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Ontario Energy Board Issues Final Report on the Regulatory Treatment

On September 14, 2017, the Ontario Energy Board ("OEB") released its final report,Regulatory Treatment of Pension and Other Post-employment Benefits (OPEBs) Costs(EB-2015-0040)("Report"). The Report clarifies the regulatory treatment of the cost of pension and other post-employment benefits ("OPEBs") incurred by rate-regulated Ontario energy utilities as part of the overall compensation paid to their employees. The Report represents the conclusion of a stakeholder consultation process with the OEB that was initiated in May 2015.

The OEB Report confirms that:

  • Accrual accounting, as opposed to the funding contribution (or "cash" method) is the preferred accounting method to calculate the amount that must be recovered in rates for both pension and OPEB costs. This has the benefit of aligning regulatory and financial accounting treatment of the costs associated with pensions and OPEBs.
  • The Report recognizes that the accrual method might not result in just and reasonable rates in particular cases. Where a utility recognizes that the accrual method will not result in just and reasonable rates and elects to use a method other than accrual, such utility should support their proposal having regard to the factors, principles and practices enunciated in the Report. The intended practice of maintaining a consistent method used to determine recovery over time may be one reason for not adopting the accrual method for rate setting. Stability and predictability in regulation are desirable unless unintended and undesirable effects occur.
  • A new variance account (with appropriate sub-accounts) will be established on a generic basis effective January 1, 2018 to track the difference between the forecast accrual amounts recovered in rates and the actual cash payments made for both pension and OPEBs. The account will have an asymmetric carrying charge sub-account in favour of ratepayers. The carrying charge will be assessed on the monthly opening account balance at the OEB’s prescribed Construction Work in Progress ("CWIP") rate, currently at 2.53%. Only the carrying charges sub-account will be subject to disposition.
  • The OEB will not establish a set-aside mechanism for pension plans or for OPEBs. ThePension Benefits Act("PBA") already requires employers to fund any shortfalls in a registered pension plan. Nor will the OEB require a set-aside for OPEBs — the Report acknowledges that it will be the utility’s responsibility to manage their OPEBs responsibly and not seek to recover from ratepayers if their cash requirements exceed their accrual expenses in the future.

The OEB was guided by the established regulatory principle of setting just and reasonable rates in analyzing the regulatory treatment of pension and OPEB costs. Thus where the accrual method would not result in just or reasonable rates, the OEB is not bound to require it. The OEB considered, but did not adopt, other recovery methods proposed by KPMG for pension and OPEBs.

The OEB may require a transition from one accounting method to another, if the transition is manageable for the utility and necessary to set just and reasonable rates.

Where the OEB has previously approved the use of the cash based accounting method in the interim pending the outcome of the Report, the utilities shall dispose of the variance account where they were tracking the difference between the cash and accrual methods at their next cost-based rates application if the OEB approves the transition to the accrual method.