In legislative committee hearings that were part of the fallout from Ontario’s 2010 gas plant scandal, one of the more charged — some might say naïve — observations was offered by an expert witness who, when asked for his opinion on remedying Ontario’s continuing electricity woes, recommended that politicians “swear a blood oath to not meddle in electricity policy.” This observation was made in the wake of Ontario’s Liberal government having cancelled construction of a controversial gas plant on the eve of a provincial election — a decision which ultimately cost hundreds of millions of dollars. However, it might just as easily have been made in response to other notable government electricity policy initiatives over the previous decades which likewise caused economic uncertainty and imposed substantial costs on electricity ratepayers. These government initiatives — which have included the opening and then shuttering of the deregulated electricity market, electricity price freezes, suspensions of regulatory hearings¹ and, of course, the Green Energy and Green Economy Act, 2009 (the “Green Energy Act”)² — have entailed intervening in the market, overriding the authority of independent agencies and regulators and, ultimately, using electricity policy to further broader socioeconomic objectives. Ratepayer groups, regulators, academics and others have at times all railed against government intervention, but for the most part to little avail.

National Steel Car Limited v Independent Electricity System Operator (“National Steel Car”)³ represents a bolder approach — employing litigation to challenge the authority of the provincial government to use electricity policy to pursue ulterior objectives. In this case, challenging the Ontario government’s use of the Green Energy Act’s Feed-in Tariff (“FIT”) program to promote jobs and subsidize indigenous and local communities, all at the expense of Ontario ratepayers through the “Global Adjustment.”

The Ontario Attorney General, supported by the Independent Electricity System Operator (“IESO”), was initially successful on a pleadings motion in having National Steel Car’s (“NSC”) applications struck as disclosing no cause of action.⁴ However, late last year the Ontario Court of Appeal allowed NSC’s appeal finding that NSC’s claim that the Global Adjustment was a “colourable attempt to disguise a tax as a regulatory charge with the purpose of funding the costs of [ulterior policy initiatives was]…sufficiently plausible on the evidentiary record it put forward [such] that the applications should not have been dismissed on a pleadings motion before the development of a full record.”⁵ The case and the Court of Appeal’s decision is briefly summarized below.

GLOBAL ADJUSTMENT AND THE FEED-IN TARIFF (FIT) PROGRAM

The litigation centred on the FIT program which was enabled by the now repealed Green Energy Act,⁶ and spurred by the then-Liberal government’s commitment to reducing Ontario’s environmental footprint through the promotion of renewable energy, protecting the health of Ontarians by eliminating harmful emissions, creating green energy jobs and attracting necessary investment capital. The Act authorized the Minister to direct the former Ontario Power Authority (“OPA”), since amalgamated with the IESO, to develop a FIT program to foster these goals, as well as goals with respect to aboriginal peoples and local communities involved in renewable energy.⁷ The Act specifically authorized the Minister of Energy to direct the OPA to enter into FIT procurement contracts and to recover the costs through the Global Adjustment charge authorized by section 25.33 of the Electricity Act.⁸ The Global Adjustment is an out-of-market charge under which the IESO tops-up FIT contracted renewable generators (and all other contracted electricity suppliers) to the extent they do not recover their full contract payments through the IESO-administered wholesale market.⁹ The Global Adjustment is inversely related to the wholesale market price and over time, as Ontario has procured more generation (and other electricity resources), the Global Adjustment has come to dwarf all other electricity costs. Today, it constitutes the substantial majority of the charges on an average retail customer’s bill. In the case of NSC, it claimed that between 2008 and 2019, the Global Adjustment charge on its electricity bills had increased by over 1300 per cent as compared to the electricity commodity charge which had increased by just over 20 per cent.¹⁰ NSC accordingly alleged that the portion of the Global Adjustment that funded the FIT program was a colourable attempt to disguise what is in essence a tax as a regulatory charge to achieve non-regulatory objectives, including to redress the economic harm perceived by the government suffered by the preferred aboriginal and communities (the “Policy Goals”):

Overall, the appellant submits that these facts demonstrate that the FIT program component of the Global Adjustment was not truly related to the purposes of the Electricity Act or the regulation of electricity, and had nothing to do with the true costs of generating electricity. Rather, the FIT program component was intended to support the Policy Goals by conferring a financial benefit on the Preferred Communities.¹¹

PROCEDURAL HISTORY

NSC filed two applications before the Ontario Superior Court to “seek a declaration that part of the amount that it has paid for electricity is an unconstitutional tax rather than a valid regulatory charge…and that section 25.33 of the Electricity Act…which authorizes the Global Adjustment is ultra vires as of the enacted of the Green Energy Act and it’s policy-driven goals.”¹² Rather than filing responding material, the Ontario Attorney General, supported by the IESO, moved under rule 21.01(b) of the Rules of Civil Procedure¹³ to strike out the applications on the ground that they disclosed no reasonable cause of action.

The motion judge found in favour of the Attorney General and struck the applications on the basis that it was “plain, obvious and beyond doubt” that they could not succeed.¹⁴ She added that even if the Global Adjustment or the challenged FIT component of it was a tax, it nevertheless complied with section 53 of the Constitution Act, 1867.¹⁵

ANALYSIS

The Court of Appeal allowed the appeal and held that based on the evidentiary record, NSC’s claim that the Global Adjustment’s inclusion of FIT contract payments is a “colourable attempt to disguise a tax as a regulatory charge with the purpose of funding the costs of the Policy Goals” is “sufficiently plausible” and that the respondents’ position is “not plain, obvious and beyond doubt.”¹⁶ Furthermore, the Court held that the motion judge’s treatment of whether the Global Adjustment would violate section 53 of the Constitution Act, 1867 — which regulates how to properly exercise the taxation power in the event that it is found to be a tax — “deserves more robust development.”¹⁷ The Court of Appeal expressed the view that the motion judge’s decision on the merits of the application was premature because the record required additional argument and evidence to determine whether the levy was a proper regulatory charge or a tax.

DISTINGUISHING A REGULATORY CHARGE FROM A TAX

To determine whether the IESO’s power to collect the Global Adjustment is a valid government levy as opposed to a tax, the Court of Appeal stated that it is necessary to consider whether its pith and substance (i.e. its dominant purpose) is a tax to raise revenue for a general purpose, or to finance or constitute a regulatory scheme. For a regulatory charge to constitute a valid government levy, it must be sufficiently connected to or adhesive to the scheme in question or be a charge for services directly rendered.¹⁸ The Supreme Court of Canada stated in Westbank First Nation v British Columbia Hydro and Power Authority (“Westbank”)¹⁹ and 620 Connaught Ltd v Canada (Attorney General) (“620 Connaught”)²⁰ that the underlying inquiry is whether the charge in question is closely connected to a regulatory scheme and articulated the applicable analytical framework.

In this regard, the first step of the analysis is to “identify the existence of a relevant regulatory scheme.”²¹ This step involves considering the following indicia:

1. a complete, complex and detailed code of regulation;
2. a regulatory purpose which seeks to affect some behaviour;
3. the presence of actual or properly estimated costs of the regulation; and
4. a relationship between the person being regulated and the regulation, where the person being regulated either benefits from, or causes the need for, the regulation.²²

After the court has identified the existence of a regulatory scheme, the second step is “to find a relationship between the charge and the scheme itself…This [relationship] will exist when the revenues are tied to the costs of the regulatory scheme or [where] the charges themselves have a regulatory purpose, such as the regulation of certain behaviour.”²³ At this stage of the analysis, proponents of the charge should demonstrate reasonably close correspondence between the administrative costs of the regulatory scheme and the revenues generated by the charge in question. A charge that systemically or significantly generates a surplus of revenues above what is needed would militate in favour of the position that the levy in question is in pith and substance a tax.²⁴

COURT OF APPEAL’S DECISION

The Court of Appeal held that the motion judge was correct in finding that “the electricity regulatory scheme is a complete, complex and detailed code of regulation,”²⁵ but found that in conducting the second step of the analysis that the motion judge did not address the relevant questions.²⁶ In particular, the Court of Appeal held that the motion judge “sidestepped the appellant’s colourability challenge and the evidence” by failing to undergo a careful assessment of the legislation and the underlying intent thereof.²⁷ The colourability doctrine “is invoked when a statute bears the formal trappings of a matter within [a public body’s] jurisdiction, but in reality is addressed to a matter outside [its] jurisdiction.”²⁸ This doctrine is built on the notion that the essential character of legislation governs the validity of legislation as opposed to its surface-level form and that “a legislative body cannot do indirectly what it cannot do directly.”²⁹ To this end, NSC had argued that the pricing formula is a tax because it was included in the regulatory scheme to achieve the collateral purpose to generate a significant revenue surplus for the benefit of the aboriginal and local communities.³⁰ The Court of Appeal observed that the fact that the Global Adjustment is expressly authorized under the Electricity Act and regulations “does not immunize the program from challenge.”³¹ Rather, the Court stated that it is within the reviewing court’s role to determine whether the evidence of the mechanics and accounting of the scheme in question are consistent with the position that the Global Adjustment is not a colourable attempt to tax (and provide an economic stimulus to the Preferred Communities) under the disguise of regulating the generation, transmission, delivery and use of electricity in Ontario.³²

The Court directed that the relevant inquiry must entail analyzing whether the “dominant purpose” of the FIT program is to generate useful electricity, or rather, to produce a substantial revenue surplus for redistribution to the preferred aboriginal and local communities.³³ To this end the Court highlighted that “much of the electricity generated under the FIT program is both very expensive and useless.³⁴ However, the motion judge failed to address the critical questions of whether the cause of the excess electricity was predicted and planned or unexpected and incidental; and whether IESO purposefully incurred excessively inflated liabilities through the FIT Program and similar programs to create an indirect economic benefit to the preferred communities to achieve the Policy Goals.³⁵

Notably, the Court of Appeal also rejected the motion judge’s finding that the Global Adjustment was not a tax because the pricing formula was constructed as a “closed system.” The Court observed that the motion judge’s findings did “not address the Appellant’s colourability argument that the electricity pricing formula was manipulated to provide a windfall surplus to the preferred communities at the expense of all Ontario electricity consumers.”³⁶ Even if the Global Adjustment operates within a “closed system” in the sense that the funds collected from the Global Adjustment are paid directly to generators as opposed to entering the Province’s coffers, the Court of Appeal held that the existence of a closed system does not mitigate the possibility that preferred communities can become the beneficiaries of “off-book wealth transfer[s]” made under the guise of a regulatory charge.³⁷ The motion judge’s reasoning failed to resolve the concern that a cost recovery mechanism under a closed system can nevertheless serve the primary — and illegitimate — purpose of conferring an economic stimulus to the preferred communities.

CONCLUSION

The threshold for success on a motion to strike is high. The moving party — in this case the Attorney General — was required to show it was plain, obvious and beyond doubt that NSC’s applications could not succeed. The Court of Appeal in allowing the appeal did not pronounce on the merits. It simply found that the Attorney General had not met the high burden for striking the applications and that the motion judge had erred by prematurely dismissing the applications without the development of a full evidentiary record. In this regard, the Court’s ruling may be narrowly construed as limited to matters of civil procedure. On the other hand, the Court of Appeal’s reasons were not solely limited to pronouncing on matters of procedure. The Court stated that the law on colourability extends beyond the face of legislation and that “sometimes [legislative] intent is more difficult to ferret out and requires more evidence than the words of the legislation itself, including evidence put forward by the [parties] accompanied by cross-examination.”³⁸ In this case, the Court observed that the fact that the legislation expressly authorized the FIT Program did not immunize it from challenge. At a minimum, the Court of Appeal’s determination raises the prospect of further proceedings in which the Attorney General may have to defend the legislation and FIT Program on the merits including, as the Court of Appeal suggested, by adducing evidence of “the legislation and underlying intent” so that the application judge may discern whether “the effects of the law diverge substantially from the stated aim, or whether the stated aim was permissible as part of a regulatory scheme.”³⁹

* Glenn Zacher is a partner in the Energy and Litigation & Dispute Resolution Groups in the Toronto Office of Stikeman Elliott LLP and is co-head of the firm’s energy practice.

** Daniel Gralnick is an associate in the Energy and Litigation & Dispute Resolution Groups in the Toronto Office of Stikeman Elliott LLP.

1. Notably, the Liberal government suspended and ultimately brought to a halt the former Ontario Power Authority’s (“OPA”) Integrated Power System Plan application before the Ontario Energy Board.
2. Green Energy Act, 2009, SO 2009, c 12, Sched A.
3. National Steel Car Limited v Independent Electricity System Operator, 2019 ONCA 929 (the “National Steel Car”).
4. National Steel Car Limited v Independent Electricity System Operator, 2018 ONSC 3845 (the “Superior Court Decision”).
5. National Steel Car, supra note 3, paras 9-10.
6. See Energy Statute Law Amendment Act, 2016, SO 2016, c 10.
7.  Under the FIT program rules, applicants who included participation by “preferred communities” (i.e., indigenous and local communities were entitled to a price “adder.”
8. Electricity Act, 1998, SO 1998, c 15, Sched A (“Electricity Act”).
9. The Global Adjustment also compensates Ontario Power Generation to the extent it does not recover its full Ontario energy Board (“OEB”) rate through market revenues.
10. Note that the rate of inflation during the relevant time period was approximately 13 per cent.
11. National Steel Car, supra note 3, para 18.
12. Superior Court Decision, supra note 4 at para 15.
13. Rules of Civil Procedure, RRO 1990, Reg 194.
14. Superior Court Decision, supra note 4 at para 84.
15. Constitution Act, 1867 (UK), 30 & 31 Vict, c 3, s 91, reprinted in RSC 1985, Appendix II, No 5.
16. National Steel Car, supra note 3 at paras 9-10; An application for leave to appeal was filed before the Supreme Court of Canada in January of 2020. At the time of writing, a ruling on the application for leave has not yet been issued.
17. Ibid  at para 75; Note that NSC also alleged that if the Global Adjustment was a tax, it would be invalid as a     result of violating the Taxpayer Protection Act, 1999, SO 1999, c 7, Sched A. This argument was not substantially addressed by either court.
18. Ibid at paras 30-31; Westbank First Nation v British Columbia Hydro and Power Authority, [1999] 3 SCR 134, at para 30 (“Westbank”).
19. Ibid.
20.  620 Connaught Ltd v Canada (Attorney General), 2008 SCC 7 (“620 Connaught”).
21. National Steel Car, supra note 3 at para 33; 620 Connaught, supra note 20 at para 25.
22. Westbank, supra note 18 at para 44; National Steel Car, supra note 3 at para 33.
23. Westbank, supra note 18 at para 44; National Steel Car, supra note 3 at para 35.
24. 620 Connaught, supra note 20 at para 40; National Steel Car, supra note 3 at para 40.
25. National Steel Car, supra note 3 at para 59.
26. Ibid at paras 64, 67, 71.
27. Ibid at para 55; Peter Hogg, Constitutional Law of Canada, loose-leaf (2018-Rel 1), 5^th ed (Toronto: Thomson Reuters Canada Ltd, 2007), vol 1, at para 15.5(g).
28. National Steel Car, supra note 3 at para 43; Ibid.
29. National Steel Car, supra note 3 at para 44; Ibid.
30. Ibid at para 42.
31. Ibid at para 57.
32. Ibid at para 58.
33. Ibid at paras 61-62.
34. Ibid at para 61.
35. Ibid at para 64.
36. Ibid at paras 69, 71.
37. Ibid.
38. Ibid at para 58.
39. Ibid at para 57.