) ) NATURAL RESOURCE GAS LIMITED Appellant – v. –, 2017 ONSC 1763

CITATION : Natural Resource Gas Limited v. Ontario Energy Board, 2017 ONSC 1763 DIVISIONAL COURT FILE NO.: 068/16 DATE: 20170316 ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT SACHS, SPIES and PARAYESKI JJ. BETWEEN: ) ) NATURAL RESOURCE GAS LIMITED Appellant – and – ONTARIO ENERGY BOARD and UNION GAS LIMITED Respondents ) ) ) ) ) ) ) ) ) ) ) ) Lawrence E.

Thacker , for the Appellant Michael Millar , for the Respondent, The Ontario Energy Board Myriam Seers , for the Respondent Union Gas Limited ) HEARD at Toronto: March 16, 2017 SPIES J. (Orally) [ 1 ] The appellant appeals the decision and order of The Ontario Energy Board (“OEB”) dated January 14, 2016. The OEB held that the appellant is required to pay the respondent, Union Gas Limited (“Union Gas”) a penalty in the amount of $1,287,548 and that only $181,531 of the penalty amount can be recovered from the appellant’s rate payers.

The rest must be paid by the appellant’s shareholders due to the OEB’s finding that the appellant’s conduct was not prudent. [ 2 ]

Section 33 of The Ontario Energy Board Act, 1998, S.O. 1998, c.15, Sched. B (the “ Act ”) gives this Court jurisdiction to hear an appeal on a question of law or jurisdiction. The appellant and the respondents do not agree on what the standard of review is in this case. We find that it is one of reasonableness, not correctness as submitted by the appellant. The OEB’s decision in this matter relates to setting “just and reasonable” rates which is at the heart of the OEB’s mandate and expertise under s. 36 of the Act . The Supreme Court of Canada confirmed in Ontario (Energy Board) v.

Ontario Power Generation Inc. , 2015 SCC 44 at para. 73 that reasonableness is the appropriate standard of review for the OEB’s rate-setting decisions. [ 3 ] While the appellant raised a number of arguments in its factum, the issues that the appellant chose to pursue are as follows:

(1) The penalty decision of the OEB was outside of its jurisdiction because the effect of that decision was “utterly punitive.”

(2) The OEB erred when it grounded its penalty decision in a need to deter the appellant and other direct purchase customers from failing to meet their contractual balancing requirements.

(3) The OEB erred in making a finding that the appellant failed to act prudently when the only evidence before it on this issue was the uncontradicted and unchallenged evidence of the appellant. [ 4 ] Dealing with the first argument, the appellant was unable to provide any jurisprudence to support the argument that the OEB could lose jurisdiction in imposing a punitive penalty. In fact, this argument fails to properly recognize that the penalty was intended to be punitive and not restorative.

The OEB’s squarely dealt with this issue at p.13 of its reasons, quoting from an earlier decision of the OEB that stated as follows: The Board accepts the premise that it is important to encourage compliance with contractual obligations to balance in a system such as Union’s, where a wide variety of users are dependent on such balancing to ensure the integrity, security and efficient operation of the system.

The failure to balance can place compliant system participants at risk, and may result in additional costs… In the Board’s view, the penalty must be sufficiently costly to defaulters to strongly discourage strategic non-compliance with balance obligations, and the careless or incompetent acceptance of contractual obligations which are not reasonably achievable. The Board is concerned that parties wishing to engage in the market, either directly or through agents, must be appropriately encouraged to manage

their obligations responsibly. The system as a whole requires that. [ 5 ] In this case, it is important to recognize that Union Gas has 600 direct purchase customers. If a significant number of these customers had acted in the way the appellant did, the integrity, security and efficient operation of Union Gas’s system would have been put at risk. [ 6 ] The OEB however recognized that in this particular case, the penalty under the contract with direct purchase customers could have the effect of driving certain of those customers out of business.

Therefore at the request of Union Gas, the OEB took the unprecedented step of approving a 38% reduction in the penalty. In its view, this reduction struck the appropriate balance between encouraging compliance with contractual obligations and not driving the affected direct purchase customers out of business. [ 7 ] In addition, with respect to the appellant, the OEB went further.

The OEB granted a stay of the interest charges applicable to the penalty amount and established a payment plan which recognized that the penalty amount the appellant’s shareholders had to pay was significant relative to the appellant’s annual shareholder returns. [ 8 ] In the end, the appellant’s submission is that the OEB should have exercised its discretion in a different way by choosing a lower penalty amount.

Absent an error in principle (which did not exist in this case), the balancing required to determine the appropriate penalty lies at the heart of the OEB’s expertise and does not raise a question of law or jurisdiction. [ 9 ] With respect to the second argument, the appellant submits that there was no need to deter the appellant since it could never have an economic incentive to breach its balancing obligations under its contract with Union Gas.

Whatever the appellant pays for natural gas is passed on to its customers at cost. [ 10 ] This argument also fails to recognize the purpose of the penalty which is to maintain the integrity of the whole system. Whether the appellant makes a profit or not on the sale of gas, the fact remains the contract imposes a penalty if the appellant breaches its balancing obligations which could be borne in whole or in part by the shareholders. [ 11 ] This is the incentive not to breach.

Therefore, there is no merit to the appellant’s submission that the OEB erred in grounding its decision on a need to provide an incentive not to breach. [ 12 ] Finally, with respect to the third argument, this was considered by the OEB and they did not accept it. At pp. 23-24 of their decision, the OEB found as follows: NRG also argued that the evidence it filed with regard to the prudence its gas supply procurement during the 2013-2014 winter is uncontested. NRG noted that no party filed evidence to the contrary nor did any party cross-examine on NRG’s evidence.

NRG argued that since no party cross examined NRG on its evidence, all of NRG’s evidence must be accepted and that the prudence of NRG’s actions cannot be questioned. The OEB does not agree. Prudence is not a “fact” that can be sworn to in an affidavit. Prudence (or imprudence) is a conclusion arrived at after reviewing the facts. Clearly a utility (or any party) cannot “prove” prudence simply by stating that it was prudent. We agree. [ 13 ] The appellant did not argue that the OEB ignored or misapprehended the evidence that was before it.

The fact that the evidence before the OEB came from the appellant and was not challenged or contradicted does not mean that it could not form the basis for a finding by the OEB that the appellant did not act in a prudent manner. [ 14 ] There were no significant disagreements about the facts in this case. The OEB considered those facts and determined that the appellant’s conduct was not prudent and that it would therefore not be just and reasonable to pass the full cost of the penalty onto the appellant’s rate payers. [ 15 ] The OEB acted under the proper

section of its home statute. It then exercised its discretion and came to a conclusion. The essence of the appellant’s argument is that the OEB came to the wrong conclusion i.e. that it exercised its discretion poorly. Absent an error in principle (which did not exist in this case), this cannot be characterized as an error of law or jurisdiction. [ 16 ] For these reasons, the appeal is dismissed. costs – Sachs j. [ 17 ] I have endorsed the Appeal Book and Compendium of Natural Resource Gas Limited as follows: “This appeal is dismissed for oral reasons as delivered by Spies J.

As agreed by the parties, the Appellant shall pay the Respondent, Union Gas, its costs fixed in the amount of $7,500 all-inclusive within 30 days of today’s date. The OEB is not seeking costs.” ___________________________ SPIES J.

I agree ___________________________ SACHS J. I agree ___________________________ PARAYESKI J. Date of Reasons for Judgment: March 16, 2017 Date of Release: March 29, 2017 CITATION : Natural Resource Gas Limited v. Ontario Energy Board, 2017 ONSC 1763 DIVISIONAL COURT FILE NO.: 068/16 DATE: 20170317 ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT SACHS, SPIES and PARAYESKI JJ. BETWEEN: NATURAL RESOURCE GAS LIMITED Appellant – and – ONTARIO ENERGY BOARD and UNION GAS LIMITED Respondents ORAL REASONS FOR JUDGMENT SPIES J. Date of Reasons for Judgment: March 16, 2017 Date of Release: March 29, 2017