald Commission Report, the
    government-sponsored White Paper that in part led to the restructuring of the
    electricity market.

[81]

Counsel
    also submits that para. 79 of the application judges reasons demonstrates a
    material factual error.  In para. 79, the application judge described the
    positions of the parties.  He does not make any factual finding.  The
    application judge refers to the respondents position as based on a certain
    assumption.  On appeal, counsel submits that the assumption is incorrect.  That
    is not an argument about the application judges fact-finding, but is instead
    an argument challenging the merits of the respondents position.  The argument
    also echoes the appellants position before the application judge.

[82]

The
    next alleged unsupported finding of fact appears in para. 106:

First, as set out above, an important general principle
    articulated in the Working Paper is that the DCR was selected as an index
    reflecting over time the impact of changes in Ontario Hydros cost of doing
    business.  Such costs were incurred in one of two forms  direct costs that
    were allocated directly to the customer and other costs that were aggregated
    into a demand charge that was then allocated in accordance with the Proxy Customer
    assumptions.

[83]

The
    appellant accepts that the application judge properly described the general principle
    from the Working Paper in the first sentence quoted above.  Counsel argues,
    however, that the remainder of the paragraph misstates the manner in which Hydro
    classified its costs, and the manner in which it aggregated and allocated those
    costs to customers.

[84]

In
    my view, for the purposes of the issue before application judge, the first
    sentence was the important one.  The judge looked to the principle articulated
    in the Working Paper as an important surrounding circumstance in his
    interpretation of the definition of TMC contained in the PPAs.  The rest of the
    paragraph strikes me as a fair description, although perhaps less detailed than
    the appellant might like, of Hydros costs and the allocation of those costs.

[85]

The
    next alleged factual error appears in para. 113 of the application judges
    reasons:

Under the regulated market system, Ontario Hydro in effect
    charged a blended rate that incorporated the varying costs of generation of
    electricity from different sources on a volumetric basis based on a
pro rata
consumption.

[86]

The
    appellant submits that Hydro never charged its Direct Industrial Customers a
    blended rate.  It always charged a separate demand and energy charge.  Counsel
    contends that the factual error in the description of the nature of Hydros
    charging is significant because it carried through to the application judges interpretation
    of TMC as defined in the Term Sheets.

[87]

The
    appellants submissions ignore the words in effect in the passage quoted from
    para. 113 of the application judges reasons.  The application judge was not describing
    how Hydro actually charged any of its customers, but rather was describing the
    effect of rates that contained an energy and a demand component.  Perhaps, the
    application judges language could have been more precise.  However, I see no
    factual error.

[88]

The
    last alleged factual error appears in para. 123 of the application judges
    reasons:

As a conceptual matter, therefore, TMC is understood to
    comprise all energy-related costs that are intended to be recovered from
    electricity customers, including but not limited to all of the costs associated
    with the generation and supply of electricity, just as the DCR included all
    such costs prior to the market opening.

[89]

The
    appellant submits that the trial judge wrongly described TMC as referable only
    to energy-related costs.  The appellant contends that TMC relates to both
    energy and capacity-related costs.

[90]

I
    do not understand the application judge to have used the phrase energy-related
    costs, in para. 123, in the narrow sense advanced by the appellant.  I think
    he simply meant all costs related, directly or indirectly, to the production
    and supply of electricity.  Read in that way, the paragraph finds ample support
    in the evidence and is consistent with the position advanced by the respondents
    on the applications.

[91]

Counsel
    for the appellant spent most of the appeal carefully analyzing the findings of
    fact made by the application judge.  This approach reflected the nature of the
    applications.  The factual
minutiae
were important.  Despite his
    forceful submissions, counsel did not demonstrate that the application judge
    made any palpable and overriding factual error.

C.  Did the application
    judge err in the interpretation of TMC?

(i)

Standard of review

[92]

Although
    the evidentiary record before the application judge was dense, almost to the
    point of being impenetrable in some respects, the outcome of the applications
    turned on a single question of contractual interpretation  is the calculation
    of the GA as provided for in the Reallocation Regulation consistent with the
    definition of TMC contained in the various Term Sheets?

[93]

The
    appellant alleges multiple errors by the application judge in his
    interpretation of TMC.  Counsel submits that all of the alleged errors raised
    questions of law and are therefore reviewable on a correctness standard.  As
    explained in
Sattva Capital Corp. v. Creston Moly Corp.
, 2014 SCC 53,
    [2014] 2 S.C.R. 633, at paras. 42-55, contractual interpretation can raise questions
    of law alone reviewable on a correctness standard or questions fact or mixed
    fact and law reviewable on a palpable and overriding error standard:  see also
Holland
    v. Hostopia.com Inc.
, 2015 ONCA 762, 392 D.L.R. (4th) 650 at paras. 40-43;
Martenfeld v. Collins Barrow Toronto LLP
, 2014 ONCA 625, 122 O.R. (3d)
    568, at paras. 41-42.

[94]

Before
Sattva
,
    many courts treated most questions pertaining to the interpretation of
    contracts as questions of law alone.
Sattva
identified two reasons for rejecting this traditional
    position.

[95]

First, the goal of contemporary
    contractual
interpretation is to discern the objective intention of
    the parties through a reading of the agreement as a whole in the context of the
    surrounding circumstances as known by the parties when they entered into the
    agreement:
Sattva
, paras. 46-48;
    A. Swan & J. Adamski,
Canadian Contract Law
, 3rd ed. (Markham: LexisNexis, 2012), at ch. 8.  This
    approach to contractual interpretation almost inevitably raises factual
    questions.  The answers to those questions are not found by a formalistic
    application of prefabricated technical rules, but rather through a careful
    assessment of often conflicting evidence.  The trial venue, unlike the appeal
    venue, is particularly well-suited for this kind of assessment.

[96]

Second, present day contractual
    interpretation is by its nature a fact-specific inquiry that yields
    fact-specific results.  The interpretation of an agreement will often require a
    consideration of a unique constellation of specific words used in a specific
    context and in specific circumstances.  The courts interpretation of the
    contract will usually have no precedential value beyond the litigation.  Questions
    that generate answers that have no value beyond the specific litigation in
    which they arise are inevitably characterized as questions of fact or mixed
    fact and law:
Sattva
,
    paras. 51-53.  As explained in
Sattva
, there is little to be gained and much to be lost by
    the re-litigation of these kinds of question at the appellate level.

[97]

The twin rationales for
    treating most
aspects of
    contractual interpretation as involving questions of mixed fact and law identified
    in
Sattva
will not
    apply to all contracts: e.g. see
MacDonald v. Chicago Title
    Insurance Company of Canada
, 2015 ONCA
    842, 127 O.R. (3d) 663, at paras. 31-41, leave to appeal to S.C.C. requested.  They,
    however, apply with full force to the contracts at the centre of this
    litigation.

[98]

The PPAs and the
    subsequent amendments to the PPAs, including the definition of TMC, were the
    product of extensive and careful negotiations and consultations among
    sophisticated commercial entities.  They were, in the truest sense of the word,
    negotiated agreements designed by the parties to address a very specific
    ongoing business relationship.  The parties to the agreements had a
    longstanding and ongoing relationship in a unique marketplace.  Both were very
    familiar with that marketplace and sought to preserve their mutually beneficial
    relationship as the marketplace changed in response to new government policies. 
    In particular, the parties fully appreciated the far-reaching effects on their
    relationship of the profound changes to the electricity marketplace brought
    about in 2002.  They set out, through a lengthy, formalized and detailed series
    of consultations and negotiations, to adjust the PPAs to the realities of the
    new marketplace.  Together, they fashioned a contractual response to that new
    reality.  The definition of TMC was at the heart of that joint response.

[99]

The meaning of TMC can
    only be properly understood through an examination of the language used in the
    definition considered in the context of the extensive and detailed discussions
    and negotiations that produced the definition.  It is difficult to imagine an
    exercise in contractual interpretation that would be more fact-specific than the
    one called for here.  Similarly, it is difficult to imagine a product of that
    interpretative process that could have less precedential value.

[100]

The fact-specific nature
    of the interpretative process engaged on these applications makes applicable the
    caution sounded in
Sattva
,
    at para. 54,
against too
    readily turning questions of contractual interpretation into questions of law. 
    That of course does not mean that there are no questions of law raised in the
    interpretative process.  Interpreting a contract almost inevitably engages
    questions of law.
Sattva
,
    at paras. 53-54, provides several examples.

[101]

The two very different
    standards of review potentially applicable, depending on the nature of the
    ground of appeal, require that a distinction be drawn between arguments that
    raise a question of law and arguments which raise either a question of fact
    alone or a question of mixed fact and law.  The distinction is not drawn by
    counsels characterization of an issue as raising a question of law alone.  The
    distinction is determined by reference to the substance of the arguments made in
    support of a specific ground of appeal.  While the appellant describes its
    challenges to the application judges interpretation of TMC as raising
    questions of law, an examination of the arguments in support of those grounds
    of appeal leads me to conclude that apart from the argument that the
    application judge improperly implied a term into the definition of TMC, the
    arguments advanced on behalf of the appellant all raise questions of fact or
    questions of mixed fact and law.

[102]

Counsel for the
    appellant submits that the application judge failed to apply the principle of
    contractual interpretation that requires that a contract be read as a whole and
    that the words of the agreement be given their ordinary and grammatical
    meaning.  Counsel correctly identifies this as a legal principle of contractual
    interpretation.  The failure to apply that principle would be an error in law.

[103]

However, counsels
    argument is not in substance about the failure of the application judge to
    apply that principle.  He clearly did (see paras. 64-65, 97-104).  Counsels
    argument is that the application judge wrongly applied that legal principle.  For
    example, he maintains that the application judge wrongly defined the word 
cost, misapplied applicable rules of grammar, and
    incorrectly parsed the sentences defining TMC.  These arguments are not the
    stuff from which questions of law are made.  They raise questions of mixed fact
    and law, if not pure questions of fact.  One example makes my point.  The
    appellant submits that while the word cost may refer to cost to the seller or
    cost to the purchaser, the phrase market cost must refer to cost to the
    purchaser.  Clearly, there is no extricable question of law in this argument.

[104]

The appellants other
    principal attack on the application judges interpretation of TMC is also
    framed as raising a question of law alone.  Counsel argues that the application
    judge failed to consider the surrounding circumstances when interpreting TMC.  Once
    again, counsel identifies a legal principle.  Once again, his argument is not directed
    at the application judges failure to apply the principle.  He clearly did (see
    paras. 105-11).  The appellant takes issue with the way the application judge
    considered the surrounding circumstances.  For example, the application judge properly
    looked to the 2002 Working Paper as part of the surrounding circumstances.  He
    viewed the Working Paper as identifying the shared principles guiding the
    parties in their formulation of the amendments to the PPAs, including the
    definition of TMC (see paras. 81-82).  The appellant argues that the
    application judge should have relied on the specific wording used in various
    parts of the Working Paper.  The application judge considered and rejected this
    argument.  In my view, this submission comes down to an argument that the application
    judge should have given more weight to the actual wording used in the Working
    Paper than he did.  That is not a question of law.

[105]

As counsel for the
    appellant framed the issues as questions of law, he did not attempt to
    demonstrate any palpable and overriding factual errors in the application
    judges analysis.  His well-framed arguments demonstrate that there was much to
    be said in favour of the appellants interpretation of TMC.  They provide no
    basis, however, upon which this court can set aside the application judges
    different interpretation of TMC.  The appellant asks this court to redo the
    exercise in contractual interpretation performed by the application judge. 
    This court cannot do so, but must defer to the application judges findings
    absent a finding of palpable and overriding error.  No such finding can be made
    here.  The appellants arguments raising questions of fact and questions of
    mixed fact and law cannot succeed.

(ii)

Did the application judge
    wrongly imply a term into the agreement?

[106]

Counsel
    submits that the application judge wrongly implied a term into the agreements
    by requiring that TMC reflect costs as allocated on a basis
pro rata
to
    the consumption of energy.  Counsel argues that case law binding on the
    application judge recognizes limited circumstances in which a court can add to
    the terms of an agreement by implying a term into the agreement.  He submits
    that the application judge failed to consider this jurisprudence and that none
    of the criteria identified in the case law are met here.  This argument raises
    a question of law alone to which the correctness standard applies.

[107]

In
M.J.B. Enterprises Ltd. v. Defence Construction
    (1951) Ltd.
, [1999] 1 S.C.R. 619
, at para. 27, the court held:

[T]erms may be applied in a contract: (1) based on custom or
    usage; (2) as the legal incidents of a particular class or kind of contract; or
    (3) based on the presumed intention of the parties where the implied term must
    be necessary to give business efficacy to a contract or as otherwise meeting
    the officious bystander test as a term which the parties would say, if
    questioned, that they had obviously assumed. [Citations omitted.]

[108]

The appellant
    submits that the application judge must have relied on the third category of
    implied term to read the further condition into the definition of TMC,
    requiring that it reflect costs as allocated on a basis
pro rata
to the
    consumption of energy.  Counsel submits that the application judge did so
    without addressing the necessity requirement identified in the case law and in
    the absence of any evidence that could support that requirement.

[109]

The respondents
    do not take issue with the legal principles controlling the implication of
    terms into a contract.  They also accept that the application judge made no
    reference to these principles.  They maintain that the application judges
    failure to refer to these principles, in what is otherwise a careful and
    detailed set of reasons, is explained by the simple fact that the application
    judge did not purport to imply any term into the agreement.  The respondents
    argue that the application judge did not add any term to the definition of TMC,
    but rather interpreted the words used in the definition as they applied to the
    new formula for calculation of the GA set out in the Reallocation Regulation.

[110]

This ground of
    appeal raises two questions:  Did the application judge imply a term into the
    agreement?  If the answer is yes, did he err in law in doing so?  I accept
    the respondents submission that the application judge did not imply a term
    into the definition of TMC and would reject this argument on that basis.

[111]

Implying a term
    in an agreement and articulating the meaning of a term in an agreement are both
    a part of the interpretative process.   As the construction of contracts turns
    more to an attempt to discern objective intent by reference, not only to the
    words used, but to the relevant context, the distinction between implying a
    term and interpreting a term can become somewhat blurred:  see
Attorney
    General of Belize and Ors v. Belize Telecom Ltd. and Anor
, [2009] UKPC 10,
    [2009] 1 W.L.R. 1988, at paras. 17-21; B. Kain, The Implication of Contractual
    Terms in the New Millennium, (2011) 51 Can. Bus. L.J. 170.

[112]

There is,
    however, an essential difference between implying a term into an agreement, and
    interpreting a term in an agreement.  Kain, at p. 172, makes a distinction in
    the course of his helpful summary of the judgment in
Attorney General of
    Belize and Ors
:

The question of implication arises where an instrument does not
    expressly provide for what is to happen when an event occurs.  In most cases,
    the usual inference is that nothing is to happen, and the express provisions of
    the instrument continue to operate undisturbed.  If the event causes loss to
    one of the parties, the loss lies where it falls.

Occasionally, the reasonable addressee of the instrument will
    conclude that the
only
meaning which the instrument can have is that
    something is to happen in response to the relevant event.  In that case, the
    court is said to imply a term as to the response. [Emphasis in original.]

[113]

The same
    distinction is drawn by G. Hall in
Canadian Contractual Interpretation Law
,
    2nd ed. (Markham: LexisNexis, 2012), at p. 150:

While the principles governing the implication of terms into a
    contract are closely related to broader themes in contractual interpretation,
    implying a term into a contract is a separate process from simple
    interpretation of the contract.
Interpretation gives
    meaning to the words used by the parties; implication fills gaps in those
    words.
[Emphasis added.]

[114]

Neither the
    relief claimed in the Notices of Application, nor the arguments made on the
    applications, suggested that a term should be implied into the meaning of TMC. 
    The respondents argued that the calculation of the GA as required by the
    Reallocation Regulation was incompatible with the definition of TMC.  The
    appellant argued that the GA had always been included in the calculation of TMC
    and that the Reallocation Regulation had no effect on the
status

quo
. 
    Both sides urged the application judge to interpret the words used in the
    definition of TMC in the context of the surrounding circumstances, especially
    the Working Paper and related documents.  Neither side suggested that the
    outcome of the applications turned on whether the application judge was
    prepared to imply a term into the definition of TMC to fill a gap in that
    definition.

[115]

The appellant
    points to two passages from the reasons of the application judge in support of
    the argument that he implied a term into the definition of TMC.  At para. 111,
    the application judge said:

These three general principles regarding the intended operation
    of the replacement index for DCR collectively indicate or imply an intention
    that any costs to be aggregated and allocated to purchasers of electricity
    should be allocated on a basis that is
pro rata
to the purchases or
    consumption of electricity by all purchasers.

[116]

This passage
    occurs in the course of the application judges detailed consideration of the
    Working Paper as one of the surrounding circumstances to be considered in
    interpreting TMC (see paras. 105-111).  In para. 111, the application judge is
    referring to his understanding of the general principles articulated in the
    Working Paper applicable to the selection of a price adjustment index to
    replace DCR.  He is not referring to language used to define TMC in the
    agreement.  Furthermore, I read the word imply in para. 111 as used as a synonym
    for indicate, the other word used in the sentence.  I do not understand the
    application judge to use the word imply in the more narrow legal sense of
    implying a term into a contract.

[117]

The second passage
    relied on by the appellant appears at para. 124:

Based on the foregoing, I conclude that it is implicit in the
    definition of TMC that costs that are not by their nature capable of being
    passed on directly to purchasers of electricity must be aggregated and
    allocated to purchasers
pro rata
based on purchases or consumption of
    electricity relative to purchases or consumption by all customers.

[118]

Paragraph 124
    must be read in the context of the rest of the application judges reasons.  He
    spent some 60 paragraphs setting out the legal principles governing contractual
    interpretation and applying those principles to the massive record before him. 
    At no point in that process did he allude to the principles governing the
    implying of terms into a contract or to any gap in the definition of TMC that
    called for a consideration of whether a term should be implied into that
    agreement.  The application judges entire analysis reflected an attempt to
    interpret the language contained in the definition of TMC in light of the
    context in which those words were used by the parties.  The use of the word
    implicit, in para. 124, is nothing more than a recognition that the language
    used to define TMC does not expressly capture the full meaning of TMC.  In
    other words, the language had to be interpreted having regard to the context in
    which it was used.

[119]

The application
    judge did not err in law in his interpretation of TMC.  There are no grounds
    for appellate intervention.


VI



the cross-appeal

[120]

As I would
    dismiss the appeals, I need not address the cross-appeals.


VII



conclusion

[121]

The appeals are
    dismissed.  The cross-appeals are dismissed as moot.  The parties have agreed
    on costs. The respondents, as the successful parties, are entitled to one set
    of costs fixed at $150,000 all in.

Released: DD  APR 19 2016

Doherty J.A.

I agree K. van
    Rensburg J.A.

I agree Bradley W.
    Miller J.A.


Appendix A

DCR 
    Direct Customer Rate

DCR
new
 Replacement index for DCR

GA 
    Global Adjustment Mechanism

HOEP 
    Hourly Ontario Energy Price

IESO 
Independent
    Electricity System Operator

NUG 
    Non-utility Generator

OEFC 
    Ontario Electricity Financial Corporation

PPA 
    Power Purchase Agreement

TMC 
    Total Market Costs





[1]
Unfortunately, the evidence, the reasons below and these reasons are full of
    acronyms.  For convenience, the more common acronyms are set out in Appendix A
    (App. A).



[2]
I include in this category the appellants submission based on an alleged misapplication
    of s. 92 of the
Power Corporation Act
, R.S.O. 1990, c. P.18.  As I
    understand the submission, the appellant argues that the misunderstanding of s.
    92 led to a misapprehension of the evidence by the application judge:  see
infra
paras. 78-80.



[3]
The respondents cross-examined only Mr. Russell.



[4]
I acknowledge that there may be cases in which there are gaps in the record
    that may be filled by fresh evidence.  For example, there may be correspondence
    between counsel and the judge which illuminates the nature of the issues to be
    litigated and which does not find its way into the record.  None of this fresh
    evidence falls into that category.  The correspondence referred to by Mr.
    Russell is already part of the record.



[5]
As indicated above in footnote 1, counsel alleged as a separate ground of
    appeal that the application judge misapplied the
Power Corporation Act
. 
    He further alleges that this misapplication led to a misapprehension of the
    evidence in para. 78 of the application judges reasons.  I therefore include
    that ground of appeal in this category.  I address the alleged misapprehension
    of the evidence below, at paras. 78-80.


