In a noteworthy decision, the Ontario Energy Board (OEB) recently gave some specific clarity to the rule that utilities have an obligation to disclose material facts to the OEB on a timely basis with respect to proceedings before the OEB. This is part and parcel of the "regulatory compact" which involves the regulator's rate-making decisions needing to balance the interests of investors and consumers.
The ruling came as a result of an application by Union Gas Limited (Union) to transfer all of the voting shares of Union to a limited partnership organized under the laws of Ontario. The purpose of the reorganization, which also involved Union becoming a Nova Scotia unlimited liability company, was to generate $50 million in tax savings for Union's parent U.S. company. Of significance, as a result of the transaction, Union would benefit from an annual $1.3 million reduction in its revenue requirement.
Union and the intervenors to the application agreed that the quantum of tax savings should be reflected in the reduction of rates, though the parties disagreed on the timing of such a reduction. Union took the position that the reduction should occur on rebasing in 2012, since on January 1, 2008, it entered into a five-year Incentive Rate Plan (IRP), which only allows for rate adjustments in unusual circumstances. The intervenors took the position, however, that had Union disclosed the transaction in a timely manner, the cost reductions would have been taken into account by the OEB in negotiating the IRP. To support this position, the intervenors relied on an internal Union memorandum from August, 2007, which outlined the proposed corporate restructuring and quantified the tax savings. In response, Union's contention was that firstly, in August, 2007, the tax plan was "just a gleam in somebody's eye" as the restructuring was not approved by Union's Board of Directors until September, 2008 and secondly, that the annnual reduction in revenue requirement was not material.
In coming to its decision, the OEB found that in August, 2007, "there was a real prospect that Union would be reorganized to secure these tax savings on behalf of the U.S. parent". Therefore, at the time that Union was negotiating the IRP, it had a "duty to disclose all relevant information relating to Board proceedings it [was] engaged in". The OEB further held that, in disclosing information, a utility should "err on the side of inclusion" and that a "utility bears the burden of establishing that there is no reasonable possibility that withholding the information would impair a fair outcome in [a] proceeding". With respect to Union's materiality argument, the OEB concluded that the $1.3 million annual reduction in revenue requirement is material.
Union's application was approved, though its rates will be reduced effective January 1, 2009 to reflect the annual cost reduction resulting from the reorganization.