The 2023 OEB Letter of Direction: The Role of the Regulator in Economic Development, the Energy Transition, and the Future of Natural Gas

On November 29, 2023 Ontario’s Minister of Energy issued a renewed Letter of Direction to the Ontario Energy Board (OEB) outlining the Government of Ontario’s priorities for the energy sector and expectations for the OEB’s upcoming 3-year planning period.

The letter’s preamble states that electrification and the energy transition “requires strong, proactive thought leadership from the OEB in consultation with the sector.”  

The Minister’s letter then sets out eleven near-term priorities stating that there is an “urgent need to advance these items in the next 12 months.”

The priorities are:

1. Powering Ontario’s Growth: The OEB will work with the Ministry on initiatives to support implementation of the government’s Powering Ontario’s Growth plan to meet growing future electricity demand caused by economic growth and electrification.
2. Housing, Transportation and Job Creation: The letter references the government’s goals of building at least 1.5 million new homes, new transportation infrastructure, and attracting jobs, stating the OEB must ensure energy infrastructure (electricity and gas transmission and distribution systems) is in place to achieve these goals. The Minister makes two requests of the OEB: (1) to review electricity infrastructure unit costs in the electricity sector and potential models for cost recovery to keep infrastructure costs low so as not to inhibit growth; and (2) review electricity distribution system expansion connection and revenue horizons to ensure that the balance of growth and ratepayer costs remain appropriate. The OEB is to report back on this review in June 2024.
3. Facilitating Innovation within Ontario’s Regulatory Framework: The letter asks the OEB to consider if the traditional approach to utility remuneration based on capital deployment still is the most cost-effective model for achieving the energy transition and what changes may be required to ensure timely investments are made. The OEB is to report back on this review by September 2024, incorporating a review of models deployed in other jurisdictions, with the results of the review included in the findings of the Benefit-Cost Analysis Framework for Addressing Electricity System Needs (or another report).
4. Distributed Energy Resources (DERs) and Future Utility Business Models: The OEB is to continue to work with the Ministry and IESO on developing and assessing local and market opportunities for distributed energy resources (DERs), including consideration of a future regulatory landscape for alternative utility business models.
5. Electricity and Natural Gas Conservation: The OEB is to consult with the IESO and Enbridge on how electricity and natural gas low-income and residential programs can be delivered through a “single window,” reporting back in April 2024. OEB staff are asked to provide guidance on a suitable cost-sharing mechanism for funding energy efficiency programs from the Global Adjustment (GA) and distribution rates based on the principle of beneficiary pays.
6. Electric Vehicles (EVs): The OEB is to provide clear direction to the sector on EV charging, including consideration of service standards, a standardized process with enforceable timelines for connecting EV charging infrastructure, and publicly available electric distribution capacity information.
7. Intervenor Process: The OEB is to continue reviewing the intervenor process and identify opportunities to improve regulatory efficiency and reduce regulatory burden. The OEB is report back in September 2024 with a plan to implement reforms, including consideration of a designated consumer advocate and capping intervenor costs.
8. Performance Measurement Framework Review: The Minister endorsed the OEB’s proposal to launch a small working group with the sector to provide feedback on goals and performance measurement as part of the upcoming mid-term performance measurement framework review.
9. Red Tape Reduction: The OEB is to keep the Ministry informed on progress towards meeting its target of a 5% burden reduction over the baseline measured by the Ministry of Energy in 2018 by March 2026.
10. Distribution Sector Resiliency, Responsiveness, and Cost Efficiency: The Ministered endorsed several recommendations identified by the OEB in its Improving Distribution Sector Resiliency, Responsiveness, and Cost Efficiency report, asking the OEB to make significant progress by the end of 2024 in developing and implementing policies that will require local distribution companies to:

• Provide details and report on their current storm recovery planning and preparation activities;
• Incorporate climate resiliency into their asset and investment planning;
• Engage in a regular assessment of the vulnerabilities in their distribution system and operations in the event of severe weather;
• Prioritize value for customers when investing in system enhancements for resilience purposes; and
• Satisfy minimum targets for customer communication regarding interruptions and restoration of service following major weather events and measure and report on restoration of service following such events.

The Minister also endorsed the OEB’s proposals related to cost-effective service, including:

• Reviewing whether the accounting and associated rate treatment of shared services should be adjusted and develop guidance on a fair approach to cost and risk apportionment for shared service provision;
• Engaging stakeholders in a scoping exercise at the outset of the Mergers, Acquisitions, Amalgamations and Divestiture (MAADs) review;
• Reviewing elements in its incentive rate-setting mechanisms and examining distributors’ spending patterns to identify where changes or incremental incentives are warranted; and
• Developing a performance incentive regime that considers aspects such as customer service, resilience, or managing peak loads to defer distribution system needs, and working with the sector to develop principles, generic designs, and other criteria for performance incentives.

   11. Electrification and Energy Transition Panel: The Minister will keep the OEB informed on further initiatives to be incorporated into the OEB’s subsequent business plans resulting from the Panel’s advice.
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Commentary
The renewed letter of direction to the OEB continues the trend of prescriptive letters with many priorities, requiring the OEB to carry out a significant amount of work over the next 12-month and 3-year planning periods.

However, this new letter of direction is different than previous letters in three ways by setting out: (1) an expectation of OEB thought leadership; and, more significantly, (2) expectations for the OEB to facilitate broader government policy beyond its traditional role as an economic regulator; and (3) clarity to the OEB on the government’s policy regarding the future role of natural gas in Ontario’s energy system

1. Thought Leadership

The letter asks the OEB to review specific aspects of utility regulation and regulatory processes, including, as noted above, electricity distribution system expansion connection horizons and revenue horizons for the purposes of cost recovery, as well as utility remuneration models and intervenor processes. Changes to connection and revenue horizons as well as remuneration methods would represent a significant departure from current, longstanding practices at the OEB.

However, evolving changes associated with the energy transition are creating much uncertainty about the future structure of the energy system, the role of utilities, consumers, and markets as well as potential new competitive markets entrants. This is leading many to question whether traditional regulatory frameworks are fit for purpose to address these emerging challenges.

As a result, reviews of existing regulatory frameworks are warranted now, which makes the Minister’s statement regarding the need for “strong, proactive thought leadership” appear to be a signal to the OEB to take greater initiative and conduct reviews on its own motion rather than being prompted through prescriptive Ministerial requests (such as those included in the letter of direction).

      2. Provincial Economic Development

Governments around the world have historically used energy policy for economic development purposes with a focus on competitive energy costs. In Ontario, this has typically occurred through taxpayers subsidizing electricity costs, cross-subsidization between different customers classes, and the government designating certain transmission lines as priority projects to accelerate regulatory reviews by declaring that the line is needed.

However, the Minister’s letter contains statements directed at ensuring that regulatory energy infrastructure development and cost recovery processes are supporting provincial housing and economic development goals.

For example, on Housing, Transportation and Job Creation, the letter states:

“Our government has ambitious goals to build at least 1.5 million new homes, new highways, subways and improved rail transportation […] it is critical that the OEB ensures that Ontario’s electricity and gas transmission and distribution systems are built to support these goals in a timely manner […] to review electricity infrastructure unit costs in the electricity sector and potential models for cost recovery that could help to ensure infrastructure costs are kept low and are not a barrier to growth in our province […] keep in mind the impact that delays and uncertainty can have on Ontario families, businesses and Indigenous communities, as well as economic investment in the province.” (emphasis added)

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Further, with respect to Facilitating Innovation within Ontario’s Regulatory Framework, the letter states that the “government’s vision for a clean energy grid that attracts investment and creates jobs while continually enhancing reliability, resiliency and customer choice will require utilities to make new investments.”

Through these statements, the letter appears to mark a significant shift in how the government views the role of the OEB, moving from primarily an economic regulator focussed on economic efficiency, cost effectiveness, and protecting consumers (on prices, reliability, and quality of service) to a new role of explicitly considering and supporting broader provincial economic development, investment, and job creation initiatives in its regulatory policy and decision-making. This is a major departure from how the OEB has operated historically.

It is not apparent that the OEB is currently equipped in terms of statutory mandate, expertise, or processes to take on such a role. Nor is it clear how the OEB will incorporate economic development with its existing legislated objectives and traditional approach to utility regulation. For example, the OEB will need to balance the time needed to appropriately assess applications filed by distributors and transmitters (and allow stakeholder participation) and evaluate criteria such as need, affordability and cost effectiveness while also ensuring infrastructure is built in a timely manner to meet broader government goals.

      3. The Future Role of Natural Gas
The other significant aspect of the letter is the clarity on current government policy on the role of the natural gas system in the energy transition. The energy transition became a contentious and central issue in Enbridge Gas Inc’s 2024-2028 Natural Gas Distribution Rates proceeding, which concluded the Phase 1 portion of the hearing in October.

Much debate centred on the future of natural gas broadly (including the potential for stranded assets), the role and jurisdiction of the OEB in considering the energy transition in general as well as how it related to the government’s plan to build 1.5 million new homes over the next 10 years with a focus on the role of natural gas versus electricity in serving the planned new residential heating load.

The statements in the Minister’s letter regarding Housing, Transportation and Job Creation are unambiguous and likely will be interpreted by some as aimed directly at the policy issues at the Enbridge proceeding: “it is critical that the OEB ensures that Ontario’s electricity and gas transmission and distribution systems are built […] The OEB should continue to ensure that the needs of all customers are considered in its work, and that access to electricity and natural gas in an affordable manner remains central to decision-making.” (emphasis added)

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Further, with respect to the province’s Powering Ontario’s Growth plan, the letter of direction from the Minister states that he expects “the OEB will work with my Ministry on a number of initiatives that support implementation of our plan.”  While Powering Ontario’s Growth is very much focussed on electrification and the energy transition, it says “Natural gas will continue to play a critical role in providing Ontarians with a reliable and cost-effective fuel supply for space heating, industrial growth, and economic prosperity.” (p. 30)

These explicit statements that the OEB ensure the building of systems for, and access to, both electricity and natural gas as well as implementing Powering Ontario’s Growth effectively settles the policy uncertainty over whether the new homes are to be connected to the natural gas system. Government policy is unmistakably supportive of maintaining and expanding the natural gas system to meet future energy needs.

To be clear, unlike the Minister’s explicit direction to the OEB to facilitate the electrification of transportation through EV-specific rates and charging infrastructure, there is no direction to the OEB to facilitate electrification and fuel-switching of space and water heating or curb expansion of the natural gas system.

Conclusion‍

The renewed letter of direction continues a long-term trend of prescriptive letters of direction (formerly mandate letters) to the OEB, highlighting the importance of affordability and reliability. At the same time, it states the need for the OEB to take a strong thought leadership position in the sector.

However, the letter goes deeper into how the OEB should specifically discharge its responsibilities through explicit expectations on advancing provincial economic goals and clarifying government policy on the evolution of Ontario’s energy sector infrastructure, particularly the natural gas system. Importantly, the OEB’s role as an economic regulator appears to be changing to one as a facilitator of broader government policies.

Looking ahead, how the renewed letter of direction is incorporated within the OEB’s new corporate governance structure that created discrete separation between the management, administrative, and adjudicative functions of the OEB, will be a matter of interest going forward.

Specifically, the OEB expects to issue the Phase 1 decision of the Enbridge rebasing application by the end of 2023. To the extent the Panel’s decision acknowledges and/or incorporates the letter of direction may provide an early understanding of how OEB Commissioners are considering and interpreting the Minister’s expectations and government policy. The more recent proceeding regarding the 2023 Panhandle Regional Expansion Project will provide further insight.

Similarly, the OEB’s upcoming 2024/25–2026/27 Business Plan will provide greater insight into how the OEB’s Board of Directors and Executives interpret and intend to operationalize the items in the letter of direction, such as proactive thought leadership. Additionally, the Business Plan will reveal how OEB management’s view on natural gas system access and infrastructure aligns with the interpretation of OEB Commissioners.

The reaction of sector stakeholders and intervenors to the letter of direction and how the letter is used by participants in current and future policy consultations and adjudicative hearings will also be of interest.

Last, it remains to be seen how the advice contained in the Electrification and Energy Transition Panel’s forthcoming report will align with the letter of direction, and what additional government direction to the OEB in 2024 follow from the Panel’s recommendations.
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