The OEB Releases Draft Corporate Governance Guidance for Regulated Utilities: From Prescriptive Regulation to Prescriptive Governance?

Introduction

On June 22, the Ontario Energy Board (the "OEB") released a preliminary draft report of its Corporate Governance for Regulated Natural Gas and Electricity Utilities (the "Draft Report"). The draft, prepared by the consulting firm Elenchus Research Associates Inc., is the latest step in the OEB's ongoing development of a guidance for corporate governance (the "Guidance"). According to the OEB, the Guidance is intended to help deliver outcomes that were established in the Renewed Regulatory Framework and to create a more consumer-centric regulatory framework by encouraging better planning and more efficient performance by utilities.

The Consultation Process

In 2014, the OEB commissioned KPMG to conduct cross-jurisdictional research into the corporate governance requirements of other energy regulators. KPMG also surveyed corporate governance practices already employed by certain electricity distributors in Ontario. In its Review of Corporate Governance of Electricity Distributors Report, KPMG provided the OEB with three recommendations to assist electricity distributors in achieving good corporate governance: (1) establish a guidance for corporate governance that reflects leading practices, (2) identify indicators to assist with ongoing monitoring of the effectiveness of corporate governance and (3) develop an approach to bolster the OEB's regulatory oversight of corporate governance. The OEB decided to follow through with the recommendations provided in the KPMG report and determined that it would broaden the scope of the guidance to include all rate-related utilities.

Draft Report

Elenchus was retained to build upon the KPMG Report by developing a principles-based guidance that would apply to all OEB rate-regulated utilities, whether gas or electric, municipally-owned or not. The Draft Report provides an overview of the consultation process and contains chapters that detail:

• historical corporate governance considerations;
• corporate governance principles;
• select court cases relevant to regulated utilities that involve corporate governance;
• corporate governance best practices;
• ownership structures in Ontario's natural gas and electricity utilities;
• recommendations for the OEB guidance;
• recommendations for monitoring objectives; and
• recommendations for assessing utility corporate governance performance.

Preliminary Draft Guidance

A key section of the Draft Report is the Preliminary Draft Guidance contained in Appendix 1. The guidance sets out specific guidance in four areas concerning corporate governance:

Section 1 outlines the responsibilities of the board of directors and recommends a clear delineation of responsibilities for the chair of the board, the chair of each board committee and the CEO.

Section 2 makes recommendations concerning the composition of the board. The guidance recommends that a majority of the board of directors be independent so as to ensure that decisions are made in the best interests of the utility. Further recommendations include the imposition of term limits for directors, regularly meetings between independent directors and the adoption of policy or targets relating to the identification and consideration of women as directors.

Section 3 provides guidance for the creation of board committees to fulfill its responsibilities. The draft recommends the creation of an audit committee at a minimum, but further suggests creating committees responsible for human resources, director nomination, corporate governance and risk management. Provisions related to each proposed committee are contained within the section.

Section 4 details recommended practices to develop, adopt and uphold a written code of business conduct. The Board should also develop practices to avoid conflicts of interest, mitigate risk, formalize a corporate strategy and promote effective communication between the board, management and the shareholders.

Stakeholder Participation

While utilities will not be required to adhere to the guidance, the OEB expects utilities to consider the guidance when developing their corporate governance practices. The OEB and Elenchus want to receive feedback from stakeholders following the release of the Draft Report to assist in the preparation of the final guidance for corporate governance. Interested parties should indicate their intent to participate by filing a letter with the OEB by July 11, 2016, in accordance with the instructions set out in a June 22, 2016 letter posted on the OEB website. There will then be meetings with utilities and other stakeholders to discuss the principles and recommendations in the Draft Report. A second opportunity for stakeholder comment will be available following the issuance of Elenchus' final report.

Issues That Might Be Raised

It can be anticipated that the stakeholder process will generate considerable feedback. The following are issues that stakeholders might raise:

• What are the particular instances of substandard corporate governance in Ontario's regulated utilities that triggered the OEB's initiative in this area? The Draft Report cites the OEB Chair's statement "As the Board moves from a more prescriptive approach to regulation ... there must be greater reliance on robust governance." (p. 8). Parties may question the OEB's justification for replacing a prescriptive approach to regulation with a prescriptive approach to governance.
• Entities regulated by the OEB include electricity transmitters, distributors and generators and gas transmitters and distributors. These entities may be very large corporations that are publicly listed, a (majority) provincially-owned entity, subsidiaries of multinationals, large municipally-owned entities, organizations that are part of a "multi-utility model" (that may involve gas, electricity, water and wastewater services) and numerous small and mid-size companies, all with a variety of ownership structures. These different types of entities are already regulated or governed in myriad ways, including (as applicable) securities regulation, stock exchange rules, corporate statutes, municipal bylaws, common law duties and existing OEB codes, rules and regulations. While the variety of ownership structures is recognized in the Draft Report (p. 39), it appears that neither the Draft Report's recommendations (commencing at p. 46) nor Preliminary Draft Guidance differentiate between the various structures and models of regulated entities. Concerns might be raised about whether and how such recommendations and guidance may or may not conflict with, complement or duplicate existing corporate governance regimes as contained in statutory and regulatory frameworks to which a regulated entity may already be subject.
• In a fast-changing technological environment, where revenue models, customer relationships, service offerings, competitive vs. regulated businesses, and even the monopolistic nature of utilities are being challenged and disrupted, one might expect some discussion of how regulated entities are evolving to meet these challenges and opportunities, and how corporate governance should likewise evolve. These issues are not addressed in the Draft Report and we expect comment on them.
• Finally, where the vast majority of regulated entities consist of municipally-owned electricity distribution companies, there is little consideration of the relationship between the municipality and the corporation, including councillors serving as directors, the municipal council's role as the shareholder and recognition of the distinct political environment in which such entities operate. We expect this too will be addressed in stakeholder feedback.