The Ontario Energy Board recently announced plans to open a consultation respecting its role in providing guidance to regulated entities with respect to corporate governance. In September, the Mowat Centre, a policy analysis group based in Toronto, released a strongly worded analysis of the proposition. Written by prominent regulatory lawyer Robert Warren, the paper examines the possible role of the Ontario Energy Board in the governance of rate-regulated utilities. The conclusion of the paper is that the Board should have no such role. To begin with, Mr. Warren says, it serves no practical purpose. Beyond that, the paper highlights the fact that the OEB already has effective control over much of this activity. The paper asserts that for the OEB to exercise a direct form of oversight over corporate governance would serve no public policy objective, and would instead would represent a particularly intrusive form of regulatory over-reach.
In a letter of June 22, 2016, the Ontario Energy Board (OEB) initiated a consultation to develop guidance on corporate governance for OEB rate-regulated utilities.1 The Board-commissioned reports – from consultants Elenchus and KPMG2 – on which the consultation will apparently be based suggest a range of possible “guidance mechanisms”, ranging on a continuum from the issuing of standards for corporate governance, to periodic performance audits of compliance with those standards, to direct OEB engagement with utility boards.
The Mowat paper examines the potential role of the OEB in relation to the governance of rate-regulated utilities. It argues that the OEB should have no such role. The reasons it gives for its conclusions are:
• The OEB’s jurisdiction with respect to guidance on governance is, at best, questionable. Prior to recent amendments to the Ontario Energy Board Act (OEBA), the OEB had neither explicit nor implicit jurisdiction with regard to governance. As a result of these recent amendments the OEB has, arguably, implicit jurisdiction, but only to a limited extent. Whether it should exercise that jurisdiction is questionable, based on the interpretation and application of similar provisions in other statutes.
• At the most basic level, playing any role with respect to governance would serve no purpose. What is regarded as good governance practice is well known. It has been the subject of policies issued by securities regulators, rulings by the courts, academic commentary and writings in the business press. The OEB has no expertise in governance that would enable it to add anything useful to what is already well established.
• The OEB already has extensive knowledge of, and control over, certain business practices of rate-regulated utilities through its powers to approve rates, to issue licenses, and to make Codes. It can fulfill its statutory mandate to set just and reasonable rates, and protect the interests of consumers with respect to prices, without playing any role, however limited, in the governance of regulated utilities.
• That the OEB should play some role in the governance of rate-regulated utilities is not supported by either the Elenchus Report or the KPMG Report. In addition, the recommendations in those reports would, if adopted, represent an inappropriate regulatory over reach.
• Playing some role in the governance of rate-regulated utilities would serve no public policy goal. On the contrary, playing such a role would be contrary to good public policy.
The paper begins with an examination of what is meant by governance. It then reviews existing regulatory rules and practices of the OEB. Mr. Warren contends that those rules and practices affect some of the outcomes of utility governance, but not the governance itself. That is an important distinction, and one that he argues the OEB should respect.
The paper then examines the question of the jurisdiction of the OEB to engage in the oversight of corporate governance. In discussing jurisdiction, it contrasts the roles of governance as set out in two Ontario statutes, those in the Ontario Business Corporations Act (OBCA)3 and those in the Ontario Environmental Protection Act (EPA)4. It discusses the approach of the courts to interpreting the governance provisions of the OBCA, an approach he argued should preclude the OEB from trying to play any role in the governance of utilities.
The paper reviews consultants’ reports from KPMG and Elenchus with a view to determining first, whether they support the OEB playing a role in the oversight of corporate governance and, second, whether the recommendations they contain are either reasonable or appropriate.
Finally, the paper considered whether having the OEB play a role with respect to the governance of rate-regulated utilities represents good public policy.
Near the outset, Mr. Warren notes that existing regulatory rules and practices of the OEB “affect some of the outcomes of utility governance, but not the governance itself. That is an important distinction, and I will argue one the OEB should respect.” He stresses that “The OEB exercises control over the outcome of some corporate decisions through the regulatory process, but not over the decision-making process giving rise to those outcomes. The latter is what constitutes corporate governance.”
Mr. Warren argues that, “Given that the OEB has no jurisdiction over the activities of the unregulated affiliates of rate-regulated utilities, any attempt to do so indirectly by exercising control over the governance activities of the regulated utilities would take the OEB beyond its jurisdiction. … [W]hile Sections 125.2 and 126(1)(d) of the OEBA appear to give the OEB some measure of control over the governance of regulated utilities, though not their unregulated affiliates, the interpretation and application of similar provisions in the OBCA strongly militates against the OEB exercising any jurisdiction with respect to the governance of regulated utilities.”
He notes that “The deference shown by the courts to the decisions of officers and directors, reflected in these decisions, should be kept in mind when the OEB decides whether it should play any role with respect to the governance of regulated utilities. … Once in place, any form of guidance with respect to corporate governance will amount to an invitation to exercise control for governance decisions. … It will become difficult for the OEB, whether on its own or at the behest of some stakeholder, to resist interfering in governance matters which are properly the concern of the corporation and its shareholders.”
At a more general level, Mr. Warren contends that, “The public interest expects, and deserves, the exercise of discipline and restraint by regulatory agencies in the exercise of their powers. … Further
articulation of the principles of good governance by the OEB is unnecessary. … [T]here is no need
for any measure of interference, no matter how seemingly benign, with the corporate governance of those regulated utilities.”
He concludes the paper saying, “It may be asked, what harm is there in the OEB providing guidance on corporate governance, particularly if that guidance consists only in repeating already well-known principles? The harm lies in what I refer to as regulatory over-reach. The rule of law depends, in part, on regulatory agencies doing only what their statutes permit them to do. Doing more, whether they exceed either their jurisdiction or their expertise, creates confusion and is an implicit invitation to the abuse of power.”
Robert B. Warren is senior counsel at WeirFoulds LLP in the area of regulatory advocacy. This article was originally published by the Mowat Centre, https://mowatcentre.ca/regulating-utility-governance/. Reprinted with permission.