Keith Bryan

February 28, 2002

Please also see  Energy Probe urges ammendments to Ontario Energy Board :http://energy.probeinternational.org/utility-reform/reforming-ontarios-local-electrical-distribution-sector/energy-probe-urges-ammendment

Summary and Conclusions

The evolution of Ontario’s regulatory processes is resulting in a situation where the interests of some stakeholders may not be adequately represented. It is necessary that a mechanism be put in place that will allow for the funding to be obtained during all aspects of each process.

Introduction

In recent years the province of Ontario has joined various other jurisdictions, both in North America and elsewhere in the world, in attempting to increase the benefits accruing to society by changing its approach to the regulation of natural monopolies in the energy sector. Its efforts have taken the form of two major sets of initiatives. One has been to encourage regulated companies to unbundle the activities they engaged in into those that have to be regulated and those that do not and to remove the latter from the regulated environment. The second set of initiatives, examples of which include PBR and future rule making processes, have been targeted at reducing the time and effort, and thus the cost related to, the process of regulating the remaining activities. While it is obviously beneficial, where possible, to reduce the time and costs associated with the regulatory process, these reductions should not be at the expense of the overall public interest. It is the tension between the desire to modify the regulatory process and the need to ensure that the public interest is protected that will be addressed here.ContextThe body charged with the responsibility for regulating the activities of natural monopolies in the energy sector in Ontario is the Ontario Energy Board (“OEB”). The OEB draws its authority from the Ontario Energy Board Act, 1998 (“the Act”).

One of the underlying principals of the OEB’s responsibilities under the Act is the protection of the public interest. This has traditionally been interpreted to mean that the Board should consider the interests of all consumers, and society in general, when arriving at its decisions. This responsibility is also set out in the Act. In terms of the Board’s objectives in relation to the regulation electricity, Part I, Section 1.3 identifies one as:

“To protect the interests of consumers with respect to prices and the reliability and quality of electricity service”

While Section 1.6 identifies another as:

“To facilitate energy efficiency and the use of cleaner, more environmentally benign energy sources in a manner consistent with the policies of the Government of Ontario. 1998, c.15, Sched. B, s.1.”

Similarly, Part 1 Section 2 sets out the Board’s objectives concerning its responsibilities for the regulation of activities involving natural gas. Section 2.2 identifies one of those objectives as:

“To maintain just and reasonable rates for the transmission, distribution and storage of gas”

While Section 1.5 states another as being:

“To facilitate opportunities for energy efficiency consistent with the policies of the Ontario government. 1998, c.15, Sched. B, s.2.

 It is also clear that the government takes these responsibilities related to consumer interests seriously. On June 7, 2000, the Minister of Energy, Science and Technology issued a letter to the OEB related to its deliberations concerning allowable earnings levels for electrical distribution utilities. The letter stated, in part:

“In making an order under section 78 of the Act approving or fixing just and reasonable rates for the distributing of electricity by a municipal electric utility, in being guided by the objectives set out in section I of the Act, the Board shall give primacy to the objective “to protect the interests of consumers with respect to prices and the reliability and quality of the electricity service.”

Leaving aside what many saw as an intrusion into the Board’s jurisdiction and a threat to its independence, it is clear that the government thought it of the utmost importance that the Board gives the interests of the consumers’ primacy.

The logical first step in the Board carrying out its mandate to protect the interests of consumers is becoming aware of what those interests are. These interests are not always obvious and they must be derived in the context of a process where normally some parties are actively representing their own interests. A presiding panel of the OEB must base its decision on the evidence and arguments it hears in a given proceeding. The only exceptions to this are facts that are generally known or those that are commonly accepted technical or scientific facts that are within the members’ areas of expertise. This means that the panels are, for the most part, dependent upon the evidence and arguments put forward by the parties that are active in that particular proceeding. It is therefore necessary for some party to actively advocate for the stakeholders that are not able to do so directly if those interests are to be properly represented in the decision making process.

Actively participating in an OEB process is both time consuming and expensive. Since larger customers generally have the concentration of interests and the resources to obtain such representation, it is the residential and smaller commercial customers that, due to their lack of connectivity and organization, find participation difficult or impossible. In addition there is a need for parties to represent the more general aspects of the public interest, such as environmental matters, which are less directly cost driven. In some U.S. jurisdictions, the task of representing such interests in the regulatory process has been undertaken by a public advocate that is part of, or associated with, the state government. In Ontario there has never been an official government sponsored advocate. Traditionally various public interest groups have taken on the role of representing the interests of those parties who were not present and more general societal interests. Small commercial interest seem particularly underrepresented. At one time, the staff played a very role as well but this ceased with the reorganization of the Staff a few years ago. At that time, there was a concern with redundant activities and the most appropriate use of the Board Staff’s limited resources. The decision was made to cede this responsibility entirely to the public interest groups and leave the Board Staff with the duties of advising the Board on technical matters and ensuring that there was as complete a record as possible upon which the Board could base its decision. As a result the Staff would no longer take positions on matters at issue before the Board. This meant that the Board has had to rely solely on the public interest groups to act on behalf of smaller customers and other interests that would otherwise go unrepresented.

The above situation will be exacerbated in the future by the changing role of the municipal electric distribution utilities. Whereas in the past, as municipally owned, non-profit entities, they acted as an advocate for the customers served by their systems and were responsible to locally elected officials, there is a growing tendency for these entities to be put on a for-profit footing. As a result, their interests may not always be as coincidental with the interests of their customers and thus may deprive the latter of another source of representation.

Current Situation

Regulation is frequently viewed as a process that is both costly in terms of both financial and other resources and one that does not necessarily adequately achieve the goal of replicating what would occur in a competitive market. Over the past few years there have been initiatives around the world that have attempted to bring market discipline to regulated companies. Many, if not most, of these initiatives have taken the form of some variant of Performance Based Regulation or PBR. A PBR mechanism is one that in some fashion seeks to provide an incentive to a regulated company to attempt to achieve a stated objective, such as the reduction of costs, where that same incentive would not be present in the previous cost of service regulation. In addition, many of the mechanisms have a multi-year time frame with limited if any regulatory activity in the interval. This has the benefit of reducing the level of regulatory expenses for all of the parties involved.

The most common PBR mechanisms provide a cap for either rates or revenues each year. These mechanisms first establish a base for the chosen variable and then allow it to escalate by some inflation related factor each year. This is usually modified by a factor to introduce some level of anticipated productivity improvement. The end result of these mechanisms is that if the utility can hold its cost escalation to an amount that is less than the allowable increase less the productivity offset, it will enhance the revenues flowing through to shareholders. Conversely, if the utility incurs costs that are larger than the amounts allowable under the formula, the returns to shareholders are decreased. In Ontario, most of the PBR mechanisms that are either in place or contemplated fall into this category.

In addition to the movement towards multi-year PBR mechanisms, there has also been a tendency towards the use of consultative processes to either augment or in some instances replace the standard hearing process. These consultations are attractive for a number of reasons. The meetings involved are frequently more productive because the atmosphere is generally less confrontational and adversarial. As such the discussions are more open and parties are less guarded and willing to discuss compromises. In addition, they are less costly since they do not to the same degree require the incurrence costs such as those for legal and transcript services. There still are however, substantial costs associated with participating in these processes. Typically the processes are complex and require substantial time to review and analyze and, in some cases, the assistance of outside experts. In addition, the processes typically involve a series of meetings, such as information and negotiating sessions, which parties must attend if their participation is to be effective. This does not present a hurdle for larger entities such as customers with significant usage levels, some marketers and many other utilities that have substantial financial stakes in the outcome. It can however act to deter other entities like smaller customers and utilities and public interest groups that must rely on fund raising to support their activities. Where funding for such groups was, and still is, available for the hearing process, there is no such mechanism that can be accessed with respect to the activities that occur prior to or as a partial alternative to the start of the formal, legal, filing. Similar problems will arise as the OEB begins to engage in rulemaking proceedings.

While it might be argued that the disadvantaged parties will have an opportunity to express their concerns during the formal process, which still operates under the OEB’s current funding mechanism, this is only superficially true. The impact of group dynamics and the integrated nature of most settlements, make it much more difficult to effect a settlement agreement once it has been finalized by the participating parties as compared to achieving the same result during the settlement’s development. Parties that might be swayed by arguments during the initial discussions may be less likely to agree to re-open the settlement when that might put other aspects of the agreement at risk. In addition they may be concerned about being viewed as being unreliable by other parties. In fact many settlement agreements prohibit parties to that agreement from opposing any aspect at a later date in all but the most extreme of circumstances. In any event the social sanctions that would apply to any party that changed its position would act as a great deterrent. Similarly, the OEB panel that would have to weigh the arguments of the new parties against the chances that the agreement that had been reached would unravel due to the changes it was directing. All of these factors work to increase the burden of proof that the new participants would have to meet in order to be successful and thus likely puts them at a disadvantage that could at times be significant.

The lack of a funding mechanism also puts the utilities in an awkward position. They would prefer to have all parties involved from the beginning. This works to avoid having the settlement, into which they have often invested considerable time, effort and money, unravel during the hearing process. However, if they were to provide funding themselves it would be at the expense of their shareholders. Further, given the presence of representatives from some stakeholders in the process, the utilities often feel the responsibility to represent the interests of those that are not represented. This is not appropriate because the interests of those stakeholders may not always be aligned with the interests of their shareholders. Further, it potentially results in the utilities being forced to take the side of one group of stakeholders against another when, in fact, the utility’s own direct interests are not at stake.

Absent some sort of funding mechanism, the public interest groups have two courses of action open to them: They can decline to participate until the formal hearing process starts or they can try to participate using their organization’s own funds. If they take the first option they risk encountering all of the problems set out above. On the other hand, given the acute shortage of funds experienced by most such organizations, if they try to participate using their own funds they risk their involvement being ineffective due to under funding. In addition the funds used to participate in the regulatory process would be at then expense of the group’s other activities.It might be suggested that the obvious answer would be for these groups to raise funds directly from the customer groups involved. This is often easier said than done. As mentioned earlier, the interests of both the regulated utility and larger individual customers can be said to be concentrated, however for the smaller customers they are diluted. While larger customers are frequently sophisticated enough analyze the material involved in order to recognize the benefits of participating in the regulatory process and then to retain and instruct legal counsel accordingly, the same is likely not true of residential and smaller commercial customers. These parties often do not have the same understanding of the process and likely think that since the utility is regulated that some government agency is looking out for their best interests. Individually these customers do not have the funds to participate and the pooling of resources is difficult. Direct fund raising is an inefficient method of funding these activities since the administrative costs are high and the direct benefit to those that do contribute may be out weighed by the costs of participating. This gives rise to the question of fairness since those that do not contribute will none-the-less reap the benefits arising from the efforts and contributions of those that do.

Proposal

As the new regulatory environment develops, it will be necessary to ensure that a level playing field for all stakeholders is maintained and that the OEB be able to properly consider the interests of all stakeholder groups when arriving at its decisions. It will therefore be necessary to develop a mechanism whereby there are parties participating in all phases of that process who will represent the interests of the residential and small commercial customers.

There would unlikely be significant support for the establishment of a Public Advocate like that which exists in many U.S. jurisdictions. Current government policy is targeted at reducing both the size of government and its footprint in business process. It would be unlikely that they would entertain the establishment of a new agency at this time.

Similarly, there would probably be difficulties in gaining approval for the expansion of the OEB staff that would be necessary for them to assume this role. Further, there are hazards inherent in this course of action. Given the close day-to-day proximity and the close working relationship between the Board Staff and the Board members, there is a danger of a perception that the staff would have undue access to, and therefore would, even inadvertently, exert undue influence on, those members.The most appropriate mechanism would be to extend the funding currently available to public interest groups during the formal hearing to other phases of the regulatory process. This would allow those entities to adequately participate in all aspects of the processes and thus ensure their ability to act for those interests that would otherwise not be represented. Another advantage of this approach would be that the variety of public interest groups that would likely be involved would better reflect the diversity of opinion concerning the topics at issue than would a single group such as OEB Staff.

The discipline of the mechanism could be maintained by continuing to apply, with some minor modifications, the funding rules currently utilized by the OEB as set out in Part IX of their current Rules of Practice and Procedure. Under this mechanism the burden of proving that the costs were incurred necessarily and directly in order to participate in the proceeding lies with the party claiming the costs. The party seeking cost recovery would be obliged to file an affidavit setting out a detailed claim for those costs and the OEB panel would have to be assured that that party’s involvement was in the public interest and aided the process as a whole. In addition, the OEB requires that, where parties represent similar points of view, they attempt to work co-operatively in order to reduce costs. It would be open to the utility involved to challenge part or all of a claim with the OEB as arbitrator. Board Staff, which is generally present during the consultation meetings, could provide assistance to the OEB panel during such a challenge if that were to be required.The current cost recovery process results in payment being made after the OEB renders its decision in a proceeding. Given the length of some of the consultations, it might not be feasible for those requiring recovery to wait that long for their entire funding. One approach to address this concern would be to pay a per diem for attendance at the meetings on a regular basis while leaving the recovery of claims for costs such as preparatory activity until the conclusion of the hearing. The attendance at the meetings would likely be the least controversial aspect of any cost claim. The OEB would set the per diem amount each year and the utilities would put the amounts involved into an interest bearing deferral account for recovery at a later date. The opportunity for such recovery would be guaranteed as long as the rules set down by the OEB were adhered to. Some might challenge that appropriateness of using revenues from ratepayers to represent their interests without their expressed consent. However, the precedent of small residential customers providing, through the rates they pay, the funds necessary to protect their interests is well established and should not be altered by the change in the form of the regulatory process. As discussed above it is likely not practical or efficient for the public interest groups to raise funds directly for the purposes of participating in regulatory processes. Further, it is likely that the overall costs payable by these customers would still be significantly less than that under the current system.

Resume-Keith BryanPROFILE

·  Twenty-four years experience gas electricity industries assuming steadily increasing levels responsibility activities primarily related regulation rate design but involving wide range functional areas.

·  Directed applications interventions before Ontario Energy Board (OEB), National Energy Board (NEB) U. S. Federal Energy Regulatory Commission (FERC). ·  Appeared witness before regulatory tribunals on numerous occasions.

·  Played major role redesign gas utility rate schedules meet challenges resulting restructuring industry due deregulation.

·  Frequently served company representative on industry groups

WORK EXPERIENCEINDEPENDENT ELECTRICITY MARKET OPERATOR

The IMO operates bulk electricity system province Ontario. Once electricity market opens, IMO will run electricity spot market province will bill settle financial accounts with those wholesale market.

Manager Regulatory Proceedings Research 1999-2001

·  Provided management, strategic tactical support IMO’s annual financial regulatory filings with OEB.

·  Managed, coordinated chaired series meetings with stakeholders related potential benchmarking IMO costs services.

 ·  Managed IMO’s compliance with regulation related conditions set out its OEB licence.

·  Facilitated monitoring IMO’s participation regulatory proceedings matters Ontario other jurisdictions including FERC.

·  Provided research support concerning regulatory related matters

. ·  Acted primary representative directed involvement IMO Electronic Regulatory Filing project. an initiative Ontario Energy Board developing methodologies required allow regulatory proceedings conducted an electronic opposed paper environment.

·  Managed development regulatory databases both electronic hard copy format

UNION GAS

(Formerly known Centra Gas, ICG Utilities Northern Centra Gas)

Union Gas major Canadian natural gas utility providing storage, transmission services customers Canada U. S. distribution services customers over 400 communities Ontario.

Manager, Regulatory Planning Research 1995-1999

·  Directed activities Union Gas Centra Gas applications other utilities before OEB. Recommend strategy senior management approval direct legal counsel. Determined reported on implications developments such applications Union Centra.

·  Directed staff five persons charged with researching regulatory developments other jurisdictions order keep senior management other personnel apprised matters interest importance Union Gas Centra Gas. group’s activities included development publishing two periodic newsletters circulated within utility its affiliates.

·  Managed activities two regulatory libraries

·  Acted primary representative directed involvement Union Gas Centra Gas Electronic Regulatory Filing project.

·  Directed Regulatory Affairs Departments activities related Y2K problem.

·  Acted an advisor other personnel on cost allocation rate design matters. Manager, Regulatory Projects Research 1992-1995

·  Directed Centra’s interventions applications other natural gas electric utilities before OEB NEB.

·  Acted an advisor rate design cost allocation personnel including, where required, appearing witness regulatory proceedings. involved development presentation both written oral evidence production legal argument.

·  Served company representative on various industry committees including Direct Purchase Industry Committee, which consisted utilities their customers attempting shorten regulatory proceedings reaching consensus on contentious matters related direct purchase activities.

·  Identified, researched reported senior management on wide range topics including developments other jurisdictions involving regulation, direct purchase matters, rate design cost allocation methods.

Manager/Supervisor, Regulatory Projects 1988-1992

·  Administered regulated activities two subsidiary pipelines under jurisdiction NEB FERC.

·  Managed Centra’s interventions regulatory proceedings other utilities both federal provincial levels.

·  Directed administration company’s regulatory library.

·  Conducted research into wide range matters related regulation rate design.

Supervisor, Rates Cost Studies 1985-1987

·  Took lead role complete redesign Centra’s rates meet requirements newly deregulated environment. Developed provided extensive written evidence oral testimony support these changes. These were accepted virtually without modification regulator, which commended Centra on its efforts.

·  Administered company’s rates developing evidence support modifications necessary reflect changes costs. EDUCATIONM.B.A. (Natural Resource Management Personnel Management), University of TorontoHonours B.A. (Economics), Laurentian University Sudbury