In a recent Union Gas application, the Ontario Energy Board (OEB) confirmed that it retains inherent jurisdiction to review the operation of earnings share mechanisms even if the parties to a settlement agreement have not agreed to an explicit review procedure.
The issue arose in connection with the earning share mechanism that Union agreed to in its 2008 rate case. In the 2008 settlement, Union agreed to split 50/50 with ratepayers any return on equity that was more than 200 basis points over the return on equity calculated under the OEB's cost of capital formula. The 2008 settlement also provided an "off-ramp" in the event that Union's return on equity was more 300 basis points above the OEB's formula; if triggered, the provision required Union to bring application for review of the earnings share mechanism.
As Union's 2008 earnings were more than 300 basis points above the OEB's formula, Union was required to bring a review application. As part of the application, Union agreed to a settlement under which the off-ramp provision was replaced by a commitment to share 90% of any earnings more than 300 basis points above the OEB's formula with ratepayers. One intervenor, the Industrial Gas Users Association (IGUA), objected to the removal of the off-ramp provision because it provided Union with a "licence" to continue to over-earn without review of the reasons for the over-earning.
While recognizing IGUA's concern, the OEB panel approved the settlement, noting that "even if the contractual right of the parties to review the plan disappears when the trigger mechanism disappears, the Board still has inherent jurisdiction to review situations it regards as unfair or unreasonable." In the panel's view, the 90/10 sharing mechanism was an appropriate check on Union's ability to over-earn and provided greater regulatory certainty. In reaching this conclusion, the OEB made it clear that, while parties have considerable latitude to design and alter earnings share mechanisms, it continues to have the ultimate responsibility to ensure such mechanisms are just and reasonable.