In a decision released on April 20, 2010, the Ontario Court of
Appeal reinstated an Ontario Energy Board (OEB) decision that
required Toronto Hydro-Electric System Limited (THESL) to obtain
the approval of a majority of its independent directors before
declaring a dividend. The decision is notable because it reinforces
the unique obligations that distinguish regulated monopolies from
private corporations and indicates that regulators have
considerable latitude to intervene where a regulated company fails
to meet those obligations.
The appeal concerned the dividend policies of THESL, an
electricity distributor licensed and regulated by the OEB. THESL is
a wholly owned subsidiary of the Toronto Hydro Corporation (THC)
and all of the shares of THC are owned by the City of Toronto. In
2004-2005, THC paid over $166 million to the City in dividends and
interest payments, which were funded from substantial increases in
dividends from THESL and by charging THESL an above-market rate of
interest on an inter-company loan.
When THESL applied to the OEB for approval of its 2006
distribution rates, the OEB was concerned that THESL was making
substantial payments to the City while insufficient amounts were
being re-invested in THESL's aging infrastructure. The OEB
disallowed collection of any interest charges above market rates
from THESL's customers and imposed a condition requiring a
majority of THESL's independent directors to approve any future
dividend payments. THESL successfully appealed the OEB's
restriction on the issuance of dividends to the Divisional Court by
arguing that the condition exceeded the OEB's jurisdiction and
was an unlawful restriction on the authority of the board of
directors to declare a dividend.
A three-judge panel of the Court of Appeal set aside the
Divisional Court's order and reinstated the requirement for
THESL to obtain approval from its independent directors before
issuing a dividend. In doing so, the Court stated that deference is
owed to the decisions of regulatory tribunals with specialized
expertise and held that the OEB has very broad rate-setting
authority that allows it to "impose such conditions as it
considers proper" when making rate orders. In this respect,
the Court distinguished the case from the Supreme Court of
Canada's decision in ATCO Gas & Pipeline Ltd. v.
Alberta (Energy & Utilities Board),  1 S.C.R.
140 (ATCO). In the Court's opinion, the facts of
ATCO were different from the present case because the
condition set by the OEB was guided by specific objectives set out
in its enabling statute (which require the OEB to consider the
interests of both customers and distributors) in contrast to the
"vague, elastic, and open-ended" provision at issue in
The key issue in the appeal was the clash between the principles
of regulatory law and of corporate law. THESL argued that the
OEB's remedy was inconsistent with the principles that govern
THESL as a company incorporated under the Business Corporations
Act (Ontario). This argument was strongly rejected by the
Court. The Court noted that the principles governing a regulated
utility that operates as a monopoly are different from those that
apply to private sector companies operating in a competitive
market. Whereas the directors of private-sector corporations must
act in the best interest of the company (which is often taken to
mean the best interests of the shareholders), the Court stated that
a regulated public utility must operate in a manner that balances
the interests of the utility's shareholders against those of
its ratepayers. The panel noted that "[i]f a utility fails to
operate in this way, it is incumbent on the OEB to intervene in
order to strike this balance and protect the interests of the
With respect to the specific condition imposed on THESL, the
Court reviewed the OEB's reasons in making the order and
concluded that it was "within a range of possible, acceptable
outcomes which are defensible in respect of the fact and law."
The OEB had a legitimate concern that THESL would either have to
ignore its aging infrastructure or borrow funds in order to
maintain it, which would negatively impact THESL's credit
rating and lead to higher borrowing costs. As THESL admitted it was
making large dividend payouts at the request of the City, the Court
determined that it was reasonable for the OEB to require approval
from THESL's independent directors before any future dividends
could be paid.
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guide to the subject matter. Specialist advice should be sought
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Canada is a constitutional monarchy, a parliamentary democracy and a federation comprised of ten provinces and three territories. Canada's judiciary is independent of the legislative and executive branches of Government.
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