Appendix C: Discussion Notes

Introduction

In December 2017, the Minister of Energy announced the creation of the Ontario Energy Board Modernization Review Panel ("Panel"). The launch of the Panel follows the release of the Long-Term Energy Plan 2017: Delivering Fairness and Choice. The Panel will explore how the mandate, role, and structure of the OEB^{footnote 1[1]} could be modernized to assist it in responding to a rapidly changing energy sector. The Panel will be guided by its Terms of Reference, which sets out the purpose and mandate for the review.

The purpose of these discussion notes is to set a context for the Panel's investigation into the questions described in the Terms of Reference. The Panel will seek input to examine and identify best practices, and to learn lessons from other jurisdictions that may have undertaken regulatory modernization and reforms.

The Panel is interested in learning about best practices for regulators, and in particular about qualities that promote regulatory excellence. Dr. Cary Coglianese, Director of the Penn Program on Regulation at the University of Pennsylvania has suggested^{footnote 2[2]} that the traits of an excellent regulator could be described by such adjectives as:

strong, well-funded, adequately staffed, credible, honest, and legitimate

and the actions of an excellent regulator could be described by adjectives such as:

vigilant, serious, reasonable, and evidence-based.

The Organisation for Economic Co-operation and Development (OECD) has also developed recommendations and guidelines on regulatory policy. The OECD has been working over the past few decades to "support OECD countries' governments to improve the institutional arrangements, processes and practices within regulators, support regulators' efforts to build a high level of professional competence, and attract, develop and retain the best people to manage regulatory systems."^{footnote 3[3]}

The OECD has outlined 7 principles for the governance of regulators^{footnote 4[4]}

• Role clarity;
• Preventing undue influence and maintaining trust;
• Decision making and governing body structure for independent regulators;
• Accountability and transparency;
• Engagement;
• Funding; and,
• Performance evaluation.

Others have made similar observations. Dr. Mark A. Jamison, Director of the Public Utility Research Center at the University of Florida's Warrington College of Business has suggested:

The regulator's authority to make decisions is affected by the regulator's independence, which simply means that the regulatory agency operates under laws rather than decrees; manages its own budget, subject to legal limits imposed by law; and makes decisions that are reviewable only by an independent judiciary and not by ministries, parliament, or the government...The regulator can affect its degree of independence by choices it makes regarding transparency, credibility, and legitimacy.^{footnote 5[5]}

In their 1999 study on assessing the regulatory performance in infrastructure industries, Stern and Holder^{footnote 6[6]} discuss similar criteria, such as:

• Clarity of Roles and Objectives
• Autonomy
• Participation
• Accountability
• Transparency
• Predictability

In another study on regulatory effectiveness published by the World Bank, additional criteria to the above such as "coherence" and "capacity" were also suggested.^{footnote 7[7]}

Following these principles, the panel has developed 7 themes for consideration that reflect what has been suggested by academics, NGOs, and others studying regulatory effectiveness and governance as important characteristics of a regulator. These themes are:

1. Mandate and Activities: Does the scope of the OEB's mandate and activities need to be adjusted (increased, decreased, or otherwise optimized) in order to support the modernization of Ontario's energy sector? If so, in what way?
2. Disruption and Innovation: How can the regulator ensure its policies and practices are best positioned to encourage innovation in Ontario's energy sector?
3. Governance Framework: What is the appropriate governance framework for a modern energy regulator?
4. Stakeholder Relationship: What are the effective mechanisms to provide stakeholders with appropriate opportunities to participate in OEB decision-making?
5. Relationship to Government: Considering the diversity of Ontario's energy sector, how can the OEB best fulfill its adjudicative responsibilities and obligations within an accountability framework set by the legislature?
6. Regulatory Excellence and Benchmarking: What are fair and meaningful performance metrics for measuring regulatory excellence, both in terms of efficiency of process and effectiveness of outcomes?
7. Resourcing: What is the appropriate level of financial and human resources that will best equip the OEB to deliver on its mandate, and what is the appropriate source of its funding?

These themes are very briefly expanded upon below to help facilitate discussion, input and ideas from stakeholders interested in contributing to the future of the OEB. The Panel intends to explore what is considered best practice in each of these themes.. The themes are not to be interpreted as standalone or isolated from one another, nor are they intended to limit discussion. The themes should be thought of as interconnected and interrelated and are separated here only to facilitate input.

The Panel looks forward to a vibrant discussion.

Discussion Theme: OEB Mandate and Activities

The Panel seeks to explore issues related to the appropriate mandate and role of the regulator. The OEB's role and mandate, including the tools with which to carry out that mandate, are established through statutes. It is the responsibility of government to establish a legislative framework that sets a clear and appropriate mandate for the OEB to effectively regulate the energy sector, both today and in the future.

The OEB's historical core function is economic regulation, including consumer price protection. The OEB is authorized to set rates for regulated entities, license market participants, review/approve consolidations, grant leave to construct applications, and approve IESO charges. The OEB undertakes this role through quasi-judicial processes, reviewing utility applications within formal hearings and issuing legally-binding orders.

Additional responsibilities include authority over the wholesale electricity market rules, (including oversight by the Market Surveillance Panel), conduct of market participants, and program administration (e.g. the Ontario Electricity Support Program).

Ofgem^{footnote 8[8]} (Office of Gas and Electricity Markets) is an independent regulator in the UK, responsible for regulating Gas and Electricity. Ofgem's approach to regulation is administrative (decisions determined and issued by regulator staff), rather than quasi-judicial.

The Alberta Utilities Commission (AUC)^{footnote 9[9]} is an independent, quasi-judicial agency responsible for regulating the rates of investor-owned (and some municipal) gas, electric and water utilities. The AUC does not set any of the rates or terms and conditions of service for competitive retailers^{footnote 10[10]}. The Utilities Consumer Advocate (UCA)^{footnote 11[11]} holds mandate for consumer education and advocacy.

The Public Utilities Board of Manitoba (PUB)^{footnote 12[12]} "is an independent, quasi-judicial administrative tribunal that has broad oversight and supervisory powers over public utilities and designated monopolies." The mandate of the PUB includes oversight over natural gas/propane safety, funeral homes, and auto-insurance in addition to electricity and gas.

Question: Does the scope of the OEB's mandate and activities need to be adjusted (increased, decreased, or otherwise optimized) in order to support the modernization of Ontario's energy sector? If so, in what way?

Discussion Theme: Disruption and Innovation

The panel seeks to explore how the OEB can position itself to respond to the significant changes underway in Ontario's energy sector. Non-traditional technologies such as energy storage are becoming cost-effective; customer demands, expectations and participation trends are evolving; and new business models are emerging.

The Ontario Energy Board (OEB) articulated its direction on smart grid and innovation through the 2012 Renewed Regulatory Framework for Electricity and the 2013 Supplemental Report on the Smart Grid. Innovation and smart grid activities are now required as part of utility Distribution System Plans. Presented at rate filings, these plans articulate the capital investment strategies that utilities propose to use over a five year period. On June 27, 2013, the Board created the Smart Grid Advisory Committee, which issued a paper on barriers to energy storage in 2014, and a questionnaire on cybersecurity in 2015. In December 2017, the OEB released its Strategic Blueprint that sets out a roadmap of how the regulator will equip itself to address sector transformation in the next five years.

The 2017 Long-Term Energy Plan (LTEP) commits the OEB to provide utilities with the right environment to invest in innovative solutions that make their systems more efficient, reliable and cost-effective, and provide more customer choice. In response, OEB's LTEP Implementation Plan describes a number of initiatives to promote a more innovative energy sector, including establishing an Advisory Committee on Innovation.^{footnote 13[13]}

Regulatory reviews are underway in other jurisdictions; fundamental questions are being asked as to what constitutes "value" in an energy system, and what the public interest looks like in an increasingly distributed energy future.

For example, the New York Public Commission is developing new methodologies to value and compensate distributed energy resources, which takes into account energy price, reduction of costs for consumers, and the value of deferred capital.^{footnote 14[14]} Regulators in California are exploring models like locational net benefits to facilitate the transition to a distributed energy future.^{footnote 15[15]} In Great Britain, Ofgem established the RIIO framework, which "encourages[s] a more flexible and forward looking approach".^{footnote 16[16]} Ofgem's framework does not differentiate between capital and operational expenditures in determining utility rate-of-return, which avoids debate over expenditure types^{footnote 17[17]} and removes any incentive to overspend on capital assets.

Question: How can the regulator ensure its policies and practices are best positioned to encourage innovation in Ontario's energy sector?

Discussion Theme: Governance Framework

The Panel seeks to explore the components of an appropriate governance framework for a modern energy regulator. The Ontario Energy Board (OEB) is an independent regulator with its basic governance structure set out in the Ontario Energy Board Act, 1998. The governance structure includes the dual position of Chair/Chief Executive Officer (CEO), two Vice Chairs, other Board Members (full-time and part-time), a Chief Operating Officer (COO), and a Board Secretary. The Management Committee, consisting of the Chair/CEO and two Vice Chairs, serves as a quasi-Board of Directors. It is responsible for the overall performance of the OEB including budgeting, allocation of resources, and making by-laws governing the operation of the Board.

As legislation designates that the Chair also has the duties of the CEO, the oversight of all activities (both adjudicative and operational) are directed through the same office. In the past decade, the mandate and role of the OEB have expanded considerably, increasing operational workload. In recent years, Board membership has seen a trend away from full-time Members with greater utilization of part-time Members. Currently the Chair/CEO is supported by a COO/General Counsel.

Other models also exist in other jurisdictions. The California Public Utilities Commission (CPUC)^{footnote 18[18]} is governed by Commissioners led by the President. The Executive Director responsible for executive functions reports to the President. The Chief Administrative Law Judges Division maintains an independent forum for processing formal filings and conducting hearings.

The Alberta Energy Regulator^{footnote 19[19]} governance model has a governing board of directors for corporate oversight while the Chief Hearing Commissioner is responsible for independent adjudication.

The National Energy Board has a joint Chair/CEO arrangement. However, the NEB is undergoing a fundamental reform as a result of an Expert Panel Review,^{footnote 20[20]} moving away from the joint Chair/CEO arrangement towards separate positions heading the board of directors and hearing commissioners. The Canadian Government recently introduced Bill C-69 which would, if passed, repeal the National Energy Board Act and enact, among other statutes, the Canadian Energy Regulator Act. Under the proposed Bill, the Canadian Energy Regulator would have a separate Chair and CEO, both of which are separate from the Commission (the suite of adjudicators).^{footnote 21[21]}

Question: What is the appropriate governance framework for a modern energy regulator?

Discussion Theme: Stakeholder Relationship

The Panel seeks to explore the nature of participation of stakeholders in the OEB's decision-making and how it relates to what is considered best practice for a regulator. As many of the OEB's regulated entities are natural monopolies, ensuring the OEB hears from those who pay rates or are affected by investment decisions is critical to the integrity of the process. Effective stakeholdering must also consider opportunities to attract stakeholders that have a range of interests (consumers, power producers and utilities, non-governmental organizations, etc.) that can contribute to efficient decision making and policy development. Stakeholder participation is vital to the effectiveness and legitimacy of the regulator. The OEB must also considered how to engage with First Nations and Métis communities.

Stakeholders provide input to the OEB through avenues such as formal adjudicative hearings and through non-adjudicative engagement processes such as consultations and working groups. Some stakeholders may qualify for cost awards for participation in adjudicative proceedings and consultations (intervenor funding). The OEB relies on standing and ad hoc committees to provide advice and recommendations to the OEB.^{footnote 22[22]} The OEB has also convened the new "Advisory Council on Innovation" to support its work on the LTEP Implementation Plan.

Some jurisdictions have limited or no funding available to intervenors. However, they may have a publicly funded consumer advocate that represents customers who may not have the resources to fund participation on their own. Examples include Nova Scotia and Alberta.^{footnote 23[23]}

The National Energy Board (NEB) provides an envelope of funds under the Participant Funding Program (PFP) that all intervenors may apply for to receive funds for participating in proceedings and hearings. Funding is limited and is not intended to cover all costs. Currently the maximum funding allowed for individuals is $12K and for an eligible group $80K.^{footnote 24[24]}

Ofgem (UK) has specific process guidelines for consultations. For major issues of wide interest, Ofgem allows 12 weeks consultation as the maximum timeline. By statute, Ofgem must publish an impact assessment if it is going to propose an important change related to the functions under the Gas and Electricity Act.^{footnote 26[26]}

Question: What are the effective mechanisms to provide stakeholders with appropriate opportunities to participate in OEB decision-making?

Discussion Theme: Relationship with Government

The Panel seeks to explore how the OEB can best fulfill its adjudicative responsibilities and obligations within the accountability framework set by the legislature. As Stern and Holder have noted, both autonomy and accountability are fundamental characteristics of a best-in-class regulator.^{footnote 27[27]}

Currently there are five main touch points between the government and the OEB as required by the Ontario Energy Board Act, 1998:

• Board appointments: The government is responsible for appointing board members to the OEB, including designating the Chair and Vice Chairs.
• Memorandum of Understanding (MOU): The OEB and the Ministry of Energy must enter into a MOU every 3 years. The MOU sets out expectations for the operational, administrative, communication, and reporting arrangements between the OEB and the Ministry.^{footnote 28[28]}
• Business Plan: The Minister of Energy is responsible for approving the OEB's annual business plan and budget.
• Directives: The government is authorized to send directives to the OEB concerning general policy objectives to be pursued by the Board, on specific issues and licence condition requirements, and to develop a Long Term Energy Plan (LTEP) Implementation Plan.
• Questions & Advice: The Minister is authorized to require the OEB to examine and report on questions respecting energy.

In British Columbia, the government has broad authority to direct the British Columbia Utilities Commission (BCUC) with respect to the exercise of its powers and the performance of its duties, limited only in that the government cannot rescind an order or decision of the Commission.^{footnote 29[29]}

In Nova Scotia there is no government direction-making authority over the Nova Scotia Utility and Review Board (NSUARB).^{footnote 30[30]} The appointment of its board members is also distinct in that members are appointed in a manner similar to Provincial Court judges.^{footnote 31[31]}

In the United Kingdom, the Secretary of State can issue guidance to the Gas and Electricity Markets Authority (GEMA) (the governing body of Ofgem) about contributing towards the attainment of social or environmental policies set out in the guidance. Before issuing the guidance, the government must consult with GEMA and licence holders and lay the guidance before each House of Parliament for 40 days.^{footnote 32[32]}

Question: Considering the diversity of Ontario's energy sector, how can the OEB best fulfill its adjudicative responsibilities and obligations within an accountability framework set by the legislature?

Discussion Theme: Regulatory Excellence and Benchmarking

The Panel seeks to explore best practices for performance measurement that both benchmark regulatory activities and appropriately evaluate regulatory outcomes. Proper performance measurement is critical to promoting regulatory excellence.

The OEB currently measures its performance against performance indicators that support four primary objectives defined in the OEB Business Plan that are subject to an independent audit.

In 2011 (electricity) and 2014 (natural gas), the office of the Auditor General of Ontario conducted a value for money audit of the OEB. The recommendations of the audits focussed on better Operational Efficiency, Cost Effectiveness, and Consumer Protection.

While the AG reported that "substantial progress"^{footnote 33[33]} has been made, many of the issues identified continue to be of concern to some stakeholders.^{footnote 34[34]} Expressed concerns include lack of transparency; increasing regulatory burden; concern with timeliness; lack of cost-benefit analysis;^{footnote 35[35]} and lack of "an outcome based approach"^{footnote 36[36]} when it comes to setting regulation.

The Annual Report^{footnote 37[37]} of Ofgem includes a section that includes Key Performance Indicators (KPIs) and evaluates performance of Ofgem against these KPIs. These KPIs are specific, quantitative (e.g., license grant within 70 days) and measurable.

Performance metrics used by Alberta Energy Regulator appear values-based (e.g., Albertans benefit from a stable, reliable electricity system that protects consumers, attracts investment and has improved environmental performance^{footnote 38[38]}) as compared to transaction or activity based (e.g., number of rate applications reviewed).

The Australian Energy Regulator (AER) takes a quantitative approach to reporting outcomes in its Annual Report^{footnote 39[39]}, outlining the key deliverables as well as the target for the fiscal year.

Question: What are fair and meaningful performance metrics for measuring regulatory excellence, both in terms of efficiency of process and effectiveness of outcomes?

Discussion Theme: Resourcing

The Panel seeks to explore the appropriate financial and human resources required for the regulator to deliver on its mandate. This includes considering best practices in areas such as required staff skills, methods for determining resource levels, and accountability frameworks to ensure the regulator is pursuing best value in setting its budgetary requirements.

The OEB allocates its general operating costs to regulated entities in accordance with a cost assessment model that the OEB determines. Periodically, the OEB conducts reviews and amendments of its cost assessment model to maintain alignment to changing OEB policy, strategic objectives and mandate. The OEB also has discretion to levy costs on regulated entities in relation to specific proceedings or consultations. Revenues from administrative penalties are restricted to support activities relating to consumer education, outreach and other activities in the public interest and cannot be used for other activities.

OEB is financially accountable through reporting its audited financial statements in its annual report. Internal resourcing decisions to support the OEB's mandate are largely the responsibility of the Management Committee (OEB Chair and Vice Chairs serving as the OEB's head governing body), subject to the Minister of Energy's approval through annual business plans. The revenue received by the OEB does not form part of the government's Consolidated Revenue Fund.

The Management Committee has the ability to determine its internal organizational structure as well as human resources requirements (roles, required expertise, and remuneration policies of staff).

Canadian energy regulators are typically self-funded where costs are passed on to regulated entities, and ultimately rate-payers (for example, Alberta, BC, Ontario and Quebec^{footnote 40[40]}). Elsewhere, regulators, such as the California Public Utilities Commission and the Australian Energy Regulator^{footnote 41[41]} are taxpayer-funded. These organizations receive their annual allocations through standard government budgeting processes.

Question: What is the appropriate level of financial and human resources that will best equip the OEB to deliver on its mandate, and what is the appropriate source of its funding?