On Confidence and Trust – Submission to the OEB Modernization Review Panel

Mr. Stephen Rhodes
Deputy Minister of Energy
Email: stephen.rhodes@ontario.ca

Dear Mr. Rhodes,

I am writing to you with a request that you can bring my letter to the attention of the OEB Modernization Review Panel.

I have sought from both the OEB and your ministry direction as to how a citizen might make a submission to that panel pursuant to its revised terms of reference but have been unable to identify a more direct process for public participation. Hence, my letter is directed through you.

The revised terms of reference for the panel issued September 6th seek to “enhance stakeholder confidence in the OEB” and notes the need for “trust in government agencies”. These items are central concerns in the circumstances of Ontario’s electricity situation.

In order to appropriately address these referenced elements of the revised terms of reference, the panel ought to consider the OEB’s record in recent years of illegal governance, turning a blind eye to conflicts of interest, and law-breaking decisions.

Ontario’s electricity cost escalation of billions of dollars of annual excess cost during a time of falling demand — out of step for almost any but the some of the most mismanaged economies in the OECD — did not arise from nowhere.

It is quite obvious to any interested observer that Ontario’s electricity system is suffering from systemic dysfunctionality. What exactly is the locus and character of this dysfunctionality?

Some of the root causes of Ontario’s electricity policy problems are institutional.

For the reasons set out below, the OEB has become central to the character of Ontario’s power system. Stabilizing Ontario’s degraded power situation will require many reforms, but a major renewal of the OEB should be high on the priority list.

What is the OEB’s record on governance? What is the OEB’s record on abiding by existing legislation?

Especially in light of its history as one of the premier public utility regulators anywhere in the world, one might expect that the current OEB would at a minimum operate in compliance with existing legislation and minimal conflict of interest standards.

Instead, abiding by the rule of law has not been a priority at the OEB.

Here’s the OEB’s record:

Deficient Management Committee

The OEB Act S. 4.2 requires the Board to have a chair and two vice-chairs, who together form a management committee with statutorily defined responsibilities.

Management committee
4.2 (1) The Board shall have a management committee composed of the chair and the vice-chairs. 2003, c. 3, s. 7.

From July 2010 until May 2016 — almost six years — the OEB operated with only one vice chair and therefore an incomplete management committee. This deficiency effectively increased the authority of the chair. While the gov’t, not the OEB, is responsible for appointments, I urge the Panel to document and report on the role the OEB Chair played behind the scenes in this illegal arrangement.

Lack of Chief Operating Officer (COO)

The OEB Act S. 5 requires the Board to have a COO.

Chief operating officer and secretary
5 The Board’s management committee shall appoint a chief operating officer of the Board and a secretary of the Board from among the Board’s employees. 2003, c. 3, s. 13.

In January 2014, the COO position was eliminated, contrary to the legislation. Again, the circumstances behind this law-breaking should be investigated by the Panel.

These deficiencies were so well known that they were debated in the legislature in 2015. Here is Ontario PC MPP Monte McNaughton in Committee addressing the governance deficiencies including the lack of a second vice chair and a COO:

Mr. Monte McNaughton: The point I wanted to make is that shouldn’t the government comply with the existing law first, before they have any credibility in claiming to strengthen the Ontario Energy Board? Ref: https://www.ola.org/en/legislative-business/committees/finance-economic-affairs/parliament-41/transcripts/committee-transcript-2015-may-20#P509_130608

Conflict of Interest

A rotating door for energy executives has persisted at the OEB for the last seven years. Cross-appointments linking the regulator and regulated energy companies at the senior corporate level became routine.

Given the relatively small pool of talent Ontario is likely to be able to attract to positions on the OEB, some overlap with local industry is reasonable, but what actually happened since 2011 has gone far beyond what I suggest is any reasonable boundary.

The current OEB chair was CEO at Hydro Ottawa immediately before joining the Board in 2011. Her final duties at Hydro Ottawa included overseeing a rate application seeking a dramatic distribution rate increase.

The chair of the OEB administers conflict guidelines as they apply to board members. In 2012, the current chair, Ms. Leclair, approved a full-time board member, Paul Sommerville, taking the senior regulatory affairs role at Toronto Hydro. Since Mr. Sommerville moved directly from the OEB to Toronto Hydro, there remains an appearance that he was negotiating his move to Toronto Hydro at a time he was a board member with influence on the decisions bearing on Toronto Hydro.

This conflict of interest at the OEB was well-known among the active energy stakeholder community at the time. For example, the OEB’s practices around conflict of interest were debated in front of virtually the entire regulatory energy bar in Ontario at the Ontario Energy Association conference September 14, 2012.

Notwithstanding the widespread knowledge in the energy community about conflicts of interest, the issue persisted as a major concern. For example, the issue was debated in the legislature in 2015. Ontario NDP MPP Peter Tabuns in the same Hansard reference previously cited made this comment:

Mr. Peter Tabuns: The government just appointed Susan Frank, Hydro One’s former VP and chief regulatory officer, to the OEB. Her job at Hydro One was to persuade the OEB to approve rate increase applications. Can you understand why the public might be worried to have someone who spent her career arguing for higher electricity rates serving on the OEB?

Illegal Rates

From May 1, 2017 through June 30, 2017, the Regulated Price Plan commodity rate administered by the OEB and charged to small consumers was set at a price below that required by the then-applicable laws and regulations.

The following legislative or regulatory elements all required the Regulated Price Plan (RPP) rates to recover the full cost of power (as reflected in HOEP and GA):

– Section 79.16 of the OEB Act (current to the period)
– O. Reg. 95/05 and the OEB’s Standard Supply Service Code
– the RPP Manual, and
– the Retail Settlement Code.

Despite all of that, the RPP rate effective May 1 recovered less than the full cost.

The passage of the Fair Hydro Plan Act made the rates starting July 1, 2017 legal, although, I would suggest, imprudent.

I urge the Panel to document and report on the circumstances behind the illegal RPP rates of early 2017.

Concluding Observations and Arguments

The current state of OEB governance reflects the previous government’s preference for a weak, conflicted regulator suited best for shielding the government from responsibility for its energy decisions.

Many pieces of legislation undermined the independence of the OEB, but the most significant was the Green Energy and Green Economy Act, 2009, Schedule D. The thrust of that schedule of the legislation was to shift OEB jurisdiction in various areas to the government.

The shift of OEB appointments toward part-timers, away from full-time regulators — another trend evident over the last seven years — further weakened the agency.

As the OEB has declined in governance standards and authority, its budget has dramatically expanded. In 2004, the total expenses of the OEB were $12.9 million. In 2017, the OEB spent $45.7 million “” almost 3 times what it was in 2004 adjusted for inflation.

It is disappointing that Auditor General did not pick up on any of the above-noted deficiencies despite annual report chapters specifically focused on the OEB in 2013, 2014, and 2016 and AG oversight of OEB annual reports.

I urge the Panel to report to the Ontario government that sweeping changes to the OEB are required. Ontario would be better served by an independent, professional public utility regulatory service. If the current OEB cannot be reformed, accountability to the public would be better achieved if the OEB’s authority with respect to electricity was transferred entirely to the Ministry of Energy and the OEB downsized accordingly.

Tom Adams