Canada: Ontario Energy Board Decision On Cap & Trade Costs: Why Reasons For Decision Are Essential To Demonstrate Regulatory Independence

Last Updated: August 15 2016
Article by Ian A. Mondrow

The Ontario government has recently been criticized for a decision of the Ontario Energy Board (OEB) to "blend" the cost of carbon emissions associated with natural gas consumption on the delivery line of customers' gas bills. Both the premier and the energy minister correctly distanced themselves from the OEB's decision.

"My understanding is they talked with local distribution companies, they talked to consumer groups across the province, and as you know, they are an independent body," the premier said. "They made a decision to configure the bills that way and we don't direct the OEB."

For stakeholders in Ontario's energy sector, that is good to hear.

The energy minister has reinforced this message.

"It's not up to us as the government to tell an arms-length organization what they can and cannot do," Minister Thibeault said.

In that he is absolutely right.

That economic regulators like the OEB are perceived as independent of government and reasoned in their decision making is critical to their legitimacy in the eyes of industry stakeholders, and the general public.

You can't please everyone all the time. When a regulator makes a decision which is unpopular in some quarters, people grumble. However, if the decision is provided with a full articulation of the reasons supporting it, and those reasons have a sound basis in the evidence placed before the tribunal and expressly considered by it, then by and large the regulated community and those affected accept the decision as considered, reasonable (if not ideal), and independently arrived at. This provides the regulated sector, investors and the public with confidence that independent, "non-political" regulation will ensure regularity, rationality and predictability in the sector, and will preclude politicization and the risks and vicissitudes that go along with it. The provision of reasons for decision is so important for independent and effective regulation that it has been recognized by the courts as a legal requirement.

In its decision to "blend" the cap and trade costs to be incurred by Union Gas Limited and Enbridge Gas Distribution Inc. into the delivery charge line on customers' gas bills, the OEB provided scant reasoning. This lack of reasoning has led many to question whether the comments from the interested parties referred to by the premier, almost all of which advocated a separate line on the bill, were seriously considered.

Of the dozens of written submissions received by the Board on the topic, there was a near unanimous consensus that transparency as well as efficiency and effectiveness in billing and accounting for the cap and trade costs required that these costs be separately set out on customers' gas bills. The two main gas utilities in particular provided a very comprehensive and reasoned discussion of the topic.

In contrast, only one party advocated blending the cap and trade costs into the delivery line item on customer's the gas bill; OEB staff.1 Staff's reasoning was scant. Staff submitted that: i) customers care mostly about the bottom line on the bill (not really a reason for, so much as a defence of, blending these costs into delivery charges); and ii) if there was separate presentment of cap and trade costs, customer call volumes to the gas distributors would increase.

Union Gas, however, indicated precisely the opposite in its very comprehensive submission to the Board. Union indicated that; i) recent, specific customer research that it has done indicates that in excess of 90% of customers specifically want the cap and trade costs to be separately set out on the bill, with many participants in the survey indicating that "not showing the cost would amount to being deceived" ; ii) blending cap and trade costs into the delivery charge line on the bill would likely result in greater customer confusion, and increase call centre activity by as much as 25%; iii) blending the cap and trade costs into the delivery rate would complicate customer accounting and billing, and would effectively result in different delivery rates for different customers of the same customer class (as some larger customers have direct compliance obligations and the utilities will not incur costs on their behalf); and iv) it would not be any more expensive or any more time consuming to present a separate line item on the gas bill for cap and trade costs. Given the greater call centre volumes and accounting complexity anticipated by Union, the OEB's decision can be expected to result in increased costs relative to a more transparent approach to identification of cap and trade costs on natural gas bills.

It is also noteworthy that the two other Canadian jurisdictions which include such costs on utility bills – Quebec and B.C. – have determined that these should be charged through a separate, transparent line on customers' bills.

Why then did the OEB determine that the cap and trade costs should be blended into the delivery charge rather than separately identified? The Board's written reasons don't actually provide an answer.

While acknowledging that "these costs are not specifically tied to the activity of operating a gas transmission or distribution system, the OEB nonetheless asserts that "they are an ongoing business obligation of a natural gas distributor under the Climate Change Act."  Read in context of the balance of the determination, this rationale seems to urge that as a cost of the gas distribution business, it is appropriate to recover this cost like other utility costs (i.e. in delivery rates). The premise, however, is inaccurate. These cap and trade compliance costs are not at all similar to other costs to the utility of providing delivery service.

The OEB's determination that cap and trade costs will not be transparently identified on the bill is all the more curious given the regulator's unwavering emphasis in recent years on energy consumer protection and education. Almost all observers are of the view that blending cap and trade with other delivery costs on the bill undermines rather than supports consumer protection, education and transparency.

The OEB itself reiterates in its determination the importance of consumer education and transparency, indicating that "Utilities will also be required to include information on Cap and Trade in the description section of monthly customer bills." Unfortunately, no further detail of such information is provided in the OEB's determination. Apparently such information is intended as a substitute for what to all of the parties who made submissions on the topic (except OEB staff) felt was the most obvious and transparent approach to informing customers; a separate line on the bill.

The OEB did direct the gas distributors to separately identify the cap and trade costs in their terms and conditions of service, so that customers can find them (though we would hazard most customers won't find them, let alone understand them). The OEB noted that "some residential consumer groups specifically stated that it was not necessary to reflect Cap and Trade program costs as a separate line as long as customers were otherwise informed of the Cap and Trade Program and resulting costs." Apart from this statement begging the question of why a less direct method of informing customers is preferable, the only consumer group submission that stated this also stated that a separate line on the bill would be the best solution.

The OEB's determination goes on to provide reasons why it is okay that the cap and trade costs will not be separately identified on the bill. For example, the OEB repeats OEB staff's contention that what customers really care about is the bottom line, and the bill components themselves do not provide any meaningful price signal.

What the OEB wrote reads more like a defence of blending the cap and trade costs than reasons for doing so. The impression left is that blending of the costs was the starting point, rather than a reasoned determination.

Given the sparseness of the OEB's written reasons, it is not possible to understand why the OEB concluded that it would be better to blend cap and trade costs into the delivery charge line than to present them separately on the bill.

Whatever reasons the OEB might have for its determination, they are not reflected in the discussion released by the regulator. The gap in the reasoning provided leaves plenty of room for the concern and unease in the stakeholder community that the determination was not in fact a judicious, non-political and reasoned one. From the regulator's perspective, and that of the government which advocates and relies on the regulator's independence, this should be a significant concern.


1  In addition, one environmental group submitted that if the costs of cap and trade are separately identified on the bill, the related benefits should be identified as well (an interesting concept but hard to imagine how this could be done).  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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