Auditor General Suggests Some Changes to OEB Processes and Mandate

In her recently released 2022 Annual Report, Ontario’s Auditor General Bonnie Lysyk focused in part on the Ontario Energy Board (OEB). The chapter titled Value-for-Money Audit: Ontario Energy Board: Electricity Oversight and Consumer Protection reviewed the OEB’s role in protecting the interests of Ontario electricity consumers. In general, the Auditor General (AG) found that the OEB has a transparent adjudicative process that takes consumer interests into consideration. However, the AG noted that there are some constraints on the OEB’s ability to protect consumer interests, and some areas where the OEB could more fully exercise its existing mandate. 

The AG’s value-for-money audit of the OEB contains 12 recommendations for improvement ( summarized here). Below are some key findings. 

Two areas where the AG found that the OEB’s mandate could be expanded are oversight of long-term energy planning and of electricity commodity charges. 

• The AG concluded that the long-term energy planning process lacks independent oversight and is too narrowly focused on electricity. The AG noted that that no Long-Term Energy Plan (LTEP) has been reviewed by the OEB since 2011 (and even that review was “abandoned”), and that no LTEP has been issued (or reviewed) since 2017. The AG also commented that although the LTEP is referred to as an “energy plan,” its focus has been almost exclusively on electricity, notwithstanding that electricity accounts for only 17 per cent of the energy used in Ontario (the balance coming from natural gas, gasoline, diesel and other fuels). The AG proposed that the Ministry of Energy develop an expedited timeline for the next LTEP and include all major energy sources in the planning process. The AG also proposed that the OEB be assigned a role in long-term energy planning. The Ministry did not make any commitments in response, but did note the ongoing work of Ontario’s Electrification and Energy Transition Panel.
• The AG found that the OEB does not regulate around one-third of a typical electricity bill. Most of the unregulated charges relate to electricity supply costs from unregulated generators. While the OEB does oversee the charges of Ontario Power Generation, the OEB does not review or regulate other generators whose charges are set through contracts entered into with the Independent Electricity System Operator (IESO). The AG proposes that the Ministry of Energy should expand the OEB’s oversight role for electricity procurement activities. The Ministry disagreed that additional oversight is needed.

Three areas where the AG found that the OEB could focus its efforts are: proportionality of rate application process for smaller local distribution companies (LDCs), review of capital structure and return on equity (ROE) for utilities, and continued monitoring of amalgamated utilities.

• The AG reviewed the costs of “cost of service” rate applications versus the “savings” achieved (the difference between the utility’s request and the OEB’s final determination). The AG found that the costs of the application process for small utilities is a large proportion of the “savings” (equal to 25 per cent of the total five-year savings). The AG proposed that the OEB pay immediate attention to this, and find ways to make the regulatory process more efficient for small utilities. The OEB committed to continue to seek opportunities for efficiency.
• The AG noted that the two key inputs to a utility’s allowed return (capital structure/debt-to-equity ratio and ROE) have not been subject to comprehensive review by the OEB since 2006 and 2009 respectively. That is not in keeping with the OEB’s mandate to ensure the financial viability of rate-regulated entities. The AG indicated that these factors are due for a comprehensive review to ensure that they represent current risk profile and result in a fair return. The OEB indicated in response that this item is included in its 2023-2025 draft work plan.
• The AG expressed concern about whether the OEB is adequately monitoring the performance of amalgamated utilities to see whether the anticipated benefits are being recognized and conditions of approval are being met. The AG noted that customers of utilities acquired by Hydro One may not have achieved the promised benefits (or no harm from) amalgamation. The AG proposed that the OEB implement more formal monitoring and reporting requirements for amalgamated regulated entities, including separate reporting from acquired and merged entities during a deferred rebasing term. The OEB committed to adding some more reporting. 

There are no official “next steps” following the issuance of the AG’s value-for-money audit.  However, the AG does publish annual “followup reports,” to review progress on prior recommendations (see here).