On March 15th, the Ontario government released the final report of the Ontario Energy Board (OEB) Modernization Review Panel, an independent panel tasked with providing the government with advice for strengthening public trust and transparency in Ontario’s energy sector - with a focus on the governance and operational framework of the OEB. The government then issued a notice of proposed amendments to the OEB Act, 1998, following up on several of the Review Panel’s recommendations.
Strengthening public trust and confidence in Ontario’s regulatory decision-making processes is important. The energy sector - particularly the electricity and natural gas sectors - is a key contributor to the long-term growth of Ontario’s economy and its citizens’ standard of living, accounting for roughly 2.4 per cent of the province’s nominal GDP and more than 38,000 direct jobs in 2017.[1] The Ontario’s energy sector's future performance depends on the pace of private investment in risky long-lived energy infrastructure, and the timely adoption of new technologies. A lack of trust and clarity in how future regulatory decisions will affect the profitability of these assets can impede efficient investment, slow economic growth, and lead to higher bills for consumers. From this perspective, the Review Panel’s report is timely and welcomed.
Accountability Matters
The Review Panel made eight recommendations that “on the whole are intended to reinforce the OEB’s core function as an economic regulator” and promote “independence, accountability, certainty, effectiveness and efficiency of Ontario’s energy regulatory system.”[2]
The Panel’s key recommendation is to establish a new internal governance structure to clarify lines of accountability and strengthen independence. The province quickly adopted this recommendation and has proposed legislation that involves:
- Creation of a Board of Directors, led by a Chair, responsible for the organization's governance and strategic oversight, interfacing with the Minister and the provincial government;
- Creation of a CEO, separate from the Chair, to provide executive leadership for the organization's operational and policy aspects;
- Creation of commissioners, who would assume an adjudicative role in hearing and determining matters within the OEB's jurisdiction; and,
- Creation of a Chief Commissioner, accountable to the CEO, responsible for assigning casework and ensuring the timeliness and dependability of the regulatory process.
These proposed reforms are largely consistent with academic research on best practice principles for the governance of regulators, which argues the organizational purpose or mandate of regulatory institutions should be clearly stated in enabling legislation.[3] The legislative mandate provides the broadest level of policy guidance, and the institution’s strategic goals and objectives should be consistent with and flow logically from this mandate. The Board of Directors' key responsibility is to ensure the organization adheres to and stays within the limits of its legislative mandate. The regulator is accountable to the legislature for this mandate.
The OEB Modernization Report referred to the importance of role clarity and acknowledged that various legislative changes and Ministerial directives have significantly expanded the OEB’s mandate beyond its core function as an economic regulator and more towards the administrator of the government’s short-term policy agenda. The Review Panel suggests it would be beneficial to make changes to OEB governance that reinforce this core mandate. We think this is an important conclusion that deserves further elaboration beyond the recommendations provided.
In particular, the function of an economic regulator is to promote economic efficiency, and in so doing, protect the “public interest.” Economists argue that competitive markets, which harness the self-interest of individuals through the “invisible hand,” lead to the best use of society’s scarce resources (i.e. economic efficiency), and in so doing, promote the public interest at large through higher per capita living standards. Economic regulators seek to address market failures and promote competition where possible. They protect the public interest by aiming to put arrangements in place to facilitate effective competition, or alternatively, addressing situations where there is evidence of market failure, by making decisions on price and non-price terms for the services provided by regulated businesses.[4]
When a regulator’s mandate is broadly defined to promote the government's short-term policy agenda, the regulator with the urging of stakeholders, may presume the role of referee, whose task is to balance stakeholder interests. As Scott Hempling argues, this presumption is wrong.[5] Instead, he argues the regulator's role is to frame the issues in public interest terms, recognizing that parties define their interests more narrowly. The regulator’s job is to ask the questions that stakeholders have omitted and then demand through evidence, the right answers. Effective economic regulators do not balance private interests, but instead resolve tensions among public interest values, such as long-term efficiencies vs. short-term costs, or the right price vs. the affordable price. The result should be well-functioning energy sectors that offer regulated firms a predictable investment environment, and ratepayers with fair, just, and reasonable rates.
Moving toward economic efficiency
Designing the appropriate governance structure for an economic regulator is an important step forward for Ontario, but amending the OEB’s legislative mandate to ensure it has a clear public interest mandate focused on economic efficiency, is essential for transparency, impartiality, and fact-based decision-making. The efficiency mandate confines the relevant evidence and lends itself to objective tests, such as cost-benefit analysis. Overall, this insulates the regulator from the pressures of the private interests of stakeholders, including elected government officials, and empowers them to make the best choices in the public interest. Furthermore, removing the Ministerial directive powers over the OEB in the Ontario Energy Board Act would reduce the ease with which future governments could again broaden the OEB’s mandate for short-term political objectives. Such a reform would align with best practice and demonstrate a firm commitment to the public interest mandate of economic efficiency, not just in the short-term, but also over the longer-term investment cycle.
Providing the OEB with a clear public interest mandate of economic efficiency would strengthen public trust and confidence in the Ontario electricity sector, and foster timely investment in large energy infrastructure and innovative technologies.[6]
[1] Calculations from Statistics Canada Table 36-10-0400-01 Gross domestic product (GDP) at basic prices, by industry, provinces and territories, percentage share and Table 36-10-0489-01 Labour statistics consistent with the System of National Accounts (SNA), by job category and industry.
[2] Ontario Energy Board Modernization Review Panel, Final Report, October 2018, page 12.
[3] Ivey Energy Policy and Management Centre papers and reports on best practices on regulatory governance can be found on the Centre’s research page at https://www.ivey.uwo.ca/energycentre/research/.
[4] This is paraphrased from the definition provided by the Organisation for Economic Co-operation and Development’s (OECD) Best Practice Principles on the Governance of Regulators retrieved from https://read.oecd-ilibrary.org/governance/the-role-of-economic-regulators-in-the-governance-of-infrastructure_9789264272804-en#page16.
[5] See Scott Hempling, “Regulatory Principles: Old Thought For The New Year,” January 2019, retrieved at https://www.scotthemplinglaw.com/essays/regulatory-principles-old-thoughts-for-the-new-year.
[6] Accompanying the notice of proposed amendments to the OEB Act were other proposed legislative reforms intended to “reduce costs, drive efficiencies and lower electricity rates for medium and large employers.” More recently, the government initiated a consultation on industrial electricity pricing to hear from business on how to offer the job-creating industrial sectors more certainty around electricity pricing and how the “electricity system can make business more competitive.” As noted previously, the electricity sector is a key contributor to the province’s economy and its citizens’ standard of living. Providing the electricity sector’s key agencies, the OEB and the Independent Electricity System Operator, with a clear economic efficiency mandate in legislation, and eliminating the ability of future governments to use Ministerial directives in the pursuit of short-term political objectives, would support the goal of building a stronger economy and improving the living standards of Ontarians.