Ontario Court denies distributor recovery of $15 million in deferred costs in absence of a prudency review

August 5, 2009

The Ontario Divisional Court recently dismissed an appeal by Great Lakes Power Limited (GLP) of a decision of the Ontario Energy Board, in which the Board refused to allow GLP to collect nearly $15 million that GLP voluntarily deferred between 2002 and 2007, but that had never been subject to a prudency review by the Board.

The roots of the appeal stretch back to GLP's 2002 distribution rate application. That application was premised on a forecast revenue requirement of $12.7 million, but to avoid "rate shock," GLP sought to recover only $9.8 million and defer the rest of its revenue requirement for recovery beginning in 2005.   The Board granted an interim order approving GLP's requested rates, but due to the passage of Bill 210 in late 2002, a full hearing was never conducted. Bill 210 deemed interim orders to be final and imposed a rate freeze on distributors.

In 2007, GLP applied for new rates and, as part of its rate application, sought to recover through a rate ride approximately $15 million related to its rate deferral plan, which GLP claimed had been recorded since 2002 in a regulatory asset account. GLP, however, did not seek to have this amount subjected to a prudency review, and instead argued that the $12.7 million revenue requirement (and associated rate deferral plan) had been implicitly approved by the Board's 2002 interim order and could not be revisited.  The Board denied recovery on the grounds that the 2002 order was "interim" and issued in anticipation of market opening, and that there had never been a full hearing through which affected parties could provide input.  Under these circumstances, the Board concluded that it would be contrary to "reasonable regulatory practice or common sense" to permit the recovery of the deferred amounts.

GLP appealed the Board's decision to the Divisional Court and argued that the Board had committed an error of law by denying GLP an opportunity to earn a reasonable rate of return. Justice Lederman, writing for a unanimous panel, dismissed the appeal.  In his decision, Justice Lederman stated that the Board would have violated its statutory obligation to ratepayers and the regulatory compact if it had permitted recovery of the deferred costs in the absence of a prudency review. In his Honour's view, the "mere happenstance" of Bill 210 coming into force did not relieve GLP of the obligation to have its costs undergo appropriate scrutiny by the Board before recovering those costs from ratepayers.  Therefore, in his view, the Board did not commit an error of law when it denied GLP's request to recover these costs.

The authors represented the Ontario Energy Board before the Divisional Court.

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