OEB's Consultation into Regulatory Treatment of Pension Costs is Moving Ahead

As we reported last year, regulated utilities in Ontario can expect changes to the reporting and recoverability in rates of their pension costs. The Ontario Energy Board's previously announced consultation to look at how pension and other post-employment benefits (OPEBs) costs are treated for regulatory purposes will be the subject of a Stakeholder Forum on July 19, 2016. Presumably, the OEB will update relevant regulatory rules and instruments after that time.

As set out in the OEB letter announcing the July 2016 Stakeholder Forum, "[t]he objectives of the consultation are to develop standard principles to guide the OEB's review of pension and OPEB costs in the future, to establish specific information requirements for applications, and to consider appropriate regulatory mechanisms for cost recovery which could be applied consistently across the gas and electricity sectors for rate-regulated entities." These objectives are consistent with the OEB's initial May 2015 Notice in this consultation, which suggested that the OEB wants to move towards a standard treatment of pension and OPEBs costs for all of the utilities that the OEB regulates. Among other things, it appears that the OEB seeks to ensure that these costs are comparable and benchmarked between utilities. Whether and how this can be accomplished remains to be seen. Standardization will be challenging among a diverse group of utilities, some of whom use different accounting standards (IFRS, US GAAP, ASPE) and many of whom have long-standing pension and benefit arrangements with their employees.

This topic has attracted widespread interest from stakeholders - more than 25 parties have applied to participate in the consultation, including utilities, ratepayer groups and at least one out-of-province observer. In response to the OEB's invitation in the initial May 2015 Notice, 16 of these parties filed submissions addressing a list of questions - copies of the submissions can be found here. Since the time that this consultation was convened, the OEB retained an outside expert (KPMG) to identify issues that are relevant to the consideration of the appropriate ratemaking treatment for pension and OPEB costs. The OEB has now published a May 2016 KPMG Report to the OEB on Pension and Other Post-Employment Benefit Costs. Among the key overview comments found in that report are that a "one-size fits all approach" may not work and that it may be appropriate for larger utilities to move away from accrual accounting for pension and OPEB costs. A proposed alternative is a "Modified Funding Contribution method," which is closer to simply including "cash costs" in rates, but which allows for some flexibility. The KPMG Report, along with stakeholder submissions, will be presented and discussed at the July 2016 Stakeholder Forum.