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Sep 29 2016

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Regulating Utility Governance

September 29, 2016 | By

An Analysis of the Ontario Energy Board’s Role

The Ontario Energy Board has announced its intention to conduct a consultation respecting its role in providing guidance to regulated entities with respect to corporate governance.

This paper examines the possible role of the Ontario Energy Board in the governance of rate-regulated utilities. The conclusion of the paper is that the Board should have no such role. To begin with, it serves no practical purpose. Beyond that, the paper highlights the fact that the OEB already has effective control over those activities. The paper asserts that for the OEB to exercise some form of oversight over corporate governance would serve no public policy objective, and would instead would represent a particularly intrusive form of regulatory over-reach.

Introduction

By letter dated June 22, 2016, the Ontario Energy Board (OEB) initiated a consultation to develop guidance on corporate governance for OEB rate-regulated utilities.1 The OEB gave no indication of what it intends to do by way of “guidance.” The Board-commissioned reports – from consultants Elenchus and KPMG2 – on which the consultation will apparently be based suggest a range of possible “guidance mechanisms”, ranging on a continuum from the issuing of standards for corporate governance, to periodic performance audits of compliance with those standards, to direct OEB engagement with utility boards.

This paper examines the possible role of the OEB in relation to the governance of rate-regulated utilities. It argues that the OEB should have no such role. The reasons for that are:

  • The OEB’s jurisdiction with respect to guidance on governance is, at best, questionable. Prior to recent amendments to the Ontario Energy Board Act (OEBA), the OEB had neither explicit nor implicit jurisdiction with regard to governance. As a result of these recent amendments the OEB has, arguably, implicit jurisdiction, but only to a limited extent. Whether it should exercise that jurisdiction is questionable, based on the interpretation and application of similar provisions in other statutes.
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  • At the most basic level, playing any role with respect to governance would serve no purpose. What is regarded as good governance practice is well known. It has been the subject of policies issued by securities regulators, rulings by the courts, academic commentary and writings in the business press. The OEB has no expertise in governance which would enable it to add anything useful to what is already well established.
  • The OEB already has extensive knowledge of, and control over, certain business practices of rate-regulated utilities through its powers to approve rates, to issue licenses, and to make Codes. It can fulfill its statutory mandate to set just and reasonable rates, and protect the interests of consumers with respect to prices, without playing any role, however limited, in the governance of regulated utilities.
  • That the OEB should play some role in the governance of rate-regulated utilities is not supported by either the Elenchus Report or the KPMG Report. In addition, the recommendations in those reports would, if adopted, represent an inappropriate regulatory over reach.
  • Playing some role in the governance of rate-regulated utilities would serve no public policy goal. On the contrary, playing such a role would be contrary to good public policy.
  • This paper will begin by examining what is meant by governance. It will then examine the existing regulatory rules and practices of the OEB, showing that those rules and practices affect some of the outcomes of utility governance, but not the governance itself. That is an important distinction, and I will argue one the OEB should respect.

    The paper will then examine the question of the jurisdiction of the OEB to engage in the oversight of corporate governance. In discussing jurisdiction, it will contrast the roles of governance as set out in two Ontario statutes, those in the Ontario Business Corporations Act (OBCA)3 and those in the Ontario Environmental Protection Act (EPA)4. It will also discuss the approach of the courts to interpreting the governance provisions of the OBCA, an approach I will argue should preclude the OEB from trying to play any role in the governance of utilities.

    The paper will examine the KPMG and Elenchus Reports with a view to determining first, whether they support the OEB playing a role in the oversight of corporate governance and, second, whether the recommendations they contain are either reasonable or appropriate.

    Finally, the paper will discuss whether having the OEB play a role with respect to the governance of rate-regulated utilities represents good public policy.

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    Mowat Energy’s On the Grid series provides a platform for original thinking about the future of the energy sector in Ontario. The series includes contributions from Mowat Energy, as well as articles or case commentaries authored by interested experts.

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    Author

    Robert B. Warren

    Release Date

    September 29, 2016

    ISBN

    978-1-77259-035-7

    Mowat Research

    No. 129

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    1. Ontario Energy Board, “Consultation on the Development of Corporate Governance Guidance for OEB Rate-Regulated Utilities”, EB- 2014-0255, August 9, 2016. At http://www.ontarioenergyboard.ca/OEB/Industry/Regulatory+Proceedings/Policy+Initiatives+and+Consultations/Corporate+Governance+Guidance+(EB-2014-0255); Letter from the OEB to regulated utilities, dated June 22, 2016. At http://www.ontarioenergyboard.ca/oeb/_Documents/EB-2014-0255/ltr_Corporate_Governance_Guidance_20160622.pdf. []
    2. Elenchus Research Associates, Corporate Governance for Regulated Natural Gas and Electricity Utilities, Draft Report Prepared for the Ontario Energy Board, June 22, 2016 (referred to later as the Elenchus Report). At http://www.ontarioenergyboard.ca/oeb/_Documents/EB-2014-0255/Elenchus_Draft_Report_Corp_Governance_20160622.pdf; KPMG LLP, Ontario Energy Board: Review of Corporate Governance of Electricity Distributors, Final Report, April 19, 2015 (referred to later as the KPMG Report). At http://www.ontarioenergyboard.ca/oeb/_Documents/EB-2014-0255/KPMG_Report_Corporate_Governance_20150429.pdf. []
    3. Business Corporations Act, R.S.O. 1990, c. B.16. []
    4. Environmental Protection Act, R.S.O. 1990, c. E.19. []