Utility Late Payment Penalties

Introduction
Background

Updated February 4, 2008

Introduction

In 2004, a ruling by the Supreme Court of Canada clarified the law regarding the rate at which utilities can set late payment penalties charged to customers who pay after the due date.

The Ontario Energy Board welcomed this clarification and believes it is important that Ontario energy customers are aware of the facts surrounding the late payment penalty ruling.

Late payment penalties and interest rates currently approved by the Board are compliant with all laws and judicial decisions.

By encouraging prompt payment of utility bills, late payment penalties reduce a utility’s cost to provide service by reducing the utility’s revenue requirement for the purpose of setting delivery rates. This lowers delivery rates for all customers.

Background

The Ontario Energy Board approved a 5% late payment penalty in 1975 as an incentive for customers to make timely payments. This approach was consistent with guidelines developed around that time by a task force of public utilities formed by the Ministry of Energy and adopted by many public utilities.

In 1981, six years after the late payment penalty was approved, the federal Parliament made changes to the Criminal Code limiting the level of interest rates chargeable to customers. It was not until 1994, when a customer (Gordon Garland) commenced a proceeding against Enbridge Gas Distribution Inc., that the courts were asked to determine whether a late payment penalty was an “interest rate” and therefore subject to the restrictions in the Criminal Code.

The Garland action was dismissed in a series of judgments by the Ontario Superior Court and Court of Appeal in 1995 and 1996. In these decisions, the Ontario courts held that the late payment penalty was not an “interest rate” and was therefore in compliance with all legislation. However, in 1998, the Supreme Court of Canada held that the 5% late payment penalty, when calculated as an annual interest rate, exceeded the limit for legal interest rates in the Criminal Code. The Supreme Court of Canada directed the Ontario courts to consider a number of other legal issues, such as whether persons who paid the late payment penalty should receive restitution.

While these issues were being addressed by the Courts, the Board carried out stakeholder consultations to review utilities’ policies on late payment penalties and interest rates. The 5% penalty remained in place during this period of court proceedings and stakeholder consultations, which the Ontario Court of Appeal stated was “quite properly” done. In the same ruling, the Ontario Court of Appeal also stated the Board should design a new penalty for late payments. In response to direction provided in December, 2001, the Board set compliant penalties and interest rates for all utilities it regulates by the end of March, 2002.

On April 22, 2004, the Supreme Court of Canada determined that anyone who paid the 5% late payment penalty was entitled to restitution, and directed Ontario courts to quantify the amounts owing.

In late 2004, the action was approved as a class action. Parties to the suit reached a $22 million settlement with Enbridge in June 2006 and in December 2006 that settlement was approved by the Ontario Superior Court.

A utility may only recover its restitution payment from its customers if it obtains the Board’s approval. The Board makes its determinations following public hearings, in which it hears the views of the utility and other parties, such as consumer groups, that normally participate in these open processes.

In September 2007, Enbridge Gas Distribution made such an application to the Board. Click here to see the Decision.

In its Decision, the Board found all costs (settlement, legal fees and interest) are recoverable from ratepayers.

The Board continues to study policies and practices regarding the charging of late payment penalties by both natural gas and electricity utilities. This includes topics such as: what interest rates are appropriate, for what period they should be charged and what provisions are made for customers who make reasonable efforts to pay bills on time but may pay them after the due date.

Similar lawsuits related to late payment penalties are also proceeding against Union Gas Limited and local electricity distributors such as Toronto Hydro. It can be expected that other settlements and applications for rate recovery will be received by the Board in the near future.