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The Governance of Regulatory Agencies – A Further Case Study of the Ontario Energy Board

Robert B. Warren




Introduction and Overview


The Ontario Energy Board (OEB) has a new governance structure, the product of the “Ontario Energy Board Modernization Review Panel” (the “Dicerni Panel“) and the recommendations of its Report (the “Dicerni Report“) enacted by the Fixing the Hydro Mess Act, 2019 (“Bill 87“). The new governance structure differs in several respects from the one it replaces, chiefly in the use of what will be referred to herein as the corporate business model.


The way the new corporate structure was developed, and the form it takes, raise a number of questions. This paper focusses on three of those questions, as follows:


  1. Is the new governance structure necessary?

  2. Is the new governance structure appropriate for a regulatory agency?

  3. Did the way the new governance structure was developed and implemented reflect good public policy?

Before addressing those questions I will do the following:


  1. Describe what governance is and the principles which should inform it:

  2. Describe what I mean by public policy or perhaps more accurately good public policy;

  3. Set out the principal functions of the OEB and describe how the performance of those functions relate to governance;

  4. Describe the governance structure which the new one replaces; and

  5. Describe the new governance structure.

Governance and Public Policy


Governance is a term used to describe the roles, mechanisms and processes by which an organization is governed. What those roles, mechanisms and processes will consist of, how they will operate and for what purposes will depend on, among other things, the nature of the organization, its objectives and its obligations. For a regulatory agency, governance may be defined, broadly, as the mechanism or instruments, processes, and relations by which the regulator is controlled and directed, and by which its decisions and actions are measured and held to account. The mechanisms and processes would include the regulatory agency’s own structure, rules, and practices.


The OEB was created by statute (The Ontario Energy Board Act, 1998) (OEBA) to serve the public interest as that interest is defined in that and other statutes. The OEBA makes the OEB accountable to the government and to the legislature. The OEB must exercise the powers granted to it in accordance with the common law and relevant provincial statutes. The exercise of its powers is subject to oversight by the courts. The governance structure of the OEB is determined in part by the provisions of the OEBA and in part by how those provisions are interpreted and applied by the responsible minister and by the OEB itself.


Business corporations, by contrast, although they must comply with statutory requirements with respect to their formation and operations, are not created by statute and serve a fundamentally different purpose, principally that of enhancing shareholder value. As a result the governance requirements for business corporations differ in fundamental ways from those a regulatory agency like the OEB.


While the governance needs of business corporations may superficially resemble the governance needs of a regulatory agency like the OEB, such as achieving identified objectives and , and while the vocabulary used to describe the principles of their governance structures may be the same , there are fundamental differences between the two. This means that the use of a governance structure applicable to a business corporation may be inappropriate for a regulatory agency like the OEB and, indeed, may pose a risk that the OEB will not be able to fulfill the functions assigned to it by statute.


There are a number of generally accepted principles of good governance, for business corporations and regulatory agencies. In this paper, as in the 2015 Paper, I use the principles developed by the Organization for Economic Co-operation and Development (OECD). Those principles include transparency and accountability. The content of those principles differs between business corporations and regulatory agencies. In addition, certain principles, for example role clarity and independence, apply to regulatory agencies because of particular statutory requirements and the common law, requirements which do not apply to business corporations. Throughout this paper I refer to the OECD principles for regulatory governance as the principles of good regulatory governance.


I also use the terms “public policy” and “good public policy” interchangeably. They are, of course, not the same. Public policy may be understood, in its most basic form, as the way governments develop and apply their policies. In that sense it is a neutral term. Good public policy, by contrast, is public policy informed by certain values. The values which should inform public policy include respect for the rule of law, integrity, transparency and accountability. For the purpose of this paper, I will focus on the last two principles, namely transparency and accountability. I suggest that those two principles, when applied to the development and implementation of a new governance structure for the OEB, required the following:

  1. A description of the deficiencies in the existing governance structure, so that the public would know why it needed to be replaced;

  2. A description of how the new governance structure would correct those deficiencies;

  3. A description, in other words, of the reasons for the replacement of one governance structure by another;

  4. A description of the benefits for the public of the new governance structure; and

  5. A description of how the new governance structure is to operate.

Adherence to these principles requires the government to use language that is clear and understandable, to avoid, in other words, the use of language that is devoid of any real meaning and which may be misleading.

The Functions of the OEB


The OEB is created by statute and has only those powers and obligations which are set out in statutes and regulations, or powers which are required by necessary implication to fulfill its statutory obligations. In exercising those powers and fulfilling those obligations the OEB is subject both to the terms of the statutes and regulations, and to the requirements, whether in statute or at common law, as to how those the powers must be exercised. The decisions resulting from the exercise of certain of its powers are subject to review by the superior courts, though it is how the powers are exercised rather than the substance of the decisions which the courts review.


The OEB is required by statute to make certain decisions by order following a hearing. In doing so the OEB is acting as a quasi-judicial decision-maker. When it acts in that capacity it must comply with the rules of natural justice as codified in the Statutory Powers Procedure Act. That the OEB must act as a quasi-judicial decision-maker, subject to those legal constraints, is one of the principal differences between it and a business corporation. This has important implications for the governance structure of the OEB, implications which are discussed later in this paper.

It is commonly, and incorrectly, said that the OEB regulates the energy sector in Ontario. It does not. The decisions of the OEB affect something less than 20% of the cost of energy. The objectives it serves are set out in its empowering statutes, chiefly the OEBA and the Electricity Act (EA). Those objectives relate principally to determining the prices to be paid for the transmission and distribution of gas and electricity. The empowering statutes also indicate the process the OEB is to use to achieve those objectives.


In fulfilling its objectives, the OEB is required to balance often competing interests. It cannot serve the interests of one group. That is why it is incorrect to characterize the OEB, as the government and indeed the OEB itself frequently and misleadingly do, as serving the interests of consumers. Some of the OEB’s powers authorize it to protect consumers from fraudulent practices in the retailing of natural gas and electricity. That does not mean that the OEB, in carrying out its core obligations to approve just and reasonable rates for the transmission and distribution of gas and electricity, is acting as a consumer protection agency. The implications of this misunderstanding of the OEB’s role for the development of the new governance structure are examined later in this paper.

The functions of the OEB may broadly be divided into three types, as follows.

Quasi-Judicial Functions


The first type are quasi-judicial functions, one in which The OEB exercises a broad discretion to apply its expertise in the interpretation and application of statutory standards. In performing quasi-judicial functions, the OEB is required to hold a hearing and adhere to the rules of natural justice. In carrying out these functions the OEB is authorized to use its expertise to determine the meaning of generally worded standards and apply that meaning to the facts in the individual cases that come before it. In some instances, no decision criteria may be specified, leaving it to the OEB to use its expertise to develop and apply criteria, including previously articulated regulatory policy or regulatory policy informed by the context of the adjudicative process, that are consistent with the objectives of the relevant statutes. However, each case must be decided on its own merits and on its own facts.

The OEB’s quasi-judicial functions include the following:

  1. Approving the rates to be charged by natural gas transmitters, distributors, and storage companies. The criteria to be used in deciding to approve the rates are whether they are “just and reasonable” (s. 36 of the OEBA);

  2. Approving a change of ownership of a gas transmitter, gas distributor or storage company. No criteria for whether to grant approval is specified (s. 43 of the OEBA);

  3. Approving rates for the transmission and distribution of electricity. The criteria are whether the proposed rates are “just and reasonable” (s. 78 of the OEBA);

  4. Approving a change of control of an electricity transmitter or developer (s. 86 of the OEBA); and

  5. Approving the construction of a hydrocarbon or electricity transmission line (ss. 90 and 92 of the OEBA).

Natural justice has two principal components: the right to be heard and the right to an impartial decision-maker. The latter component engages the issue of the independence of the decision-makers. What independence requires in the context of a regulatory agency like the OEB, and how the new governance structure may affect the independence of the OEB’s decision-making, are matters examined later in this paper.


In carrying out these quasi-judicial functions the OEB must take into consideration any relevant government policies, and any directives issued to the OEB by the government under the authority granted to it by the OEBA or the EA. However, the OEB cannot fetter its discretion by simply applying those policies or directives regardless of the facts and merits of the matter it is dealing with, unless required to by statute or regulation. Nor can the OEB itself develop policies or guidelines which, directly or by necessary implication, limit or fetter the exercise of its discretion. The OEB’s expertise, in interpreting and applying the statutory criteria, must be consistent with the objectives of the OEBA and the EA.

Functions Which Do Not Attract the Full Application of the Rules of Natural Justice

The second type of function is where there is a power to make a decision, and that power must be exercised by giving notice to affected parties and receiving and considering submissions from those parties before making a decision. There is no requirement to hold a hearing. The exercise of these functions does not attract the application of the full range of the rules of natural justice. Examples of these functions are the making of rules (s. 44 of the OEBA) and making codes (s. 70 of the OEBA).

Administrative Functions


The third type of function is a largely administrative one, that is a function which requires a limited use of discretion. In carrying out these functions the OEB is not acting as a quasi-judicial decision-maker. An example of such an administrative function is the issuance of a licence to a distributor of electricity. As long as the distributor meets the prescribed requirements a licence is issued. The issuance of the licence does not involve the exercise of discretion.

It is not always possible to draw a bright line between administrative functions and quasi-judicial functions. For example, the development of rules governing the conduct of the retailers of gas and electricity may be administrative in nature. But enforcing those, with the possibility of the application of some form of penalty, may require the OEB to act in a quasi-judicial capacity.

The OEB is not a government policy-making body. Its empowering statutes do not give the OEB the power, directly or by necessary implication, to make policies for the energy sector.


The courts have acknowledged that regulatory agencies like the OEB have the power to make what they describe as “soft law,” for example policies or guidelines as to how they will exercise their powers. However, while such policies or guidelines may guide the exercise of discretion they cannot fetter the exercise of that discretion. Moreover, the power to make such soft law does not extend to making substantive policies outside the expertise of the regulatory agency let alone limiting the exercise their discretion on the basis of such policies.


The limits on the OEB’s authority to make policies, and the implications of those limits for its new governance structure, are matters discussed later in this paper.

The Previous Governance Structure

In this section I will set out the principal components of the governance structure which existed before they were replaced by the new governance structure.

The OEBA, as it then was, provided for the appointment by the government of the chair and two vice-chairs as well as members of the OEB. The chair and the two vice-chairs were to constitute a Management Committee, which was responsible for the management of the OEB. Every three years the chair and the responsible minister were to enter into a Memorandum of Understanding (MOU) that was to define the relationship between the minister and the OEB. The OEB was authorized to make by-laws setting out how it was to operate. The chair of the OEB was to prepare an annual report to be provided to the minister who was then to lay the report before the legislature.


The MOU also provided for the appointment of a Chief Operating Officer (COO). By-law #1 set out the duties of the COO.


The length of the terms of the chair, the vice-chairs and the members were prescribed by statute, and by custom almost all were full-time members. Part-time members were the exception.


Beginning in roughly 2012, the internal structure and operating practices of the OEB began to change. Full-time members were replaced by part-time members. The positions of part-time members are less secure than the positions of full-time members. When a second vice-chair left he was not replaced even though the OEBA required that there be a second vice-chair. The position of the COO was left vacant.

As I noted in the 2015 Paper, the OEBA and the MOU assigned managerial responsibilities to the management committee of the OEB. In carrying out those responsibilities, the vice-chairs would bring areas of expertise, for example in administrative law, to the management of the OEB. That the OEBA made the management of the OEB the responsibility of three people suggests that it was the intention of the legislature that the members of the management committee were to function, if not as a “team of rivals,” then at least as a counterbalance to the to the power of the chair in providing a diversity of opinion and expertise to the management of the OEB. That structure of governance was important because it helped to ensure what the OECD describes as the “culture of independence.”


The fact that the OEB had failed to comply with the statutory requirements for its governance structure was well known to everyone including, presumably the minister. Yet the minister did nothing to correct the deficiency. The annual reports which the chair of the OEB delivered to the minister, and which the minister then lay before the legislature, while referring in one report to the OEB’s “review of its organizational structure” leading to the implementation of a “restructuring of the executive leadership” made no reference to these deficiencies and provided no explanation for them. What was an open and notorious failure of governance was allowed to continue for several years.


The evident failures of governance gave raise to concerns about the independence of the OEB’s decision-making and, in particular, whether decisions made by the OEB were being made free from influence by the chair and/or the minister. These concerns were heightened during a period when the government was using the OEB to implement a number of its policies on conservation, policies the implementation of which (in contracts to acquire electricity from renewable energy sources) was the subject of sharp criticism in two reports of the Auditor General. Whether decision of the OEB were in fact being dictated by, or influenced by, the minister could not be determined in the absence of an enquiry into the operations of the OEB. The important point is that the evident deficiencies in governance, and the government’s tolerance of those deficiencies, undermined trust in the OEB.

The governance of the OEB during this period evidently violated the principles of good governance set out by the OECD. It did not follow the statutory requirements. It was not transparent. There was no true accountability. The result was a decline in the willingness of stakeholders to trust the integrity of OEB decision-making.

Neither the government nor the OEB acknowledged these deficiencies in governance and took no overt steps to correct them. In March of 2015, the OEB created what it described as two Standing Committees, one for regulatory affairs and one for industry affairs, in what it described as “part of our new framework for engaging with stakeholders.” The OEB engaged in a number of policy-making initiatives, for example issuing what it described as its “Strategic Blueprint: Keeping Pace with the Evolving Energy Sector,” an exercise the OEB described as an effort to “support cost-effective innovation in energy services to consumers.”


It was against this background that the government commissioned the Dicerni Panel. It is striking that, in commissioning the Dicerni Panel, the government made no mention of any existing governance deficiencies. The public was left to assume that there was a problem that needed to be addressed. It should also be mentioned that the OEB had been engaged in a number of policy-making initiatives before the Dicerni Panel was commissioned, which gives rise to the question of why the government directed to Dicerni Panel to examine the OEB’s policy-making function as if that were a new activity. I will return to the question of why the new governance structure the Dicerni Report recommended was needed for the OEB to carry on the same policy-making functions it had been carrying on.

There was nothing in the previous governance structure that inevitably resulted in its failure. It is certainly arguable that what was required was that the governance structure be operated on the basis adherence to the governance requirements of the OEBA, and of good faith and respect for the principles of good regulatory governance by those parties principally responsible for governance, namely the chair of the OEB, the responsible Minister and, ultimately, the members of the legislature. If that was the case, why was a new governance structure needed and what does it do that could not have been done under the structure it replaced?


The Dicerni Report


The Dicerni Panel was asked by the Minister of Energy, Northern Development and Mines (throughout this paper I will refer to the cabinet member with responsibility for the OEB and the energy sector by the generic word “minister”) to provide “advice and recommendations” in three areas:

  1. The OEB’s internal governance structure, including opportunities to enhance oversight, transparency and accountability;

  2. Options for utilizing the OEB’s policy expertise while protecting the independence of adjudicative processes; and

  3. The OEB’s internal operations, including opportunities to better align activities with outcomes that produce enhanced value for the sector.

It is important to note what the Minister did not do in that mandate. He did not identify any deficiencies in “oversight, transparency and accountability.” While by implication identifying the tension between policy expertise and the independence of the adjudicative processes, he did not indicate what the OEB’s “policy expertise” consisted of. And he did not indicate what “enhanced value for the sector” was.

As set out in the preceding section of this paper, the evident deficiencies in the governance of the OEB were not only those related to the internal governance of the regulator. The failures included the evident failure of the minister, and of the legislature, to fulfill their obligations with respect to oversight and accountability. But the Dicerni Panel was not asked to consider those failures and how they might be remedied, thus leaving a material gap in any analysis of governance deficiencies and how those deficiencies might be corrected.


In delivering the mandate to the Dicerni Panel the Minister asked for recommendations on how the OEB’s governance and operations can deliver “better outcomes for consumers.” What such “better outcomes” might consist of, or in what way previous outcomes were deficient, the Minister did not say. The choice of that vague language does help to create the expectation that the results of the Dicerni Panel’s work will be better for people. More importantly, by focusing on “consumers” the Minister was, by implication, repeating the canard that the OEB is a consumer protection agency. It is not, particularly with respect to its core obligations of approving just and reasonable rates.


Given what was known about the deficiencies in the governance of the OEB, the Dicerni Panel should have done the following:

  1. Undertake a review of the existing governance structure of the OEB, and how it operated, and in the process identify deficiencies in that structure and how it operated;

  2. Since the governance of the OEB is not limited to the internal operations of the OEB, include in that review the reasons for the failure of the minister and the legislature to fulfill their governance obligations;

  3. Indicate why changes in that governance structure were required and why, in particular, the adoption of a corporate business model was necessary and appropriate;

  4. Describe how a board of directors of the OEB was to operate, what analyses it was to undertake, what decisions it was to make, and what criteria it was to use in making those decisions;

  5. In particular, describe the relationship between the board of directors and the adjudicative arm of the OEB;

  6. Identify the policy expertise of the OEB and the nature and extent of the OEB’s policy-making functions;

  7. Identify the respective roles of the OEB and the government in making policy; and

  8. Undertake this review and report its findings fully and openly.

In the end Dicerni Panel did none of those things, and the failure to do so undermined the value of its recommendations and of the restructuring of the OEB legislated on the basis of those recommendations. The way the Dicerni Panel was commissioned, its analyses and its report do not reflect good public policy.

The Dicerni Report made a number of recommendations. For the purpose of this analysis, the most important of the recommendations was “the establishment of a new governance framework which would include a Board of Directors with a non-executive Chair (the Board), a president, and a Chief Commissioner responsible for adjudication.” The Report did not indicate why that new governance framework was either necessary or appropriate.


The Report indicated that the Board would focus on what it called “three critical roles in the leadership of the organization,” as follows:

  1. Performing the usual governance responsibilities of a board, including overseeing the development and implementation of (OEB) strategy;

  2. Serving as the primary interface with the Minister and the government; and

  3. Ensuring the independence and effectiveness of the adjudication process.


The Report did not indicate what the “usual governance responsibilities of a board” (which presumably means the board of a business corporation) would be in the context of a regulatory agency exercising statutory powers, in the performance of which it was to act as a quasi-judicial decision-maker. The Report did not indicate how the board was to protect the “independence and effectiveness of the adjudication process” without, for example, involving itself in that process. The report also did not indicate the nature or sources of any threat to independence.

There are two additional components of the Dicerni Report that should be noted.

The Report cites a number of academic papers on regulatory governance and refers to the governance arrangements in other jurisdictions. But beyond references to the principles of good governance, already widely known, the Report does not indicate which of the governance models in those academic papers or other jurisdiction it prefers and, more importantly, why any of the models would be necessary or appropriate to be used the OEB.


The Report also refers to the submissions received from individuals and groups. The Report does not indicate which of those submissions had merit and which of the proposals in the submissions it accepted. Following that practice gives the appearance, but not the reality, of genuine, meaningful “engagement.”


It is possible to try to determine from the recommendations in the Report which of the models in other jurisdictions and which of the stakeholder submissions were adopted. It might be possible, in other words, to undertake a form of reverse engineering. Whether having to do so represents good public policy is another matter.

Implementing the Dicerni Report Recommendations – Bill 87, the Memorandum of Understanding and OEB By-law #1


The recommendations of the Dicerni Report with respect to the governance structure were legislated in Bill 87 in the form of amendments to the OEBA. The principal features of the legislation, and of the amendments to the OEBA, are:

  1. The OEB is to be composed of a board of directors, a chief executive officer and commissioners, including a chief commissioner (s. 4);

  2. The board of directors is to manage and supervise the management of the OEB’s business and affairs (s. 4.1);

  3. The government is to appoint a chair of the board of directors whose duties include being accountable to the minister for the independence of persons and entities hearing and determining matters withing the jurisdiction of the OEB in their decision-making (s. 4.1);

  4. No power given to the board of directors or a director under the OEBA or any other Act permits the board of directors or a director to interfere with or influence the hearing or determination of a matter over which the OEB has jurisdiction (s. 4.1);

  5. The board of directors is to appoint a chief executive officer who is to be responsible for the “effective and efficient” management of the operations of the OEB (s. 4.2);

  6. The board of directors is to appoint commissioners for the hearing and determination of matters over which the OEB has jurisdiction;

  7. Every three years the chair of the board of directors and the minister are to enter into an MOU which, among other things is to set out the respective roles and responsibilities of the minister, the chair and the board of directors and set out the accountability relationships between the chair, the board of directors and the minister (s. 4.6).

Bill 87 describes the duties of members of the board as follows:


  1. Act honestly and in good faith in the best interests of the OEB; and

  2. Exercise the care diligence and skill that a reasonably prudent person would exercise in comparable circumstances (s. 4.1).

That description of the duties of the board is identical to that in section 134 of the Ontario Business Corporations Act (OBCA). How those duties are to operate in the context of the OEB is a matter discussed later in this paper.


Pursuant to section 4.6 of the OEBA the chair of the board of directors and the minister have entered into an MOU, dated February 11, 2021. Section 1.1 of the MOU provides that it is the purpose of the MOU to establish the accountability relationships between the minister and the chair of the board of directors and to clarify the roles and responsibilities of the minister, the board of directors and the CEO of the OEB.


Section 6.3 of the MOU provides that the board of directors is accountable to the minister for, among other things, the “governance of the OEB” and for “the oversight of the OEB’s performance in fulfilling its mandate,” terms so vague as to be of limited value in understanding exactly what the board is to do and how it is to do it. Determining the content of those matters, crucial to the OEB being able to operate according to the principles of good regulatory governance is presumably left to the board of directors itself.


Section 7 of the MOU sets out the responsibilities of the minister, which include meeting with the chair regularly and as necessary to “discuss issues relating to the effective discharge of the OEB’s mandate “and consulting” as appropriate” with the chair on “significant new directions or initiatives affecting the energy industry and/ or the OEB.”

Section 7.2 of the MOU sets out the responsibilities of the chair of the board, which include “consulting with the Minister with respect to the OEB’s roles and responsibilities in meeting Government public policy objectives, current priorities and initiatives.”


There is nothing unusual or insidious about the MOU’s description of the respective roles and responsibilities of the minister and the chair. The OEB, as is the case with every regulatory agency, is required to be aware of and to the extent possible consistent with its obligations as a quasi-judicial decision maker, give effect to government policies and initiatives. The important point is that the description of the respective roles and responsibilities of the minister and what was formerly the chair of the OEB was essentially the same in previous versions of the MOU. And yet the previous governance arrangements were not working. How then is this an improvement? And how will the carrying out of the roles and responsibilities be overseen? Is it the board of directors and, if so, how?

Section 7.3 of the MOU sets out the responsibilities of the board of directors. The description of those responsibilities does not provide an answer to the question posed at the end of the preceding paragraph. Indeed, section 7.3 provides no meaningful guidance as to the responsibilities of the board. It is responsible for “establishing the goals, objectives and strategic directions of the OEB.” I do not know what that means, particularly when the goals and objectives of the OEB are prescribed by statute.


Two other provisions of the MOU should be noted. Section 5 of the MOU, under the heading “Guiding Principles” provides that the parties recognize that “the OEB plays a meaningful role in the development of the policies and programs of the Government, as well as in the implementation of those policies and delivery of programs.” The second part of that statement may be accurate; it is the role of every regulatory agency. Put the first part is not. The OEB’s role in policy-making is by law circumscribed.


Section 11.1 of the MOU provides that communications between the minister and the OEB are to be “conducted in an appropriate manner that respects the status of the OEB as an independent quasi-judicial regulator.” The section further provides that communications between the ministry and the OEB “shall not include discussion or information exchange between OEB personnel and ministry staff about current applications before the OEB.”


The provisions of section 11.1 are, on one level, salutary. They are based on a recognition of one of the principles of good regulatory governance, namely that the decisions of a quasi-judicial decision maker must be made independently. Indeed, the provisions reflect one of the rules of natural justice. What is troubling about the section is that it strongly implies that the decision-making of the OEB had not been independent. If that was the case it should have been examined and disclosed in the Dicerni Report, so that, among other things, the public would know which decisions had been tainted and with what effect. Such an examination and disclosure would have, incidentally, been consistent with the principles good governance, and in particular the principles of transparency and accountability.


The newly-reconstituted OEB has passed By-Law # 1 which, according to section 2.2, relates to the “internal affairs” of the OEB. Section 3.1 describes the powers, duties and function of the board of directors. The board is responsible for the governance of the OEB, with a focus on “ensuring that sound governance and management practices are in place to promote the achievement of desired results and outcomes and mitigate risk.” What the “desired results and outcomes are,” given the narrow statutory mandate of the OEB, are not specified; nor is the nature of the “risk.”


The Dicerni Report recommended a major structural change in the governance of the OEB, in the form of the adoption of a corporate business model. It did so without explaining why that model was necessary to correct any perceived deficiencies in the governance model that previously existed or appropriate for a quasi-judicial regulator. The government adopted the recommendation to the Dicerni report, adding to it a description of the duties of the board of directors taken directly from the OBCA. The instruments giving effect to the new governance structure, the MOU and By-law #1 describe how the new governance structure is operate but do so in terms so vague as to be of little value.


At no point in this process were the deficiencies in the previous governance arrangements identified, except perhaps by implication, nor were the effects of those deficiencies identified. Indeed, one of the deficiencies, namely the failures of the chair of the OEB, the minister and the legislature to insist on compliance with statutory requirements with respect to governance, was not even addressed. At no point in the process was the need for, and the appropriateness of, the new governance structure explained or justified.


The New Governance Structure


In the preceding section I discussed the question of whether the Dicerni Report and Bill 87 implementing the Report’s recommendations establish that the new governance structure for the OEB was necessary. I suggested that they did not, with the result that there was no evidence that it was. In this section I turn to the question of whether it is appropriate. In examining that question I will focus on two matters. The first is the use of the corporate business model, including the role of a board of directors. The second is the role of the OEB as a policy-making organization, and the implications of that role for the new governance structure.


I will begin with an analysis of the use of the corporate business model. I use the term “corporate business model” because the new governance structure is identical to that contemplated by the OBCA.


Bill 87 created a governance structure based on the corporate business model and used concepts and language to describe the obligations of the directors that are identical to the language and concepts used in section 134 of the OBCA. It bears stating the obvious, namely that the OEB is not a commercial corporation and has no shareholders. I acknowledge that creating a board of directors and imposing upon it obligations identical to those of the directors of an OBCA or a CBCA corporation does not make the OEB a conventional business corporation subject to the OBCA. That said, I must assume that the corporate business model was chosen for a reason, although there is no obvious reason why the governance structure should be based on a model which applies in fundamentally different circumstances. I have to assume that the model was chosen in order that there be a board of directors protecting some interest. What that interest is, and why it needs a board of directors to protect it, is the question that must be addressed.


In order to try to understand what the corporate model may entail I will set out a simplistic breakdown of the two principal duties of a board of directors of a business corporation, namely the fiduciary duty and the duty of care.


The first obligation of the directors is the fiduciary duty to act in the best interests of the corporation.


I do not know what is meant by the best interests of the OEB. The use of that language suggests that the OEB has its own interests as an organization, an interest somehow different from the obligation to fulfill its statutory obligations. The difference is not a theoretical one. For example, I argue later in this paper that there is a risk that policy-making might impinge on the independence of the OEB’s adjudicative functions. In that case, the interests of the OEB as a policy-making organization may be in conflict with its interests as an adjudicative body. How are those interests resolved? Is it the function of the board of directors to resolve those conflicts and, if so, according to what criteria? At a minimum, the use of concepts and language applicable to a business corporation creates an unnecessary confusion.


The risk of confusion arising from the use of the concept of “acting in the best interests of the corporation” is also apparent when considering the question of stakeholder engagement. The Dicerni Report places emphasis on the importance of stakeholder engagement. And the OEB, in most of its policy-making exercises, has created stakeholder bodies to consult with. To give effect to this, the OEB has in many instances provided funding to stakeholder groups to allow them to participate. There is nothing inherently wrong with stakeholder engagement; indeed, the OECD includes stakeholder engagement as one of the principles of good governance. There is, however, an open question as to whether the OEB should fund stakeholder engagement. To begin with, the OEB does not, and cannot, provide sufficient funding to allow stakeholders groups to participate on an equal footing with industry groups. In addition, the funded stakeholder groups are dependent on the OEB for funding. They become part of an OEB-centered ecosystem that may erodes the appearance, and perhaps the reality, of independence.


If it is in the best interests of the OEB to create and maintain this ecosystem of engagement, would a board of directors be fulfilling its obligation if it were to conclude that a different system of engagement, for example one with a publicly-funded energy consumer advocate, was in the public interest? Would a board of directors even ask itself that question? Put another way, does the concept of acting on the best interests of the OEB not create a conflict of interest that is at odds with the principles of good regulatory governance?

It is generally understood that the fiduciary duty of directors to act in the best interests of the corporation has three components.

The first component is to protect the shareholders from the management of the corporation engaging in self- enrichment or otherwise taking actions which serve the interests of the management rather than those of the shareholders. That is one of the reasons for the current emphasis in corporate law on the importance of having independent directors on the board. It is difficult to imagine how the management of the OEB could engage in actions which prefer their interests to those of anyone else or why a board of directors is required to prevent it from happening. What are the risks that the board is supposed to protect against?


The second component if the fiduciary duty of a board of directors is to protect the interests of shareholders. For a long time protecting the interests of shareholders was regarded as the sole component of the fiduciary duty, and the interests of the shareholders were seen in largely if not entirely in monetary terms. That remains the case, though some recent case law has suggested that the board of directors have an obligation to at least consider the interest of a broader range of stakeholders. The OEB has no shareholders. It has obligations defined by statutes to protect the public interest, in specified ways, in one sector of the Ontario economy. It adds nothing to an understanding of the statutory obligations of the OEB, and instead adds a measure of confusion, to regard the members of the public in the energy sector as shareholders of the OEB or indeed to regard the OEB itself as a body which somehow requires protection.


The third component of the fiduciary duty of a board of directors is to have regard to the interests of the stakeholders of the corporation. The Supreme Court of Canada, in the BCE v. 1976 Debenture Holders, discussed the fiduciary duty of directors to the corporation as follows:

In considering what is in the best interests of the corporation, the directors may look to the interests of (among other things) shareholders, employees, creditors, consumers, governments and the environment to inform their decisions.

It is difficult to imagine how that standard could be applied by the board of directors of the OEB. The OEB has statutory obligations to make specific kinds of decisions. Those decisions may affect, in each instance, an identifiable range of stakeholders. Is the newly constituted board of directors now to assess each OEB decision to see if the interests of the appropriate stakeholders have been properly considered and, if not, to substitute its own decisions?


The confusion about the role of the board of directors is compounded when one considers the question of the relief from a decision of the OEB that may be sought. Would decisions of the OEB now be subject to the remedies analogous to those available to shareholders of commercial corporations, for example the oppression remedy? Decisions of the OEB are, as a matter of law, subject to review by the superior courts. Would the courts review the decisions of the adjudicative panel or of the board of directors or both?


The second duty of the directors of a business corporation is the duty of care. That duty requires a director to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. What would fulfilling that duty mean in the context of the OEB? Would it require the members of the board to possess and exercise the same skills as the commissioners? Again, the exercise of the duty creates the risk of confusion and conflict.


If the objective of the new governance structure is to ensure that the adjudicative functions of the OEB, which are its core obligations, are fulfilled in compliance with the rules of natural justice, there are more effective ways to do so while ensuring transparency and accountability. A culture of respect for the law and for the principles of good regulatory governance by the OEB and the minister should be sufficient. Introducing a corporate model is not necessary. In addition, it is not appropriate given the nature of the OEB and its obligations because it risks having the board of directors interfere in the adjudicative processes in order to fulfill its vaguely worded oversight responsibility.


As I noted in the preceding section, none of the documents which gave rise to the new governance structure provided a description of the role of a board of directors for a regulatory agency exercising quasi-judicial powers. The absence of that description, and indeed the absence of a justification for the new structure, creates risks.


Absent a clear rationale for its existence, the new structure is a solution in search of a problem. A board of directors will inevitably need to find something to do. That is a risk in circumstances where the core obligation of the OEB is to make decisions in compliance with the rules of natural justice. There is a risk that the board of directors will interfere, or be perceived to have interfered, in the independence of the members of the OEB exercising adjudicative functions. How is the board of directors to ensure that the adjudicative function is carried out correctly unless it involves itself somehow in that function? The fact that Bill 87, the MOU and By-law # 1 all refer to the importance of independence and to ensuring that neither the directors nor ministry interfere in quasi-judicial decision making, while at a superficial level appropriate, is not sufficient to ensure independence in practice. Is it the board of directors which is to ensure independence and, if so, how?

Compliance with the principles of good regulatory governance, and indeed with the rules of natural justice is not only, or even principally, a function of governance structures. It is primarily a function of the willingness of the members of the OEB and of the government to understand and respect the rules of good regulatory governance. That is what was lacking in the previous governance arrangements. Correcting that deficiency did not require a new governance structure, one carrying with it a new set of risks to good regulatory governance.


The new structure is stated to have been created to reflect an enhanced policy-making function for the OEB. The mandate of the Dicerni Panel included reporting on “options for utilizing the OEB’s policy expertise.” Section 5.5 of the MOU states that the OEB “plays a meaningful role in the development of the policies and programs of the Government.”


It bears repeating that the enabling statutes give the OEB no policy-making power. The courts have allowed regulatory agencies a narrow policy-making function, one that the courts have said must not be used to fetter the discretion of regulatory agencies in the performance of quasi-judicial functions. Given those limitations, the nature of the OEB’s policy-making expertise and how it was to be used should have been made clear. The failure to do so risks having the OEB play an inappropriate role in policy-making and, in so doing, prejudice its ability to fulfill its quasi-judicial obligations.


The OECD, in its discussion of the principles of good regulatory governance, has identified the need for what it calls “role clarity.” The OECD made the following observation:


Where a regulator has a range of functions, it is important that these are complementary and not potentially in conflict. This means that the performance of one function should not limit, or appear to compromise, the regulator’s ability to fulfil other functions (including its core regulatory function).


The functions of the OEB do not include policy-making except in the narrow sense described by the courts. And carrying out some broadly-defined policy-making function may very well impede the OEB’s ability to carry out its obligations as a quasi-judicial decision-maker.


One example may illustrate this concern. The OEB has initiated what it calls the “Framework for Energy Innovation” (FEI). It is intended to address the use of distributed energy resources (DER) and the integration of DER into the electricity distribution system. The OEB has no expertise in the technical issues related to DER use. Its expertise is in assessing the prudence of utility costs and the allocation of those costs to classes of ratepayers. Discussing DER use and integration will inevitably involve consideration of costs and the allocation of those costs. To the extent the OEB, as part of the FEI process, considers those matters it risks fettering its discretion in considering applications by individual utilities for approval of the costs of DER and the allocation of those costs to utilities.


Three related questions arise. The first is why the OEB needs to be engaged in these kinds of policy-making processes at all. Does the ministry not have the required expertise or know where to get it if it does not? And why does the OEB need to be engaged in these kinds of policy-making processes if it risks prejudicing, or appearing to prejudice, its functions as a quasi-judicial decision-maker?


The second question relates to the role of the board of directors. Is the board to police the policy-making functions of the OEB in order to ensure that the quasi-judicial functions are properly fulfilled. The OEBA requires the directors to act in the best interests of the OEB. Are those interests those of the OEB as a quasi-judicial decision-maker or a policy-maker? And what criteria would the board use in deciding what the best interest are? And who would oversee those decisions of the board?


The third question is why the new structure is need for a policy-making role. I noted above that in the years prior to the commissioning of the Dicerni Panel the OEB had been engaged in policy-making. Indeed, The FEI referred to above appears indistinguishable in its objectives from the “Strategic Blueprint” process created under the old dispensation. Aside from the question of whether the OEB should be engaged in this kind of policy-making, how does the new structure affect it in ways the old one could not?


These are not idle or academic questions. They go to the heart of the new governance structure and reveal fundamental flaws in how it came to be and how it is supposed to operate. The policy-making role of the OEB should have been defined and explained, and the relationship of that function to the quasi-judicial function should have been explained. And the role of the board of directors in policing the relationship should have been explained. None of those things were done.


Conclusion


The first question I posed was whether the new regulatory structure was necessary. Nether the Dicerni Report nor the government in implementing the recommendations of that report provided evidence that it was.


The second question was whether the new structure was an appropriate one for a regulatory agency. In my view it is not. The use of the commercial corporate model, with a board of directors subject to duties that have no relationship to the statutory obligations of a regulatory agency, creates at best confusion and at worst conflicts of interest that undermine the principle of good regulatory governance.


The third question was whether the way the changes were made to the governance structure of the OEB, and the changes themselves, reflected good public policy. In my view they did not.


The OEB is not the only regulatory agency in Ontario, nor is it arguably the most important. But it is the highest profile one, in part because of its involvement, however limited in scope, in determining the price paid for an essential service and in part because it can serve as a useful shield for the government from criticisms of the government’s energy policy. Because of that profile, major changes to the governance structure of the OEB should have been based on a full and open examination of the deficiencies in the existing governance structure, the effects of those deficiencies and an explanation for how the deficiencies were to be corrected. That examination should have included the roles of the minister and the legislature in any failures of governance.


Doing all of that would, I suggest, represent good public policy. To put that another way, it would have reflected good governance. It would have been transparent, and the government would have been accountable not just for the substance of the process but for the results the process produced or failed to produce. It would have allowed the public, those ultimately affected by OEB decisions, to understand why the changes had been made and to assess whether they were necessary and appropriate. The public would have been able to ask, for example, why the Dicerni Panel had not been asked to examine the evident failure of the minister and the legislature to fulfill their governance obligations. And doing all of that would have enhanced trust, one of the OECD’s principles of good regulatory governance.


The process leading to the creation and implementation of a new governance structure for the OEB was fundamentally flawed. It did not identify the deficiencies in the governance structure it replaced and did not explain how the new structure would remedy those deficiencies. It adopted a governance model from the corporate business sector without explaining why that model was appropriate. It did not explain how that model was to operate, and in particular how the board of directors which is central to the model was to operate in a way that was consistent with the obligations of a quasi-judicial regulator.


The process leading to the creation and implementation of the new governance structure represents a failure of good public policy. Perhaps those responsible for the process felt that they could not disclose the effects of the failure of good governance under the previous regime. The public deserves to know what the deficiencies were, what the effects of the deficiencies were and how they are to be corrected. They deserve more than to be fobbed off with the assurance that all of this was necessary in the interests of “modernization,” a term that combines the unhappy qualities of being vague, meaningless and misleading.


It may be asked why any of this matters. Changes to the governance structure of the OEB may seem an arcane topic, particularly in the absence of any evidence that the changes will affect the prices consumers pay for energy. I suggest that there are at least two possible answers to the question.

The first relates to the possible public perception of the restructuring exercise. It is a matter of common knowledge that the increases in electricity prices have been and continue to be a source of public discontent. The high prices are largely due to the poorly designed and badly executed decisions by the previous government to acquire electricity from renewable energy sources. Those decisions were the subject of searing critiques by the Auditor General in a series of reports beginning in 2011. Governments have made several attempts to mitigate the effects of those decisions, for example by shifting costs among classes of consumers or simply paying rebates to consumers. Those attempts have been unsuccessful because they cannot avoid the iron logic and stark consequences of those earlier decisions.


I am not aware of any evidence that decisions of the OEB have caused or contributed to the high cost of electricity. The Auditor General made no such finding. I am also not aware of any evidence that the governance structure of the OEB caused or contributed to high electricity prices. Had that been the case the Dicerni Panel would surely have noted it. But by including the changes to the OEB’s governance structure in legislation entitled Fixing the Hydro Mess the public might reasonably conclude that changing the governance structure would somehow fix that “mess” and help reduce electricity prices. That would at best be an attempt to distract the public from the inability of this government, or any government, to materially reduce electricity prices and at worst a deliberate attempt to mislead the public. Doing either would not represent good public policy.


More broadly, I suggest it matters because the government and its regulatory agencies a owe the public an obligation, indeed arguably a moral obligation, to act in accordance with good public policy. The failure to do so, however arcane the particular circumstances may appear to be, is a breach of that obligation, a breach which corrodes, in however small a way, the rule of law.


© R.B. Warren 2021




1 Ontario Energy Board Modernization Review Panel Final Report, October 2018; Fixing the Hydro Mess Act, 2019 (Bill 87).

2 The new governance structure provides an opportunity to revisit an analysis of the governance of the OEB which I undertook in 2014. In that analysis I noted a number of evident deficiencies in the governance of the OEB. Among other things, a study of the new governance structure, and of the process by which it was developed, provide an opportunity to assess whether, and if so how, the deficiencies I noted in the earlier analysis have been corrected. This paper is, in effect, a continuation of that earlier analysis, which is why this paper is described as “further case study.” Robert B. Warren, “The Governance of Regulatory Agencies: A case Study of the Ontario Energy Board,” Council for Clean & Reliable Electricity, January 2015 (The 2015 Paper).

3 Organization for Economic Co-operation and Development, “The Governance of Regulators,” (Paris: OECD Publishing, 2014) (OECD Principles).

4 Ontario Energy Board Act, 1998 S.O 1998, C. 15.

5 The OECD’s official definition of corporate governance in business is: “the purpose of corporate governance is to help build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies.” OECD, “G20/OECD Principles of Corporate Governance,” (Paris: OECD Publishing, 2015), p. 7.

6 Statutory Powers Procedure Act, R.S.O 1990, C.S. 22.

7 Electricity Act, R.S.O 1998. C. 15.

8 See, for example Thamotharem v. Canada, 2007 FCA 198, para. 55 and following.

9 Ontario Energy Board 2014-2017 Business Plan. https://www.oeb.ca/oeb/_Documents/Corporate/OEB_Business_Plan_2014-2017.pdf .

10 Dicerni Report, Schedule A, p. 24.

11 Dicerni Report, Schedule A, p. 23.

12 Dicerni Report, p. 12.

13 Dicerni Report, p. 15.

14 The Dicerni Report refers to the governance structure of the Alberta Energy Regulator (AER), which includes the use of a board of directors. Whether the governance structure of the AER is an appropriate model for the governance of the OEB is an issue that is beyond the scope of this paper.

15 Section references are to the OEBA and not to Bill 87.

16 Business Corporations Act, R.S.O. 1990, c. B.16.

17 Memorandum of Understanding Between The Minister of Energy, Northern Development and Mines and The Chair of the Ontario Energy Board, February 11, 2021.

18 Ontario Energy Board By-law # 1, effective October 2, 2020.

19 BCE Inc. v. 1976 Debenture Holders, (2008) 3 S.C.R. 560, at 585.

20 OECD Principles, p. 33.

21 2011 Annual Report of the Auditor General of Ontario, Chapter 3, pp. 87 and 2013 Annual Report of the Auditor General of Ontario, Chapter 4, pp. 305 and following.

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