In a recent Union Gas application, the Ontario Energy Board
(OEB) confirmed that it retains inherent jurisdiction to review the
operation of earnings share mechanisms even if the parties to a
settlement agreement have not agreed to an explicit review
The issue arose in connection with the earning share mechanism
that Union agreed to in its 2008 rate case. In the 2008 settlement,
Union agreed to split 50/50 with ratepayers any return on equity
that was more than 200 basis points over the return on equity
calculated under the OEB's cost of capital formula. The 2008
settlement also provided an "off-ramp" in the event that
Union's return on equity was more 300 basis points above the
OEB's formula; if triggered, the provision required Union to
bring application for review of the earnings share mechanism.
As Union's 2008 earnings were more than 300 basis points
above the OEB's formula, Union was required to bring a review
application. As part of the application, Union agreed to a
settlement under which the off-ramp provision was replaced by a
commitment to share 90% of any earnings more than 300 basis points
above the OEB's formula with ratepayers. One intervenor, the
Industrial Gas Users Association (IGUA), objected to the removal of
the off-ramp provision because it provided Union with a
"licence" to continue to over-earn without review of the
reasons for the over-earning.
While recognizing IGUA's concern, the OEB panel approved the
settlement, noting that "even if the contractual right of the
parties to review the plan disappears when the trigger mechanism
disappears, the Board still has inherent jurisdiction to review
situations it regards as unfair or unreasonable." In the
panel's view, the 90/10 sharing mechanism was an appropriate
check on Union's ability to over-earn and provided greater
regulatory certainty. In reaching this conclusion, the OEB made it
clear that, while parties have considerable latitude to design and
alter earnings share mechanisms, it continues to have the ultimate
responsibility to ensure such mechanisms are just and
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Canada is a constitutional monarchy, a parliamentary democracy and a federation comprised of ten provinces and three territories. Canada's judiciary is independent of the legislative and executive branches of Government.
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