Ontario’s Independent Electricity System Operator (IESO) is required under subsection 25(1) of the Ontario Electricity Act[2] to periodically apply to the Ontario Energy Board (OEB) for approval of its revenue requirements, expenditures and usage fees. Until recently this application was made on a single-year basis, following the Ontario Ministry of Energy’s annual approval of the IESO’s business plan. In its most recent revenue requirement application to the OEB, however, the IESO for the first time sought approval from the OEB on a multi-year (2023–2025) basis (the “Original Fees Application”).[3]
The Original Fees Application was filed on March 29, 2023. A settlement conference was held between the IESO, OEB staff and various registered interveners on June 26-29, 2023, during which a tentative settlement proposal encompassing all disputed issues was reached — including acceptance of the IESO’s proposed 2023, 2024 and 2025 revenue requirements of $208.4 million, $218.4 million and $229.7 million, respectively (“Settlement Proposal”). The IESO subsequently filed the Settlement Proposal with the OEB on July 21, 2023, which the OEB approved in its entirety by Decision and Order dated August 29, 2023.
The OEB-approved Settlement Proposal (“Settlement Agreement”) provided that if unforeseen expenses or changes in revenues caused the IESO’s Forecast Variance Deferral Account (FVDA) balance to fall below zero for the first year of the three-year cycle, i.e. fiscal 2023, then the IESO could reapply to the OEB to have its fees adjusted for the last year of the three-year cycle, i.e. 2025 (the “Adjustment Mechanism”).[4] In short, the Adjustment Mechanism provided the IESO could return to the OEB to seek adjustment of its 2025 fees if there were unforeseen expenditures for the 2023 fiscal year.
Notwithstanding the Adjustment Mechanism, the IESO filed another application with the OEB less than 6 months later on January 12, 2024 requesting approval for incremental increases of $4.5 million and $5.4 million to its revenue requirements for 2024 and 2025 respectively[5] (“Incremental Fees Application”). The IESO claimed its incremental funding request was directly attributable to specific initiatives outlined in a July 10, 2024 letter from the Minister of Energy to the IESO furthering the Ministry of Energy’s “Powering Ontario’s Growth: Ontario’s Plan for a Clean Energy Future” (the “POG Plan”) released the same day. Following receipt of the July 10, 2023 letter, the IESO submitted an amended 2023–2025 business plan to the Ontario Minister of Energy, which was approved by the Minister on or about November 28, 2023 (“Amended Business Plan”). Unsurprisingly, various interveners challenged the IESO’s Incremental Fees Application on the basis that it was contrary to the Adjustment Mechanism which required fiscal 2023 increases to be dealt with for year three of the three-year cycle. Interveners and OEB staff argued the Incremental Fees Application was inconsistent with the parties’ intentions for including the Adjustment Mechanism in the Settlement Agreement, namely to limit the circumstances under which the IESO could seek approval to adjust its fees.[6]
Moreover, the IESO received the Ministerial letter on July 10, 2023, approximately two weeks after the June 26–29 settlement conference and more than ten days before it filed the Settlement Proposal with the OEB for approval on July 21, 2023. This was more than six weeks before the OEB issued its August 29, 2023 decision mandating the Settlement Agreement. OEB staff and interveners accordingly submitted in the Incremental Fees Application “that the IESO was aware of the situation that there would be work associated with the POG Plan before filing the Settlement Proposal, and it is likely the IESO could have anticipated the potential financial impact of the POG work at least prior to the OEB’s decision.”[7] Interveners argued the IESO should have brought the potential financial implications of the POG Plan to their attention before filing the Settlement Proposal on July 21, if not during the June 26–29 settlement conference.
In response, the IESO submitted it was not relying on the Adjustment Mechanism in support of its Incremental Fees Application. Rather, the IESO argued (as described by the OEB Panel):
the Adjustment Mechanism was designed as a guardrail that identified specific triggers that would require the IESO to consider and assess an adjustment to its fees, and the inclusion of the Adjustment Mechanism in the Settlement Proposal in no way precluded the IESO from applying to adjust its usage fees in response to unplanned material operating or capital budget [sic.] arising from changes in government policy.[8]
The IESO also took the position that “the terms of the Settlement Proposal do not and, as matter of law, could not restrict the IESO’s statutory right [under subsection 25(1) of the Electricity Act] to request approval of increased usage fees for 2024 and 2025 following the Minister’s approval of the… Amended Business Plan”[9].
Relying on subsection 25(4) of the Electricity Act[10], the OEB held it did in fact have the authority to approve the Incremental Fees Application notwithstanding the Adjustment Mechanism. Primarily because “[t]he OEB has an ongoing responsibility to ensure that the IESO’s expenditures, revenue requirements and fees are reasonable and consistent with the purposes of the Electricity Act and the OEB’s objectives under the Ontario Energy Board Act, 1998.”[11]
Nevertheless, the OEB did describe the IESO’s approach to bringing the Incremental Fees Application as “highly questionable”:
The OEB’s concern is that a timely disclosure of the Minister’s Letter to the OEB and the parties to the Settlement Proposal might have obviated the necessity of this section 25(1) application and the resultant ill will that it appears to have generated reflected in the submissions received. Such a disclosure would likely have provoked efforts to provide for the letter’s recognition by way of a delay in the OEB’s approval of any Settlement Proposal until the new information with its potential for unanticipated costs was available and addressed by the settlement conference. The OEB further notes that a Settlement Proposal emanating from such a conference could well have provided for an “off-ramp” enabling consideration of the financial impact of the Minister’s Letter when the appropriate cost assessments were complete and ministerial approval of the Business Plan was received. Such a course of action would have been consistent with a principal goal of a settlement conference to arrive at a resolution that was in keeping with the public interest and the agreement of all the participating parties.
…there was no prohibition on the IESO notifying parties to the Settlement Proposal that the Minister’s Letter was likely to require additional expenditures, and it is clear that this was known prior to the OEB issuing its decision on the EB-2022-0318 proceeding.
…
A successful result of settlement conferences that are convened by the OEB depends on full disclosure of all relevant information, a frank discussion of issues (a discussion that cannot be referenced in the proceeding outside of the conference) and a shared understanding of the results by the parties. In this case, the process chosen by the IESO to carry out the initiatives set out in the Minister’s Letter may have significant serious consequences for future settlement conferences if parties have lost trust in the transparency and timeliness of information being provided.[12]
The issues canvassed in the Incremental Fees Application dealt primarily with statutory and contractual interpretation of the Adjustment Mechanism. But, a fundamental question that was not raised was whether the IESO acted contrary to its duty to perform its contractual obligations under the Settlement Agreement in good faith.
The preamble to the Settlement Agreement explicitly stated that “this document is intended to be a legal agreement, creating mutual obligations, and binding and enforceable in accordance with its terms.”[13] And we know from the Supreme Court of Canada’s decision in Bhasin v Hrynew,[14] that parties to an existing agreement are required to “perform their contractual duties honestly and reasonably”[15]. The duty of honest performance “requires that contractual parties be honest with each other in relation to the performance of their contractual obligations”[16] — “it is a simple requirement not to lie or mislead the other party about one’s contractual performance.”[17] Each party must have an appropriate regard to the legitimate contractual interests of the other party, and the party cannot “seek to undermine those interests in bad faith.”[18]
In the case of the Settlement Agreement, it is reasonable to conclude the intervenors had a legitimate interest in limiting the ability of the IESO to return to the OEB for a fees adjustment solely to the circumstances set out in the Adjustment Mechanism.[19] Did the IESO fail to have appropriate regard to that interest in bringing the Incremental Fees Application. Did such conduct amount to “active dishonesty”[20]?
The IESO might respond that the Bhasin principles of contractual interpretation do not or should not apply to the Incremental Fees Application because it is a publicly-regulated entity[21] and therefore distinct from a private commercial contracting party. But the duty of honest performance applies to all contracts, operates irrespective of the intention of the parties and cannot be contracted out of.[22] Indeed, a further argument could be made that an elevated duty or obligation of good faith performance existed as between the IESO as a public sector entity that has discretionary authority over the ratepayers represented by the interveners. This power imbalance or information asymmetry was perpetuated by the fact that it is more likely than not that the IESO had some awareness of the POG Plan before receiving the Minister’s letter on July 10.
The IESO may rebut the immediate publication of the Minister’s letter as a news item on the IESO’s public website provided sufficient disclosure to intervenors and that therefore no information asymmetry or imbalance existed. However, the OEB correctly noted that “one of the practical purposes of regulatory proceedings is to consolidate available information touching upon the merits of an application. The assumption that relevant information may also be obtained by ongoing scrutiny of items on applicant websites is a proposition of doubtful validity.”[23] This is consistent with the Bhasin decision which recognizes the duty of good faith may extend to pre-contractual negotiations.
It is unfortunate that the duty of honest performance was not more carefully considered in the Incremental Fees Application. Perhaps it will be if and when future similar circumstances arise — a very real possibility given the accelerated pace at which provincial government policy is evolving to meet increasing demand forecasts and the broader energy transition.
Ontario’s Independent Electricity System Operator (IESO) is required under subsection 25(1) of the Ontario Electricity Act[2] to periodically apply to the Ontario Energy Board (OEB) for approval of its revenue requirements, expenditures and usage fees. Until recently this application was made on a single-year basis, following the Ontario Ministry of Energy’s annual approval of the IESO’s business plan. In its most recent revenue requirement application to the OEB, however, the IESO for the first time sought approval from the OEB on a multi-year (2023–2025) basis (the “Original Fees Application”).[3]
The Original Fees Application was filed on March 29, 2023. A settlement conference was held between the IESO, OEB staff and various registered interveners on June 26-29, 2023, during which a tentative settlement proposal encompassing all disputed issues was reached — including acceptance of the IESO’s proposed 2023, 2024 and 2025 revenue requirements of $208.4 million, $218.4 million and $229.7 million, respectively (“Settlement Proposal”). The IESO subsequently filed the Settlement Proposal with the OEB on July 21, 2023, which the OEB approved in its entirety by Decision and Order dated August 29, 2023.
The OEB-approved Settlement Proposal (“Settlement Agreement”) provided that if unforeseen expenses or changes in revenues caused the IESO’s Forecast Variance Deferral Account (FVDA) balance to fall below zero for the first year of the three-year cycle, i.e. fiscal 2023, then the IESO could reapply to the OEB to have its fees adjusted for the last year of the three-year cycle, i.e. 2025 (the “Adjustment Mechanism”).[4] In short, the Adjustment Mechanism provided the IESO could return to the OEB to seek adjustment of its 2025 fees if there were unforeseen expenditures for the 2023 fiscal year.
Notwithstanding the Adjustment Mechanism, the IESO filed another application with the OEB less than 6 months later on January 12, 2024 requesting approval for incremental increases of $4.5 million and $5.4 million to its revenue requirements for 2024 and 2025 respectively[5] (“Incremental Fees Application”). The IESO claimed its incremental funding request was directly attributable to specific initiatives outlined in a July 10, 2024 letter from the Minister of Energy to the IESO furthering the Ministry of Energy’s “Powering Ontario’s Growth: Ontario’s Plan for a Clean Energy Future” (the “POG Plan”) released the same day. Following receipt of the July 10, 2023 letter, the IESO submitted an amended 2023–2025 business plan to the Ontario Minister of Energy, which was approved by the Minister on or about November 28, 2023 (“Amended Business Plan”). Unsurprisingly, various interveners challenged the IESO’s Incremental Fees Application on the basis that it was contrary to the Adjustment Mechanism which required fiscal 2023 increases to be dealt with for year three of the three-year cycle. Interveners and OEB staff argued the Incremental Fees Application was inconsistent with the parties’ intentions for including the Adjustment Mechanism in the Settlement Agreement, namely to limit the circumstances under which the IESO could seek approval to adjust its fees.[6]
Moreover, the IESO received the Ministerial letter on July 10, 2023, approximately two weeks after the June 26–29 settlement conference and more than ten days before it filed the Settlement Proposal with the OEB for approval on July 21, 2023. This was more than six weeks before the OEB issued its August 29, 2023 decision mandating the Settlement Agreement. OEB staff and interveners accordingly submitted in the Incremental Fees Application “that the IESO was aware of the situation that there would be work associated with the POG Plan before filing the Settlement Proposal, and it is likely the IESO could have anticipated the potential financial impact of the POG work at least prior to the OEB’s decision.”[7] Interveners argued the IESO should have brought the potential financial implications of the POG Plan to their attention before filing the Settlement Proposal on July 21, if not during the June 26–29 settlement conference.
In response, the IESO submitted it was not relying on the Adjustment Mechanism in support of its Incremental Fees Application. Rather, the IESO argued (as described by the OEB Panel):
the Adjustment Mechanism was designed as a guardrail that identified specific triggers that would require the IESO to consider and assess an adjustment to its fees, and the inclusion of the Adjustment Mechanism in the Settlement Proposal in no way precluded the IESO from applying to adjust its usage fees in response to unplanned material operating or capital budget [sic.] arising from changes in government policy.[8]
The IESO also took the position that “the terms of the Settlement Proposal do not and, as matter of law, could not restrict the IESO’s statutory right [under subsection 25(1) of the Electricity Act] to request approval of increased usage fees for 2024 and 2025 following the Minister’s approval of the… Amended Business Plan”[9].
Relying on subsection 25(4) of the Electricity Act[10], the OEB held it did in fact have the authority to approve the Incremental Fees Application notwithstanding the Adjustment Mechanism. Primarily because “[t]he OEB has an ongoing responsibility to ensure that the IESO’s expenditures, revenue requirements and fees are reasonable and consistent with the purposes of the Electricity Act and the OEB’s objectives under the Ontario Energy Board Act, 1998.”[11]
Nevertheless, the OEB did describe the IESO’s approach to bringing the Incremental Fees Application as “highly questionable”:
The OEB’s concern is that a timely disclosure of the Minister’s Letter to the OEB and the parties to the Settlement Proposal might have obviated the necessity of this section 25(1) application and the resultant ill will that it appears to have generated reflected in the submissions received. Such a disclosure would likely have provoked efforts to provide for the letter’s recognition by way of a delay in the OEB’s approval of any Settlement Proposal until the new information with its potential for unanticipated costs was available and addressed by the settlement conference. The OEB further notes that a Settlement Proposal emanating from such a conference could well have provided for an “off-ramp” enabling consideration of the financial impact of the Minister’s Letter when the appropriate cost assessments were complete and ministerial approval of the Business Plan was received. Such a course of action would have been consistent with a principal goal of a settlement conference to arrive at a resolution that was in keeping with the public interest and the agreement of all the participating parties.
…there was no prohibition on the IESO notifying parties to the Settlement Proposal that the Minister’s Letter was likely to require additional expenditures, and it is clear that this was known prior to the OEB issuing its decision on the EB-2022-0318 proceeding.
…
A successful result of settlement conferences that are convened by the OEB depends on full disclosure of all relevant information, a frank discussion of issues (a discussion that cannot be referenced in the proceeding outside of the conference) and a shared understanding of the results by the parties. In this case, the process chosen by the IESO to carry out the initiatives set out in the Minister’s Letter may have significant serious consequences for future settlement conferences if parties have lost trust in the transparency and timeliness of information being provided.[12]
The issues canvassed in the Incremental Fees Application dealt primarily with statutory and contractual interpretation of the Adjustment Mechanism. But, a fundamental question that was not raised was whether the IESO acted contrary to its duty to perform its contractual obligations under the Settlement Agreement in good faith.
The preamble to the Settlement Agreement explicitly stated that “this document is intended to be a legal agreement, creating mutual obligations, and binding and enforceable in accordance with its terms.”[13] And we know from the Supreme Court of Canada’s decision in Bhasin v Hrynew,[14] that parties to an existing agreement are required to “perform their contractual duties honestly and reasonably”[15]. The duty of honest performance “requires that contractual parties be honest with each other in relation to the performance of their contractual obligations”[16] — “it is a simple requirement not to lie or mislead the other party about one’s contractual performance.”[17] Each party must have an appropriate regard to the legitimate contractual interests of the other party, and the party cannot “seek to undermine those interests in bad faith.”[18]
In the case of the Settlement Agreement, it is reasonable to conclude the intervenors had a legitimate interest in limiting the ability of the IESO to return to the OEB for a fees adjustment solely to the circumstances set out in the Adjustment Mechanism.[19] Did the IESO fail to have appropriate regard to that interest in bringing the Incremental Fees Application. Did such conduct amount to “active dishonesty”[20]?
The IESO might respond that the Bhasin principles of contractual interpretation do not or should not apply to the Incremental Fees Application because it is a publicly-regulated entity[21] and therefore distinct from a private commercial contracting party. But the duty of honest performance applies to all contracts, operates irrespective of the intention of the parties and cannot be contracted out of.[22] Indeed, a further argument could be made that an elevated duty or obligation of good faith performance existed as between the IESO as a public sector entity that has discretionary authority over the ratepayers represented by the interveners. This power imbalance or information asymmetry was perpetuated by the fact that it is more likely than not that the IESO had some awareness of the POG Plan before receiving the Minister’s letter on July 10.
The IESO may rebut the immediate publication of the Minister’s letter as a news item on the IESO’s public website provided sufficient disclosure to intervenors and that therefore no information asymmetry or imbalance existed. However, the OEB correctly noted that “one of the practical purposes of regulatory proceedings is to consolidate available information touching upon the merits of an application. The assumption that relevant information may also be obtained by ongoing scrutiny of items on applicant websites is a proposition of doubtful validity.”[23] This is consistent with the Bhasin decision which recognizes the duty of good faith may extend to pre-contractual negotiations.
It is unfortunate that the duty of honest performance was not more carefully considered in the Incremental Fees Application. Perhaps it will be if and when future similar circumstances arise — a very real possibility given the accelerated pace at which provincial government policy is evolving to meet increasing demand forecasts and the broader energy transition.
* Counsel at Blakes, Cassels & Graydon LLP (“BCG”). The views expressed in this article are those of the author alone, and do not necessarily reflect that of BCG nor any other person or entity. Reena is a leading energy lawyer with nearly 20 years of experience, specializing in energy law since 2011.