



COURT OF APPEAL FOR ONTARIO

CITATION: Power Workers' Union (Canadian Union of Public
    Employees, Local 1000) v. Ontario (Energy Board), 2013 ONCA 359

DATE: 20130604

DOCKET: C55602, C55641 and C55633

Rosenberg, Goudge and Blair JJ.A.

BETWEEN

Power Workers Union, Canadian Union of Public
    Employees, Local 1000

Appellants

and

The Ontario Energy Board, and Ontario Power
    Generation Inc.

Respondents

AND BETWEEN

Ontario Power Generation Inc.

Appellant

and

Ontario Energy Board

Respondent

AND BETWEEN

Society of Energy Professionals

Appellant

and

The Ontario Energy Board and Ontario Power
    Generation Inc.

Respondents

Richard Stephenson and Emily Lawrence, for the appellant
    Power Workers Union

John B. Laskin and Crawford Smith, for the appellant Ontario
    Power Generation

Paul Cavalluzzo, for the appellant Society of Energy
    Professionals

Mark Rubenstein, for the intervenor Ontario Education
    Services Corporation

Robert B. Warren, for the intervenor Consumers Council
    of Canada

Glen Zacher and Patrick Duffy, for the respondent
    Ontario Energy Board

Heard: January 29, 2013

On appeal from the order of the Divisional Court (Justice
Catherine D.

Aitken, Justice
Katherine E.

Swinton and Justice Alexandra Hoy),
    dated February 14, 2012.

By
    the Court:

Introduction

[1]

This is an appeal from the order of the Divisional Court dismissing the
    appeal from a decision of the respondent Ontario Energy Board (the OEB) in
    which the OEB reduced by $145,000,000 the revenue requirements sought by the
    appellant Ontario Power Generation Inc. (OPG) to cover its nuclear compensation
    costs for 2011 and 2012.

[2]

The sole issue is whether the OEBs decision was reasonable or not.  The
    majority of the Divisional Court found that it was.

[3]

In dissent, Aitken J. found that it was not.  For the reasons that
    follow, we agree with her.  We would therefore allow the appeal.

Background

[4]

OPG is Ontarios largest electricity generator.  Its three nuclear
    generating stations comprise two-thirds of its generation capacity.  The
    remainder comes from six hydro-electric stations.

[5]

OPG employs approximately 10,000 people in its regulated business, about
    95 percent of whom are associated with its nuclear generation business.

[6]

Some 90 percent of OPGs regulated workplace is unionized.  The
    appellant Power Workers Union (the PWU) represents approximately two-thirds of
    the unionized staff.  The appellant Society of Energy Professionals (the
    Society) represents the remainder of its unionized workforce.

[7]

The
Ontario Labour Relations Act
, S.O. 1995, c. 1, sched. A, s.
    17 compels OPG and its unions to bargain in good faith and make every
    reasonable effort to reach a collective agreement.  Once reached, a collective
    agreement is legally binding on the parties to it for the duration of its term.

[8]

OPG entered into a collective agreement with the PWU for the period
    April 1, 2009 to March 31, 2012.  OPG also has a collective agreement with the
    Society for the period January 1, 2011 to December 31, 2011.  These agreements
    prescribe the compensation rates for each staff position held by its
    represented employees.  They also provide strict terms regulating the staff
    levels at OPGs stations.  Under these agreements OPG is not free to reduce
    compensation rates unilaterally.  Nor can it reduce staffing levels
    unilaterally, as it wishes.  For example, the PWU collective agreement provides
    that no employee will be involuntarily laid off during the term of the
    collective agreement.

[9]

Independent of the collective agreements, the Canadian Nuclear Safety
    Commission has also imposed staffing requirements on OPG to ensure safe and
    reliable operation of its nuclear stations.

[10]

On
    May 26, 2010, OPG filed an application seeking approval of the rates its
    customers must pay for its electricity.  The rates sought provide the revenue
    required by OPG to cover its projected costs for operating and maintaining its
    assets, for making new investments, and for earning a fair rate on invested
    capital.

[11]

The
    application was for the period from January 1, 2011 to December 31, 2012.  The
    terms of the two collective agreements cover the same period, save for nine
    months, in the case of the PWU contract.  The application was for a future
    period, in other words a forward test period in the language used by the OEB.

[12]

In
    the application, OPGs single largest projected cost related to the operation,
    maintenance and administration of its nuclear facilities.  By far the biggest share
    of this was the compensation to OPGs unionized staff in its nuclear
    operations.  That compensation is a product of both compensation rates and
    staffing levels.

[13]

OPGs
    application was filed under s. 78.1 of the
Ontario Energy Board Act
,
    1998
, S.O. 1998, c. 15, sched. B (the Act).  It empowers the OEB to fix
    the rates that OPG is entitled to charge its customers.  Section 78.1(5)
    requires that those rates be just and reasonable.  In such an application, s.
    78.1(6) places the burden of proof on the applicant.  As long ago as 1929, the
    Supreme Court of Canada established that just and unreasonable rates are rates
    which, under the circumstances, would be fair to the consumer on the one hand,
    and which, on the other hand, would secure to the company a fair return for the
    capital invested.  See
Northwestern Utilities Ltd. v. Edmonton (City)
,
    [1929] S.C.R. 186 at pp. 192-3.

[14]

The
    OEB heard OPGs application over 16 days in the fall of 2010.  It issued its
    decision on March 10, 2011.

[15]

At
    pp. 18 and 19 of that decision, the OEB described two approaches it uses to
    determining rates that are just and reasonable.  In the case of forecast costs
    that can be managed by the applicant going forward, the OEB can and does have
    regard to a wide variety of considerations including current economic
    conditions, analyses of economic trends and benchmarking data comparing other
    entities.

[16]

On
    the other hand, when committed costs are at issue, that is costs that cannot be
    reduced by the applicant in the test period, the OEB undertakes a prudence
    review.  In
Enbridge Gas Distribution Inc. v. Ontario (Energy Board)
(2006), 210 O.A.C. 4 (C.A.), leave to appeal to S.C.C. refused, [2006] S.C.C.A.
    No. 208, this court accepted that approach and outlined what it entails at p.
    5:

The Board agrees that a review of prudence involves the
    following:

·

Decisions made by the utilitys management should generally be
    presumed to be prudent unless challenged on reasonable grounds.

·

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

·

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

·

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

[17]

The
    OEB summarized these two approaches at p. 19 of its decision in this case:

The benefit of a forward test period is that the company has
    the benefit of the Boards decision in advance regarding the recovery of
    forecast costs.  To the extent costs are disallowed, for example, a forward
    test period provides the company with the opportunity to adjust its plans
    accordingly.  In other words, there is not necessarily any cost borne by
    shareholders (unless the company decided to continue to spend at the higher
    level in any event).  Somewhat different considerations will come into play
    when undertaking an after-the-fact prudence review.  In the case of an
    after-the-fact prudence review, if the Board disallows a cost, it is
    necessarily borne by the shareholder.  There is no opportunity for the company
    to take action to reduce the cost at that point.  For this reason, the Board
    concludes there is a difference between the two types of examination, with the
    after-the-fact review being a prudence review conducted in the manner which
    includes a presumption of prudence.

[18]

In
    the end, the OEB reduced by $145,000,000 the nuclear compensation costs applied
    for by OPG: $55,000,000 for the 2011 year, and a further $90,000,000 for the
    2012 year.  The OEB did so because it concluded that OPGs compensation rates
    and its staffing levels were both too high.

[19]

In
    reaching this conclusion, the OEB relied on information, including staffing and
    compensation comparison reports, that was not in existence at the time OPG
    entered into the collective agreements with the PWU and the Society.

[20]

The
    OEB decided that OPG should manage its projected nuclear compensation costs
    downward over the two years by this total of $145,000,000. OPG should achieve
    this reduction by reducing the compensation rates it pays to its unionized
    staff positions sufficiently to move these costs from the 75th to the 50th
    percentile in the benchmarking study of comparator employees, and by reducing
    the number of its staff positions.

[21]

The
    OEB treated both compensation rates and staffing levels as forecast costs that
    OPG could manage downward.  Neither was treated as committed costs.  Nowhere
    did the OEB engage in a prudence review.  It did not inquire into whether OPGs
    decision to enter the collective agreements was prudent based on the
    information that was known or ought to have been known at the time.

[22]

The
    majority of the Divisional Court found that both the OEBs use of hindsight in
    determining the reasonableness of OPGs nuclear compensation costs as well as its
    ultimate decision to require a reduction of $145,000,000 were reasonable, and
    should therefore not be disturbed on appeal.  The majority agreed with the OEB
    that OPG could manage these costs downward within the framework of the
    collective agreements.  The majority of the Divisional Court concluded that a
    prudence review was not required, would not permit the OEB to fulfill its
    statutory objective of promoting cost effectiveness in the generation of
    electricity, and would not allow the OEB to act as a market proxy.

[23]

The
    dissent, on the other hand, concluded that the collective agreements imposed
    compensation costs on OPG that are committed costs.  Rates proposed to recover
    these costs should therefore be subject to a prudence review to determine
    whether they are just and reasonable.  The OEB did not undertake such an
    analysis, but assessed the reasonableness of those costs using information that
    came into existence after the collective agreements were made.  The dissent
    found the OEBs approach to contravene both the principles of the prudence
    review and the decision of this court in
Enbridge
.

Analysis

[24]

As
    in the Divisional Court, the parties all take the position that the appropriate
    standard of review is one of reasonableness.  We agree.

[25]

The
    issue, therefore, is simply whether the OEBs decision of March 20, 2011,
    including its reasoning and analysis, was reasonable.

[26]

The
    appellants say that it was not.  They all argue that the OEB impermissibly used
    hindsight in relying on current information that was not available when the
    collective agreements were made, and in not conducting a prudence review of the
    nuclear compensation costs proposed by OPG,.  The appellants argue that the
    compensation costs applied for are committed costs because of the collective
    agreements and that the OEB unreasonably evaluated these costs without a
    prudence review.

[27]

The
    OEBs position, supported by the two intervenors, is that a prudence review was
    not needed because such a review does not apply to forecast compensation costs,
    and in any event is simply a regulatory tool developed for past capital
    expenditures.  The OEB says that these compensation costs can be managed by OPG
    regardless of the collective agreements.  It argues that it was entitled to
    rely on current information in finding these compensation costs excessive and
    that its decision that these costs must be reduced by $145,000,000 over the two
    years was reasonable.

[28]

In
    resolving the issue in appeal, it is important to reiterate the difference
    between committed costs and forecast costs, a difference well-known in the
    regulation of utilities such as OPG and well-described in the decision of the
    OEB in this very case in the passage quoted above.

[29]

When
    an application is made by a utility for the approval of rates for a timeframe
    to cover the costs in that time frame, its committed costs are those that it is
    committed to pay in that time frame.  Those costs cannot be managed or reduced
    by the utility in that time frame, usually because of contractual obligations. 
    When, as in this case, the timeframe of the application stretches into the
    future, costs that have been contractually incurred to be paid over the
    timeframe are nonetheless committed even though they have not yet been paid.

[30]

The
    OEBs assessment of the reasonableness of committed costs is by way of a
    prudence review.  The OEBs jurisprudence says as much.  Moreover, this
    approach was sanctioned by this court in
Enbridge
, at para. 8.

[31]

A
    prudence review of committed costs is not confined to capital costs or to costs
    that have been paid at the date of the application.  In
Enbridge
, no
    one contested that a prudence review was warranted even though the case involved
    operating costs rather than capital costs, as well as costs that had not yet been
    paid as of the date of the application.

[32]

Moreover,
    the rationale behind the prudence review is inconsistent with confining the approach
    to a certain subset of committed costs.  All committed costs must be paid
    during the time frame under review.  The regulator is required to maintain a
    balance of fairness between the utility and the consumer.  It would upset that
    balance to evaluate the reasonableness of these costs with the benefit of
    hindsight using current information that had not been available to the utility
    when it made the commitment to pay them,

[33]

Forecast
    costs, on the other hand, are costs that the utility can alter by managing them
    during the timeframe under consideration.  The regulator is free to assess the
    reasonableness of these costs using current information.  This approach is
    sensible because the utility may act on that same information if it chooses to
    alter these costs during the timeframe under consideration.

[34]

In
    this case, the OEB found that OPGs nuclear compensation costs for 2011 and
    2012 were forecast costs and, because of current information, must be reduced
    by $145,000,000 through a reduction in the compensation rates for unionized
    positions and a reduction in the number of staff positions over these two
    years.  The OEB did so without conducting a prudence review of these costs.

[35]

In
    our view, the compensation costs at issue before the OEB were committed costs. 
    Compensation rates for unionized staff positions are, save for several months
    for the PWU, fixed for 2011 and 2012 by OPGs collective agreements.  OPG is
    legally bound to pay them.  It could not reduce the rates, or compel a
    re-opening of the agreements.  OPG is also constrained by safety requirements. 
    Equally, the number of staff positions is strictly regulated by the collective
    agreements.  OPG could not unilaterally reduce that number, nor could it compel
    unionized staff to retire.

[36]

We
    would conclude, therefore, that the OEB acted unreasonably in two respects. 
    First, the OEB unreasonably assessed the reasonableness of these committed
    costs using the hindsight of current information unavailable when the
    collective agreements were made.  Second, the OEB unreasonably failed to
    conduct a prudence review of these costs.  Its resulting decision is therefore
    also unreasonable.

[37]

We
    say this for two reasons.  First, the Boards approach to these committed costs
    is contrary to the approach required by its own jurisprudence and accepted by
    this court.  Second, it is unreasonable to require that OPG manage costs that,
    by law, it cannot manage.

[38]

Our
    conclusion does not mean that the OEB is powerless to review the compensation
    rates for OPGs unionized staff positions or the number of those positions.  In
    a prudence review, the evidence may show that the presumption of prudently
    incurred costs should be set aside, and that the committed compensation rates
    and staffing levels were not reasonable; however, the OEB cannot resort to
    hindsight, and must consider what was known or ought to have been known at the
    time.  A prudence review allows for such an outcome, and permits the OEB both to
    fulfill its statutory mandate and to serve as a market proxy, while maintaining
    a fair balance between OPG and its customers.

Disposition

[39]

As
    a result, we conclude that the OEB acted unreasonably.  The appeal must be
    allowed and the OEBs decision set aside.  OPGs application is remitted to the
    OEB to be heard in accordance with the principles in these reasons.

[40]

The
    parties have not sought costs.  None are ordered.

Released: June 4, 2013 (S.T.G.)

M. Rosenberg J.A.

S.T. Goudge J.A.

R.A. Blair J.A.


