In two appeal decisions released this past week, the Ontario
Divisional Court rejected the application of the "prudent
investment test" to forecast costs under collective bargaining
agreements negotiated between a utility and its unionized
The prudent investment test is a regulatory principle that was
first articulated by Justice Brandeis of the United States Supreme
Court in the 1923 decision of Southwestern Bell Telephone Co. v.
Public Service Commission. The purpose of the
prudent investment test is to protect utility shareholders in
respect of past investments in large capital projects that later
prove to be unnecessary. Because of the long lead times for
constructing infrastructure projects, courts and regulators have
ruled that it would be unfair to utility shareholders to assess the
prudence of the investment with the benefit of hindsight. Instead,
managerial prudence is initially assumed and any subsequent
challenges are assessed on the information available to a
utility's management at the time the investment was made.
In their respective rate cases before the Ontario Energy Board,
Ontario Power Generation (OPG) and Hydro One Networks Inc. (HONI)
argued that the Board was required to presume the prudence of their
claimed compensation costs. They argued that the costs were set by
previously negotiated collective bargaining agreements and the
Board was limited to assessing the options available to the utility
at the time it entered into the agreements. As successors to
Ontario Hydro, the utilities had historic collective bargaining
agreements that in some cases had a no strike/lockout provision
that required disputes to be settled by arbitration. Effectively,
the utilities were arguing that the Board was required to defer to
the settlement negotiated between the utility and its unions or,
where no settlement could be reached, to the decision of the labour
The Board disagreed. Rather than being limited to assessment of
the utilities options in the collective bargaining process, the
Board held that it could rely on benchmarking studies that compared
the performance of the utilities with their industry peers. These
studies showed high staffing levels, excessive compensation and, in
the case of OPG, that the performance of its nuclear business unit
was poor. Accordingly, the Board disallowed $145 million in
compensation costs for OPG and $31 million for HONI. In disallowing
these costs in OPG's case, the Board recognized the constraints
imposed by the utilities unionized workforces (and moderated its
disallowance in this respect), but nevertheless determined that
ratepayers should only be required to bear reasonable costs.
Each of the Board's decisions was appealed to the Divisional
Court. The Court heard the two cases together and issued companion
decisions dismissing both appeals. In endorsing the Board's
decisions, the Divisional Court ruled that the Board, as a
"market proxy", needs the ability to consider how each
utility was performing in comparison to its peers and cannot be
limited to the type of retrospective review advocated by the
appellants. This is particularly important in circumstances where
the agreements were negotiated between a regulated monopoly that
passes its costs onto to customers and a "near second
monopoly" on labour in form of the unions. If the Board was
bound to the outcome of the collective bargaining process, it would
not be able to perform its statutory function of promoting market
efficiency and protecting consumers. Further, the Court noted that,
unlike other cases where the prudent investment test applies, the
total compensation costs are not set solely by the collective
bargaining agreements and the utilities have the ability "to
manage, on a go-forward basis, to reduce total compensation costs
within the framework of those agreements."
The decisions discussed in this article are Ontario Power
Generation v. Ontario Energy Board, 2012 ONSC 728 and Power Workers
Union v. Ontario Energy Board, 2012 ONSC 1080. Glenn Zacher and
Patrick Duffy acted as counsel for the Ontario Energy Board on the
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 Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
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.
The Government of Alberta recently announced a number of policy changes that will impact the Alberta Electricity Market, composed of its generators, transmitters, distributors, retailers, electricity consumers and wholesale electricity market.
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).