My thesis at the outset of this series, has been that Toronto Hydro — a poorly performing, high cost utility — is controlled by a CEO seeking to exploit leadership weakness at the Ontario Energy Board in an effort to move the utility toward becoming a deregulated monopoly.

Developments at an Ontario Energy Association breakfast conference Friday, September 14 reinforce the conclusion that the OEB’s current self-governance with respect to conflict of interest is ineffective. A new, effective approach to conflict of interest is needed at the Ontario Energy Board.

Rosemarie Leclair, chair of the OEB, the morning’s featured presenter, addressed the meeting on the subject of her electric utility regulatory reform project. About 300 representatives of the energy sector attended. The crowd was almost exclusively comprised of senior executives of Ontario’s electricity and natural gas sectors, associated lawyers, consultants, suppliers, contractors, and bureaucrats. After her talk, there was a scheduled opportunity for conference attendees to ask questions.

I attended so that I might put two questions to Ms. Leclair about conflict of interest.

As I approached the microphone nearest the dias, there was an audible reaction from the crowd. The reaction appeared to be an expression of anticipated conflict.

When I had an opportunity to address the chair, I prefaced my questions with a comment that I had a high regard for Paul Sommerville’s contribution as a former member of the Ontario Energy Board. However, Mr. Sommerville’s move directly from being a full time Board member to taking the senior regulatory position at Toronto Hydro highlights concerns about how conflicts of interest are now administered by the Board. I asked, did Ms. Leclair approve Mr. Sommerville’s move? I also remarked that, particularly in light of Mr. Sommerville’s move, there appears to be no codified rules around how conflicts are administered. Would it not be better to have written rules governing conflict of interest?

The substance of Ms. Leclair’s reply was in two parts.

She said that I had misconstrued her authority related to conflict of interest. She said she has no authority with respect to the work of former Board members, only their interactions with the Board once they leave.

She remarked that there had been some concerns raised about her own move from leading a large regulated Ontario utility (Hydro Ottawa) to being CEO of the Board. She said she sees Mr. Sommerville’s move from the OEB directly to a utility as rebalancing.  I cannot recall her exact phrasing but the key word was “rebalancing”, which was her word. This remark elicited applause from some of the audience.

Considered in context, Ms. Leclair’s replies to my questions support my contention that regulatory reforms are needed to address conflict of interest at the Board.

The Sommerville trade signals Toronto Hydro’s muscular capacity to reset the regulatory agenda. However, the move has likely been directly costly and has certainly been tactically risky for the utility.

The most recent report through SEDAR of the total compensation for the positions now occupied by Mr. Sommerville was for 2009. At the time, the General Counsel earned $330,431 and the separate position for VP for Regulatory Affairs earned $310,675. Since 2009, Toronto Hydro’s executive compensation annual rate has increased dramatically. In addition to direct compensation, some senior executives at Toronto Hydro enjoy parachute clauses in their contracts. For example, if CEO Anthony Haines is terminated without cause by the Corporation, he will receive a payment now exceeding $1.5 million and rising over time.

The risk to Toronto Hydro of the Sommerville trade arises from the clauses of the existing conflict guidelines. As discussed in Part 49 of this series, Section 2.5.1 of the OEB’s Addendum to its Code of Conduct indicate that a former Board member is not allowed to “deal with the Board” for a period of a year without chair approval. If the OEB’s written conflict guidelines are observed, the utility will have to function for a full year with a General Counsel and VP Regulatory who cannot discuss with the Ontario Energy Board representatives or guide the preparation of submissions to the Board — a severe impairment.

From the perspective of Toronto Hydro’s leadership, the utility’s regulatory performance is the worst function of the utility. A recent regulatory development illustrates Toronto Hydro’s failed deregulation strategy.

On September 13th, Toronto Hydro’s efforts to operate as a deregulated monopoly with respect to the provision of space on utility poles for small cell phone antennas, a leading new communication technology, was shot down by the OEB’s EB-2011-0120 decision. The decision was authored by members Chaplin, Quesnelle, and Taylor. Under the leadership of former CEO David O’Brien, the utility had pursued normal commercial relations with telecom firms using Toronto Hydro infrastructure. Soon after Anthony Haines took over, the utility began bullying wireless firms with a variety of monopolist tactics, many of which Haines also deployed against Cogeco, the firm that had previously bought out Toronto Hydro Telecom. The wireless firms DASCOM, Extenet, and Public Mobile were forced to seek the protection of the Board, bringing a costly, cumbersome application before the Board in an effort to restore normal commercial dealings. The application was met with an obstructive series of motions from Toronto Hydro, confidentiality maneuvers, and more failed negotiations before ultimately going to hearing where Toronto Hydro lost on all major points.

As readers of this series will have seen, Toronto Hydro failed deregulation strategy for the wireless sector is just the latest in a string of regulatory defeats.

The board of directors and executives of Toronto Hydro need a turnaround in regulatory performance. What assurance do they have that Mr. Sommerville, as their new General Counsel and VP Regulatory, can win the OEB’s favour?

The timing of Mr. Sommerville’s move directly from the OEB to Toronto Hydro suggests that Toronto Hydro gained confidence that Mr. Sommerville could solve the utility’s regulatory problems while Mr. Sommerville was still at the Ontario Energy Board. The confidence Toronto Hydro needed to justify the cost of acquiring Mr. Sommerville’s services required the utility’s leadership to make a judgement about how Ms. Leclair would respond to Mr. Sommerville’s move.

As documented in a recent Enersource rates case, Ms. Leclair is known to initiate private meetings with utility CEOs and to conduct those meetings without minutes. Private one-on-one meetings between regulators and utilities is an illegal practice in many jurisdictions. (See Transcript Volume 1 pages 151-158 for the cross-examination of Ensource witnesses on September 4th by counsel Jay Shepherd on behalf of the School Energy Coalition about Ensource’s reliance on Ms. Leclair to support the utility’s claim for a major boost in capital spending, with the resulting higher rates. See Transcript Volume 2 pages 1-2 for the utility’s reply to Transcript Undertaking 1.2.)

My original question to Ms. Leclair stands unanswered. Did she approve Mr. Sommerville’s move? What communication did she have with Toronto Hydro, others reporting to Toronto Hydro, and Mr. Sommerville on the subject of his new new role? Was she aware of discussions between Toronto Hydro and Mr. Sommerville while he was a Board member? More generally, why should the OEB chair have the authority to waive conflict of interest requirements for Board members in the first place?

Ms. Leclair’s comment about “rebalancing” in reply to my questions reinforces the need for regulatory reforms governing conflict of interest. In a utility context, the term “rebalancing” has a specific meaning usually associated with fairness. It is often used to refer to situations where the ratio of costs allocated to various classes of customers are found to be unfair, necessitating rate “rebalancing”. Ms. Leclair’s comment implies that just as the government thought it was OK that she move directly from promoting Hydro Ottawa to chairing the OEB, that Mr. Sommerville is similarly unrestricted. Ms. Leclair’s use of the term “rebalancing” in this context points to a rotating door between the regulator and regulatees, with that rotating door operating in both directions.

Without effective new rules governing conflicts of interest, the outlook for consumer interests at the Ontario Energy Board is unfavourable.

As always, I invite any and all thoughtful comments. I especially invite any in the audience on Friday who applauded Ms. Leclair’s use of the term “rebalancing” . Please introduce yourself.

Post Script: Ordinary consumers concerned about their electricity bills might note that since this post was loaded onto my site, the post has received heavy readership traffic but not a single comment as of October 2, 2012. The silence of Ontario’s energy industry on the subject of conflict of interest is deafening.