Ontario Electricity Regulation Crisis Report – Part 32: Weakened OEB Needs Strengthening to Fix Tony’s Hydro (formerly Toronto Hydro)

Starting on January 12, this web site has been presenting a series of news updates and commentaries addressing the Toronto Hydro vs. Ontario Energy Board confrontation. The reason I started this series with the cumbersome title “Ontario Electricity Regulation Crisis Report” was because of my concern that developments surrounding Toronto Hydro are likely to have greater significance for public utility regulation in the province than they will for Toronto Hydro.

A summary of developments as of the morning of January 31st is here. In a nutshell, Toronto Hydro’s management has challenged the Ontario Energy Board’s authority by initiating a game of regulatory chicken. Management is pursuing unplanned downsizing, risking massive law suits from unfairly treated contractors, and undermining the confidence of lenders. Toronto Hydro’s current strategy is to threaten the Toronto public with physical harm, apply pressure on the regulator through the media, push its outages-are-assets communication strategy, co-opt other utilities into joining in its campaign for deregulation through groups such as the Ontario Electrical Distributor’s Association (EDA) and the Distribution Regulation Review Task-Force, and continue with mass firings of contractors and staff. If allowed to continue, the unplanned downsizing now going on will leave the utility unable to meet its obligations under its OEB license, particularly Section 9.1. With Toronto City Council expressing no interest in supervising its investment in Toronto Hydro, the suggestion I posted on January 12 that the Ontario Energy Board may have to take over the utility appears less unthinkable by the day.

The utility has picked a time to pursue its strategy when the regulator has been weakened by the Ontario government’s appointments practices.

Under Section 6 of the OEB Act, the Ontario government is responsible for appointing a chair and two vice chairs. Ignoring the explicit requirement of the legislation, the government has left the Board operating with a single vice chair for almost a year and a half. The legal structure of the Board requires that the chair and two vice chairs form the Management Committee of the Board. The Management Committee is empowered through a Memorandum of Understanding with the Ontario government to play key guidance and accountability roles for the organization.

The most recent appointee to the Board is the agency’s new chair, Rosemarie T. Leclair. Until the government announced her appointment in March 2011, Leclair had been, since 2005, CEO of the regulated utility Hydro Ottawa.

Hydro Ottawa had been rebuffed by the Ontario Energy Board in October 2010 after bringing an application very similar to the Toronto Hydro application that precipitated the Board’s January 5, 2012 decision and the ensuing conflict. Both Hydro Ottawa and Toronto Hydro had asked to be excused from the regulator’s incentive regulation mechanism so they could increase rates much more quickly under an alternative cost of service rate determination methodology.

Leclair had not held any senior positions in public utility regulation prior to her appointment to head the OEB. I can’t find any prominent scholarly works on administrative law or regulation authored by Leclair prior to her appointment, although perhaps others can point to examples.

In her capacity as CEO of Hydro Ottawa, Leclair had joined the board of the EDA in 2010, with her first board meeting in June of that year. While a director on the EDA board, Leclair worked on a regulatory reform platform. The fruit of that work was released a few months after she moved over to the OEB. The EDA’s platform, presented privately to the Ontario Energy Board, focused on increasing rates, reducing public participation in regulation, and lowering the standards of disclosure imposed on monopoly distributors. Anthony Haines, now leading Toronto Hydro’s efforts to undermine the regulator, was a director of the EDA along side Leclair and he remains a director today.

Key elements of the EDA’s proposed reforms now feature prominently in Leclair’s statements about where she is leading the industry. One of the EDA’s priorities is to increase rates, not in a stepwise fashion, which draws public attention, but smoothly. In a speech to industry leaders on January 26, 2012, she quoted from the CEO of the EDA, whose work she had only recently been directing, endorsing a regulatory framework “that leads to more stable and gradual rate increases” for the distribution portion of consumer bills.

Leclair is now leading a regulatory reform initiative at the Board. One of the regulatory reforms she has already implemented is the practice of issuing public statements explaining previous Board decisions — a noteworthy departure from historic practice — when she wrote to the chair of Toronto Hydro Clare Copeland on January 13. Arguably, Leclair’s letter to Copeland promised approval in advance for an expanded level of capital spending providing the utility use approved formulas. The letter suggests a level of personal engagement in a decision which, in turn, raises the spectre of bias.

Except for Leclair, the terms of all other sitting members of the OEB expire over the next several months.

The negligent inattention of the Ontario government in failing to maintain the required complement on the Board’s Management Committee speaks to the gravity of the current situation.

The Ontario government must move immediately to appoint another vice chair. In all its appointments, the government must ensure that the appointees be demonstrably unbiased. In addition, the team constituting Ontario Energy Board must have the operational and legal stature to secure public confidence and to ensure reliable service to consumers.

The current members and single vice chair of the Ontario Energy Board are exceptionally experienced, capable, and fair. Recognizing that some members may not seek reappointment, the Ontario government would be sending a signal of stability and leadership by renewing the terms of as many expiring members as possible.

The governmental appointments process for the Board is entirely unsatisfactory. The process happens behind closed doors. The chair of the Board nominates candidates but the Ontario legislature plays no role. Reappointees are often not informed of their fate until the last moment. Public debate is hardly welcome in the appointments process. In the longer term, we need parliamentary reforms to bring more public discussion to Ontario Energy Board appointments. In the mean time, I hope this commentary will encourage wider discussion.

To avoid concern that the comments presented here might be intended to influence Board processes I am involved in, my clients now active in an OEB application and I have agreed that I resign from the case and that the client indicate to the Board that they will not be seeking an award of costs for my time.

I invite your comments, criticisms, corrections, and complaints.