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Municipal - Municipal Franchise Act (MFA). Essex (County) v. Enbridge Gas Inc.
In Essex (County) v. Enbridge Gas Inc. (Ont CA, 2025) the Ontario Court of Appeal dismissed an appeal, here from a successful appeal to the Divisional Court from an OEB order that "granted an application initiated by Enbridge pursuant to s. 10(1) of the Municipal Franchises Act, R.S.O. 1990, c. M.55, and ordered “the renewal of the franchise agreement based on the terms and conditions of the Model Agreement” which it had developed for the distribution, storage, and transmission of gas in Ontario".
Here the court illustrates some procedures and litigation followed in renewing contracts for natural gas transmission over municipal lands [under Municipal Franchises Act s.10]:MATERIAL FACTS
[5] Given the age of its gas pipeline servicing the Windsor corridor, Enbridge developed concerns about its integrity and adequacy. It sought and obtained OEB approval, subject to conditions, to replace and relocate 64 kilometres of the pipeline. Part of that pipeline runs along County Road 46 in the County of Essex, therefore the pending relocation required Essex’s co-operation. But disagreements arose.
[6] First, Essex refused to issue the necessary permits unless Enbridge: (1) removed the existing pipeline instead of abandoning it in place; and (2) agreed to install the new pipeline more deeply than Enbridge had proposed. In a ruling dated November 12, 2020, the Ontario Energy Board resolved the dispute in favour of Enbridge pursuant to s. 101 of the Ontario Energy Board Act, 1998, S.O. 1998, c. 15, Sched. B.
[7] Second, the parties disagreed over whether Essex should contribute to the costs of the construction. Under the terms of the 1957 Agreement, Enbridge would be solely responsible for the costs. But under the terms of the Model Franchise Agreement now used for virtually all other gas pipelines in Ontario, the municipal corporation may have to bear responsibility for 35% of the relocation costs. Enbridge proposed to Essex that they should replace their “outdated” 1957 Agreement with the modernized and more comprehensive Model Franchise Agreement, but Essex disagreed.
[8] In response, Enbridge initiated its application pursuant to s. 10(1) of the Municipal Franchises Act for an order approving “the terms and conditions upon which, and the period for which, the County of Essex is, by by-law, to grant Enbridge Gas the right to construct and operate works for the distribution, transmission and storage of natural gas and the right to extend and add to the works”. Section 10 of the Act provides, in material part:(1) Where the term of a right … to operate works for the distribution of gas has expired or will expire within one year, either the municipality or the party having the right may apply to the Ontario Energy Board for an order for a renewal of or an extension of the term of right.
(2) The Ontario Energy Board has and may exercise jurisdiction and power necessary for the purposes of this section, and if public convenience and necessity appear to require it, may make an order renewing or extending the term of the right for such period of time and upon such terms and conditions as may be prescribed by the Board, or if public convenience and necessity do not appear to require a renewal or extension of the term of the right, may make an order refusing a renewal or extension of the right. [9] According to its terms, the 1957 Agreement had not expired at the time of Enbridge’s application, and it was not set to expire within the coming year. The provision that addresses the term of the agreement, clause 2, provides:The rights and privileges hereby granted shall continue and remain in force for a period of ten years from the date hereof and so long thereafter as the said lines are in actual use for the transportation of gas. [10] Enbridge argued before the OEB that the 1957 Agreement had nonetheless expired by operation of the rule against perpetuities, and that this triggered s. 10 of the Municipal Franchises Act and the power of the OEB to impose the terms of the Model Franchise Agreement. In support of this submission, Enbridge argued that the Divisional Court had already found in Dawn-Euphemia (Township) v. Union Gas Ltd., 2004 CarswellOnt 3909 (Div. Ct.), leave to appeal refused, 2004 CarswellOnt 3861 (C.A.), that an indistinguishably worded franchise agreement conferred a future contingent interest in land that offended the rule against perpetuities. In its March 30, 2023 Decision and Order, the OEB agreed with Enbridge, writing:If the 1957 Agreement is a perpetual agreement as contended by the County of Essex, there would be no need for a renewal as contemplated by section 10(2). However, the OEB finds that the 1957 Agreement has not vested Enbridge Gas with the perpetual rights and obligations conferred by that agreement. The franchise right is a contingent interest, contingent on the former Union Gas Limited’s (now Enbridge Gas’s) continued transportation of gas, and cannot be held and exercised in perpetuity without a violation of the common law rule against perpetuities. The operation of the rule in Ontario has been confirmed in the provisions of the Perpetuities Act and applied by the Ontario Divisional Court in the decision in Dawn-Euphemia. [11] Essex appealed this decision to the Divisional Court, which on February 12, 2024 allowed the appeal. The Divisional Court accepted the conclusion in Dawn-Euphemia that “the agreement conferred a franchise right, which was an interest in land akin to an easement” and was therefore subject to the rule against perpetuities, a conclusion which is not in issue before us. However, after cautioning itself that its appellate jurisdiction is confined to legal and jurisdictional errors, and that “an appeal court should exercise caution in identifying extricable questions of law”, the Divisional Court concluded that “in applying the rule against perpetuities in this case, the OEB made an extricable legal error (reviewable on a correctness standard) relating to the nature of the interest that is subject to the rule against perpetuities.”
[12] The Divisional Court also rejected Enbridge’s submission that the OEB was required to follow the Dawn-Euphemia decision. It noted that the reasoning in Dawn-Euphemia on the vesting issue was “more cursory” than its decision that franchise rights are subject to the rule against perpetuities, and that to the extent that it is inconsistent with the principles affirmed in Ottawa (City) v. ClubLink Corporation ULC, 2021 ONCA 847, 159 O.R. (3d) 255, leave to appeal refused, [2022] S.C.C.A. No. 17, and Clarke v. Kokic, 2018 ONCA 705, 94 R.P.R. (5th) 10, leave to appeal refused, [2018] S.C.C.A. No. 459, Dawn-Euphemia should not be followed.
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C. Did the Divisional Court Err BY Limiting the OEB’s powers to regulate the terms of natural gas franchise agreements?
[35] I would deny this ground of appeal. By the clear terms of s. 10 of the Municipal Franchises Act, the OEB does not have the power to impose a Model Franchise Agreement pursuant to that provision unless the existing agreement has or is about to lapse. Since the 1957 Agreement did not lapse and was not about to do so, the OEB did not have the authority it was claiming. A court that points out the legal limits on a regulatory body’s power is not wrongfully limiting that body’s power to regulate. It is doing no more than enforcing the limits of that power. . Leamington (Municipality of) v. Enbridge Gas Inc.
In Leamington (Municipality of) v. Enbridge Gas Inc. (Div Court, 2023) the Divisional Court considers an appeal under s.33 ['Appeal to Divisional Court'] of the Ontario Energy Board Act (OEB), here of the OEB's decision to approve "the application of the respondent Enbridge Gas Inc. to renew the existing natural gas franchise between Leamington and Enbridge on the terms and conditions set out in the OEB’s Model Franchise Agreement".
In these quotes, the court illustrates procedures of this area of energy law, here involving the Municipal Franchise Act:[2] In the OEB Decision, the OEB approved the application of the respondent Enbridge Gas Inc. to renew the existing natural gas franchise between Leamington and Enbridge on the terms and conditions set out in the OEB’s Model Franchise Agreement.
[3] The Model Franchise Agreement includes a provision relating to the sharing of costs (“gas system relocation costs”) if Leamington requires Enbridge to remove or relocate any part of the gas system to permit Leamington to carry out municipal works, including drainage works. The relocation costs sharing provision would require Leamington to pay part of the costs increase for drainage works that would otherwise be payable entirely by Enbridge under the Drainage Act, R.S.O. 1990, c. D.17.
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A. The parties
[6] Leamington is a municipal corporation under the laws of Ontario. It is one of the lower-tier municipalities whose areas comprise the County of Essex.
[7] Enbridge is an OEB-regulated natural gas storage, transmission, and distribution company that provides natural gas services to homes and businesses in Leamington and elsewhere in Ontario.
[8] The OEB is the independent regulator of electricity and natural gas sectors in Ontario. The Ontario Energy Board Act, 1998, S.O. 1998, c. 15, Sched. B. (“OEB Act”), along with the Municipal Franchises Act, R.S.O. 1990, c. M.55 (“MF Act”), set out the OEB’s regulatory mandate and powers that are relevant for the purposes of this appeal.
[9] The OEB’s approval is required for gas companies to construct any works to supply natural gas in any Ontario municipality pursuant to “certificates of public convenience and necessity” issued by the OEB: MF Act, s. 8. Enbridge is authorized to construct works to supply natural gas to persons within the municipal boundaries of Leamington pursuant to such a certificate granted to Enbridge’s predecessor corporation, Union Gas Limited, on March 17, 1959.
[10] Since that time, Enbridge (or its predecessor corporation) has delivered natural gas distribution services to customers in Leamington under the terms of a franchise agreement between Leamington and Enbridge, as described further below. Prior to the application that is the subject of this appeal, the most recent franchise agreement between Leamington and Enbridge was entered into on January 20, 2003.
B. Regulatory framework
[11] The OEB is an independent quasi-judicial regulatory body with broad statutory powers to regulate the natural gas industry. In doing so, the OEB exercises a public interest mandate, which includes promoting a financially viable and efficient energy sector that provides the public with reliable energy services at a reasonable cost: OEB Act, ss. 1, 2
[12] As part of its mandate, the OEB regulates natural gas distributors (including Enbridge) and their transmission and distribution of gas through and within municipalities (including Leamington). The OEB’s regulatory powers are broad, and include: regulating the terms of franchise agreements between municipalities and utilities; approving applications for “certificates of public convenience and necessity” for the construction of works to supply gas; and approving the construction, expansion or reinforcement of pipelines.
[13] Under the OEB Act, the OEB has “exclusive jurisdiction in all cases and in respect of all matters in which jurisdiction is conferred on it by this or any other Act”: OEB Act, s. 19(6). In all matters within its jurisdiction, the OEB has authority to hear and determine all questions of law and of fact: OEB Act, s. 19(1).
C. Natural gas franchise agreements
[14] A utility is not permitted to provide gas transmission and distribution services through or within an Ontario municipality unless the requirements of the MF Act have been met. The MF Act requires the municipality to enter into a franchise agreement with a natural gas distributor: MF Act, s. 3. The terms and conditions of the franchise agreement must be approved by the OEB: MF Act, s. 9.
[15] Where a franchise agreement has expired or is about to expire within a year, either the municipality or the utility may make an application to the OEB for a renewal or an extension of the franchise rights, including in circumstances where the parties are not able to agree on the terms and conditions for renewing or extending the franchise agreement: MF Act, s. 10. In that regard, s. 10(2) provides as follows:Powers of Energy Board
(2) The Ontario Energy Board has and may exercise jurisdiction and power necessary for the purposes of this section and, if public convenience and necessity appear to require it, may make an order renewing or extending the term of the right for such period of time and upon such terms and conditions as may be prescribed by the Board, or if public convenience and necessity do not appear to require a renewal or extension of the term of the right, may make an order refusing a renewal or extension of the right. [Emphasis added.] [16] As s. 10 and related provisions in the MF Act make clear, the MF Act confers on the OEB a broad and highly discretionary power to make decisions about the renewal of natural gas franchises, based on “public convenience and necessity”, and to decide the terms of such renewal. In Sudbury (City) v. Union Gas Ltd. (2001), 2001 CanLII 2886 (ON CA), 54 O.R. (3d) 439 (C.A.), at para. 6, the Court of Appeal for Ontario stated that the MF Act and the OEB Act “make clear that the Legislature has accorded to the OEB the widest powers to regulate the supply and distribution of natural gas in the public interest” (emphasis added). At para. 23, the court went on to state the following about the OEB’s authority with respect to a franchise renewal or extension:Section 10 of the Municipal Franchises Act … protects the interests of those who depend on the gas distribution system by allowing either the municipality or the gas utility company to seek a renewal or extension of the bundle of rights that is the franchise. The OEB may make the order on the terms it determines necessary to protect the public interest. In my view, a purposive reading of the section gives to the OEB a broad power to impose the terms of renewal or extension of the franchise so that service to the public will not be interrupted simply because the municipality and the utility have been unable to agree on the terms for carrying on the service. [Emphasis added.] D. Model Franchise Agreement
[17] After an extensive public consultation and hearing process (including oral and written submissions from municipalities and other interested parties), the OEB developed a Model Franchise Agreement in order to standardize the format and content of franchise agreements between natural gas distributors and Ontario municipalities. Following a public hearing in 1985 and a resulting OEB report, the OEB approved the initial version of the model agreement in 1987, which was revised in 2000 following a further public hearing in 1999 and a subsequent OEB report.
[18] The purpose of the Model Franchise Agreement is to provide a template to guide natural gas distributors and municipalities as to the terms and conditions that the OEB generally finds reasonable: OEB, Guidelines for Gas Expansion in Ontario, OEB-2015-0156, February 18, 2015, at p. 4. The OEB has advised that natural gas distributors “are expected to follow the form of the Model Agreement when filing applications for the approval of franchise agreements, unless there is a compelling reason for deviation”: Epcor Natural Gas Limited Partnership, Decision and Order EB-2021-0269, February 17, 2022, at p. 8. Virtually all municipal franchise agreements in Ontario are currently in the form of the OEB’s Model Franchise Agreement: see OEB, Natural Gas Facilities Handbook, EB-2022-0081, March 31, 2022, at p. 10.
E. Gas system relocation costs
[19] Section 12 of the Model Franchise Agreement addresses how municipalities and natural gas distributors will share the costs of relocating gas works where such works are relocated at the request of the municipality. Section 12(d) provides that such costs will generally be paid 35 percent by the municipality and 65 percent by the utility company.
[20] The issue of costs allocation for the relocation of gas works received a significant amount of attention and consideration as part of the consultation and hearing process that led to the adoption of the Model Franchise Agreement in 1987 and its amendment in 2000. At the 1999 hearing, the issue of relocation costs was again heavily contested, but the resulting OEB report rejected a request that the utility companies be required to pay 100 percent of the relocation costs required for municipal purposes. The OEB concluded that it continued to be generally appropriate that the municipality should bear 35 percent of the relocation costs “as a disincentive to municipalities to require gas line relocation” as a result of their municipal works: Union Gas Limited v. Norwich (Township), 2018 ONCA 11, 140 O.R. (3d) 712, at para. 30. As a result, the costs sharing provision for relocation costs in the 1987 Model Franchise Agreement was confirmed (with minor differences) in the 2000 version of the agreement.
[21] The relevant portions of the Model Franchise Agreement are as follows (emphasis added):12. Pipeline Relocation
a. If in the course of constructing, reconstructing, changing, altering or improving any highway or any municipal works, the [municipal] Corporation deems that it is necessary to take up, remove or change the location of any part of the gas system, the Gas Company shall, upon notice to do so, remove and/or relocate within a reasonable period of time such part of the gas system to a location approved by the Engineer/Road Superintendent.
b. ... .
c. Where any part of the gas system relocated in accordance with this Paragraph is located other than on a bridge, viaduct or structure, the costs of relocation shall be shared between the Corporation and the Gas Company on the basis of the total relocation costs …. [calculation method omitted]
d. The total relocation costs as calculated above shall be paid 35% by the Corporation and 65% by the Gas Company, except where the part of the gas system required to be moved is located in an unassumed road or in an unopened road allowance and the Corporation has not approved its location, in which case the Gas Company shall pay 100% of the relocation costs. III. OEB Decision under appeal
[22] The most recent franchise agreement in place between Enbridge and Leamington was dated January 20, 2003 (the “2003 Agreement”) and had a term of 20 years (running until January 2023). This agreement was based on the terms of the OEB’s Model Franchise Agreement, without amendment.
[23] Prior to expiry of the 2003 Agreement, Enbridge made an application under s. 10 of the MF Act, seeking an order approving a renewal of its gas franchise with Leamington, based on the terms and conditions of the Model Franchise Agreement and consistent with the terms of the 2003 Agreement, including s. 12 of the Model Franchise Agreement relating to pipeline relocation costs.
[24] Leamington was granted intervenor status as a party in the application. Leamington objected to s. 12(d) of the Model Franchise with respect to relocation costs that fall within the scope of s. 26 of the Drainage Act. Section 26 of that Act provides as follows:26. In addition to all other sums lawfully assessed against the property of a public utility or road authority under this Act, and despite the fact that the public utility or road authority is not otherwise assessable under this Act, the public utility or road authority shall be assessed for and shall pay all the increase of cost of such drainage works caused by the existence of the works of the public utility or road authority. [25] Under s. 26 of the Drainage Act (if applicable), Enbridge would be required to pay the entire amount of any increase in gas system relocation costs if relocation of the gas system was required to allow Leamington to perform drainage works. Under s. 12(d) of the Model Franchise Agreement, Leamington would be required to pay 35 percent of that costs increase. Leamington objected to s. 12(d) to the extent that it would require Leamington to pay part of the relocation costs required for drainage works that would otherwise be payable by Enbridge under s. 26 of the Drainage Act.
[26] At the OEB hearing, Leamington argued that deviation from the Model Franchise Agreement was warranted because of its “unique” drainage systems and because paying such relocation costs would place an unnecessary burden on its taxpayers. Leamington submitted that “public policy would dictate that such costs should be spread amongst the Enbridge ratepayers, rather than the Municipality’s taxpayers”: OEB Decision, at p. 9. Leamington asserted that it previously agreed to the terms of the Model Franchise Agreement based on the understanding that the Drainage Act would govern matters involving drainage works. However, the 2018 Court of Appeal decision in Norwich “changed the landscape”, with the result that Leamington did not agree to contract out of the Drainage Act.
[27] In the OEB Decision, the OEB found that “public convenience and necessity” required the renewal of the natural gas franchise between Leamington and Enbridge: OEB Decision, at pp. 5-7. The OEB also found that that the renewal of the gas franchise would be based on the terms of the Model Franchise Agreement, without amendment.
[28] The OEB concluded that although Leamington may prefer the Drainage Act because it is a more favourable result for municipalities, there was no basis in these circumstances to deviate from the relocation costs sharing provision contained in the Model Franchise Agreement:The standard terms that address cost-sharing in the Model Agreement were developed to provide certainty and resolve any dispute in an equitable manner. While the OEB understands that the Drainage Act may provide a more favourable result for the Municipality, the OEB finds that the Norwich decision supported a view of the Model Agreement, in general, as best meeting the public interest by providing fair treatment of both the civic duties of the Municipality and the fair treatment of Enbridge Gas’s ratepayers. This is preferable to a piecemeal approach of negotiating terms specific to a franchise. The OEB is ultimately not convinced that topographic difficulties referenced by the Municipality are sufficient to initiate a renegotiating of cost-sharing provisions in the Model Agreement. Moreover, the OEB notes that the cost-sharing arrangement in the Model Agreement is not an outlier, as such arrangements to share costs of necessary public requirements in which the municipality may have an interest exist in multiple contexts (see for example, the Public Service on Highways Act). [Emphasis added.] [29] By Notice of Appeal dated April 24, 2023, Leamington appeals the OEB Decision. The court continues [at paras 34-45] to consider the OEB's power in this specific context as a matter of statutory interpretation.
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