Canada: Ontario Court Of Appeal: Regulated Utilities Must Balance Rights Of Shareholders And Ratepayers

Last Updated: August 19 2010
Article by Michael Schafler and Marina E. Sampson

As Bastarache J. explained in ATCO . . . "utility regulations exist to protect the public from monopolistic behaviour and the consequent inelasticity of demand while ensuring the continued quality of an essential service". In other words, the OEB's regulatory power is designed to act as a proxy in the public interest for competition . . ."

Toronto Hydro-Electric System Limited v. Ontario Energy Board 2010 ONCA 284, at para. 48


The Ontario Energy Board (the "OEB") is of the view that it is entitled to intervene in corporate decision-making to ensure that a regulated utility operates in a manner that balances the interests of its shareholders against the interests of its ratepayers. The Ontario Court of Appeal recently endorsed this view.

At first blush, the decision of the Ontario Court of Appeal in Toronto Hydro-Electric System Limited v. Ontario Energy Board, 2010 ONCA 284 ("THESL v. OEB"), is contrary to the Supreme Court of Canada's decision in ATCO Gas and Pipelines Ltd. v. Alberta Energy & Utilities Board (2006 SCC 4) ("ATCO"). In ATCO, the SCC considered the power of the Alberta Energy & Utility Board (the "AEUB") to allocate the proceeds from the sale of non-utility assets to the utility's rate-paying customers, instead of leaving the gain for the utility's shareholders. The SCC held that the AEUB did not have such jurisdiction and that its decisions made in the public interest must be balanced against the corporate utility's property rights. THESL v. OEB similarly involved a consideration of the OEB's jurisdiction to intervene in matters pertaining to the regulated utility's usual corporate right to declare dividends to its shareholders.

As will be discussed further below, the Ontario Court of Appeal held that the OEB had such jurisdiction.


The OEB regulates Ontario's electricity markets and is mandated by the Ontario Energy Board Act, 1998, S.O. 1998, c. 15 (the "OEBA") to "protect the interests of consumers with respect to prices and the adequacy, reliability and quality of electricity service" (section 1(1)). One of the OEB's principal functions is to set "just and reasonable rates" that utilities may collect from ratepayers in respect of utility services. THESL is a wholly-owned subsidiary of Toronto Hydro Corporation ("THC"). All shares of THC are owned by the City of Toronto. The OEB licenses and regulates THESL as an electricity distributor.

From 2004-2005, THC had paid in excess of $116 million to the City of Toronto in dividends and interest payments, largely through significant annual increases in dividends from THESL and by charging THESL interest charges, above market rates, on an inter-company loan. The OEB noted that THESL paid such dividends and interest charges with no capital plan in place for reinvestment in its own aging infrastructure.

When THESL applied to the OEB to approve distribution rates for 2006, the OEB refused to allow interest charges above market rates as a regulatory expense. Further, the OEB required a majority of THESL's independent directors to approve any future dividend payments. The OEB held that if THESL paid its entire retained earnings to its shareholders, its credit rating would be impaired, which could result in harm to ratepayers – through increased costs and diminished services. THESL appealed this decision to Ontario's Divisional Court.

Before the Divisional Court, THESL argued that the OEB had no jurisdiction to impose the requirement that a majority of THESL's independent directors approve any future dividend payments, either by statute or at common law. THESL further argued that the OEB's requirement represented an unwarranted and unlawful restriction on the authority of THESL's board of directors to declare a dividend. A majority of the Divisional Court panel agreed with THESL. The Honourable Mr. Justice Lederman dissented. The OEB appealed.


The issue before the Court of Appeal was stated as "whether the OEB had the ability, as part of its 2006 rate decision, to require THESL to obtain the approval of a majority of its independent directors before declaring any dividends."

The Court first considered whether the OEB had exceeded its statutory grant of power, acknowledging at the outset that the OEB must balance the interests of ratepayers against ensuring a financially viable electricity industry that is both economically efficient and cost effective. The Court further determined, through its review of applicable case law, including Toronto Hydro- Electric System Ltd. v. Ontario Energy Board et al. (2009), 252 O.A.C. 188 (Div. Ct.), (leave to appeal to Ont. C.A. refused) that the OEB's power in respect of setting rates is to be interpreted broadly and extends well beyond a strict construction of the task:

Unlike the cases relied upon, this issue directly relates to the OEB's determination of rates and goes to the heart of its regulatory authority and expertise. There is no dispute that the OEB has rate-setting powers under the OEBA which are broad enough to encompass the power to determine reduced revenue requirements as a result of the sale of non-surplus assets. [Toronto Hydro- Electric System Ltd. v. Ontario Energy Board et al. (2009), 252 O.A.C. 188 at para.17.]

The Court found that the OEBA reflected a clear legislative intent to confer a subjective and open-ended grant of power to enable the OEB to engage in the necessary inquiry to achieve its rate-setting function. The Court went on to find that the OEB was entitled, as part of its rate-setting function, to take into account the history of THESL's dividend payments.

The Court distinguished ATCO, holding that it was not a "rate-setting case":

This case is distinguishable from ATCO. The statutory grant of power in ATCO to "impose any additional conditions that the Board considers necessary in the public interest" is different than the statutory grant of power in this case. Bastarache J. referred to this provision as vague, elastic, and openended. In the present case, the OEB's imposition of a condition it considers proper (s. 23(1)) has to be guided by the legislated objectives set out in s. 1(1). These objectives are not vague, elastic, and openended. To the extent that there is uncertainty with respect to the achievement of the s. 1(1) objectives, that is a matter undeniably within the expertise of the OEB. Further, unlike the ATCO provision, the objectives in the Act require that the OEB protect the interests of both the customer and the utility. [para. 33]

The Court determined that the OEB did not exceed its statutory grant of power. Its further inquiry concerned whether the OEB could order that the declaration of a dividend requires the approval of a majority of THESL's independent directors. Unlike the majority in the Divisional Court which applied a "correctness" standard of review, the Court of Appeal instead applied a "reasonableness" standard. The Court noted that having corporate law principles at play did not alone suggest a correctness standard of review, and that corporate law principles will often be engaged when making decisions regarding regulated corporations. However, it is the OEB's duty to apply corporate law principles within the context of its objectives.

THESL is described as a regulated monopoly. As a result, the Court found that it could convey the cost of any business decisions to customers – either in increased prices or in diminished services. As Justice Lederman stated in his dissent (which the Court of Appeal quoted with approval), ". . . it is not unusual to have constraints imposed on utilities that may place some restrictions on the board of directors. That is so because the directors of utility companies have an obligation not only to the company, but to the public at large" [at para. 49] [emphasis added].

Different principles govern regulated utilities which operate as monopolies than those that govern private companies. In private, unregulated companies, directors and officers must act in the best interests of the company or of its shareholders. Conversely, a regulated utility must strike a fine balance: it must accommodate the interests of shareholders and those of ratepayers. In this case, the OEB had serious concerns about the THESL's aging plant and lack of capital in the context of increased dividend payments in 2004 and 2005. Whether THESL continued to overlook its aging infrastructure or took on loans to manage it, ultimately, its customers would pay.

The OEB had concerns that dividends not be paid out when there was insufficient capital for plant maintenance. The OEB had concluded, and the Court agreed, that the best compromise given its concerns was to require approval by a majority of independent directors before dividends were paid. The remedy proposed by the OEB reposed a discretion with THESL's directors to declare a dividend, with an additional safeguard built in by THESL's independent directors, thus balancing the interests of shareholders and customers alike. The Court of Appeal agreed.


The Ontario Court of Appeal restored the OEB's decision, requiring THESL to obtain the approval of a majority of its independent directors before declaring any dividends. In doing so, the Court took a precautionary, and broad, approach to the OEB's power to regulate. One of the OEB's objectives, as set out in the OBEA, is to protect the interests of consumers with respect to prices and the adequacy, reliability and quality of electricity service. The Court did not necessarily find that there had been any failure to protect the interests of consumers; however, the Court did find that there might, in the future, be such a failure, and rendered its decision accordingly. In effect, the Court permitted the OEB to intervene to prevent a possible future harm to ratepayers: that they might endure increased costs and diminished services if THESL continued to make high payouts of dividends.

The applicable legislation in ATCO had included a provision that allowed the AEUB to, "impose any additional conditions that the Board considers necessary in the public interest." The SCC took the position that this language did not allow the AEUB to exercise a precautionary or broad power. Instead, the SCC found it to be, "vague, elastic, and open-ended." The Court of Appeal distinguished ATCO. Questions, however, remain. Principally, perhaps, is the legislative regime in Alberta so different than in Ontario to warrant such a different result? Some would argue it is not. Assuming there is not such a marked difference, does Ontario's approach simply reflect a judicial preference for stronger regulation of monopolies? Where there is a balance to strike, will the courts tip that balance toward ratepayers over shareholders? Are the courts, as well as the public, seeking greater oversight for all institutions, including utilities? Perhaps only time will tell. In the meantime, to the ratepayer, apparently, go the spoils.

As published in Canadian Corporate Counsel, July 2010.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.