The Governance Of Regulatory Agencies - A Case Study Of The Ontario Energy Board

Executive Summary

Regulatory agencies play a critical role in the operation of modern society. They perform functions which none of the legislature, the government, or the courts have the time, the expertise, or the capacity to perform. Because of the importance of regulatory agencies, it is essential that they be subject to effective governance.

This paper examines the governance of regulatory agencies, using the Ontario Energy Board (OEB) as a case study. This paper uses the Organization for Economic Co-operation and Development's (OECD) principles for governance of regulatory agencies as the standard by which to assess the governance of the OEB.

This paper examines the operations of the OEB against that standard and identifies aspects of the OEB's operations which do not meet the standard. It then examines the OEB's existing governance instruments – principally judicial review by the courts, and compliance with the Memorandum of Understanding between the responsible Minister and the chair of the OEB – to determine whether those instruments are adequate to address the deficiencies. This paper argues that those instruments are not adequate.

This paper concludes by suggesting that what is required is an independent examination of the OEB's operations, first to determine what practices need to be improved in order to meet the OECD standard and, second, to determine whether the existing governance instruments can be enhanced or whether they need to be replaced.

This paper considers the governance of regulatory agencies.

Regulatory agencies play a critical role in the functioning of Ontario's society. They are responsible for the oversight of essential parts of the economy. They play an important role, as well, in protecting the safety and ensuring the well-being of the province's residents.

The importance of regulatory agencies was recently summarized by the Organization for Economic Co-operation and Development ("OECD") as follows:

They [regulatory agencies] play a vital role in the delivery of public policy and are responsible for ensuring investment in sectors and industries, as well as for protecting the neutrality of markets. They protect citizens (including workers and consumers) for fairness and safety, and they also protect the environment and manage its future. They ensure the reliability of vital infrastructure. If the lights go out, they are held to account.1

Given the importance of regulatory agencies, it is essential that they be subject to appropriate oversight and control. On this point, the OECD has stated:

The governance arrangements of a regulator are critical. The legal remit of the regulator, the powers it is given, how it is funded and how it is held accountable are all key issues that should be carefully designed if the regulator is to succeed in combining effective regulation with high standards of integrity and trust. Regulators are pivotal in making regulatory regimes work for sustainable growth and equitable societies.2

Regulatory agencies exercise powers delegated to them by legislatures. Such delegation is necessary in a complex and highly-specialized economy. Legislatures do not have the expertise, the time, or the information to apply detailed regulatory standards to individual circumstances.

Delegation entails carrying out the objectives of the legislation. It also entails carrying out the government policies that inform the legislation. To that extent, regulatory agencies are not independent of the government. At the same time, however, the proper exercise of delegated powers in some circumstances requires regulatory agencies to act as quasi-judicial decision-makers. Acting in that capacity requires regulatory agencies to have a measure of independence.

Regulatory agencies are subject to oversight, to varying degrees and in different ways, by the legislature, the government, and the courts. They are subject, in other words, to three sources of external governance. The question this paper addresses is whether those sources, alone or in combination, provide sufficient governance.

Because of the need for a measure of independence in carrying out their quasi-judicial function – and indeed because of the very reason for their existence, such as the need for a body with a level of expertise which the legislature does not have – there are limits on the effectiveness and the appropriateness of the government, and the legislature, as sources of governance. At the same time, through the evolving jurisprudence on judicial deference, the courts have allowed regulatory agencies considerable freedom in finding facts, interpreting their own statutes, and, indeed, making law. As a result, there are limits on the role of courts in the governance of regulatory agencies. There are, thus, gaps in the nature and extent of the oversight by the legislature, the courts, and the government.

Rather than undertake an examination of the governance of regulatory agencies in the abstract, this paper uses the governance of the Ontario Energy Board ("OEB" or "Board") as a case study.

To provide a frame of reference for that examination, this paper measures OEB governance against the principles for the governance of regulatory agencies developed by the OECD.3

This paper is in the following parts:

1. In Part II, I discuss what governance of regulatory agencies consists of, and why it is important;

2. In Part III, I describe the OECD's principles for the governance of regulatory agencies;

3. In Part IV, I provide general background information regarding the regulation of the energy sector in Ontario and the role of the OEB in that sector, in order to provide a context for the assessment of OEB governance;

4. In Part V, I measure aspects of the OEB's operations against the OECD principles;

5. In Part VI, I examine the OEB's existing governance mechanisms, including the OEB's own governance processes, the Memorandum of Understanding ("MOU")4 between the Chair of the OEB and the responsible Minister, and the oversight principles applied by the superior courts to regulatory agencies, including the OEB;

6. In Part VII, I set out the conclusions of the analysis and make suggestions for how those conclusions might be applied.

   II WHAT IS GOVERNANCE OF REGULATORY AGENCIES AND WHY IT IS IMPORTANT

   In this part, I examine what governance for regulatory agencies consists of and why such governance is important. I also compare considerations of governance in the private and public sectors.

   For regulatory agencies, governance may be defined, broadly, as the mechanisms or instruments, processes, and relations by which a regulator is controlled and directed, and by which its decisions and actions are measured and held to account. The mechanisms or instruments would include the governing legislation, any regulations made under that legislation, and the rules governing the regulatory agency's relations with government, the legislature, and the courts. It would also include the regulatory agency's own structures, rules, and practices.

   The importance of good governance for regulators has been described by the OECD in the following terms:

   How a regulator is set up, directed, controlled, resourced and held to account — including the nature of the relationships between the regulatory decision-maker, political actors, the legislature, the executive administration, judicial processes and regulated entities — builds trust in the regulator and is crucial to the overall effectiveness of regulation. Improving governance arrangements can benefit the community by enhancing the effectiveness of regulators and, ultimately, the achievement of important public policy goals.5

   The Task Force for the Independent Review of the British Columbia Utilities Commission made the following observation about the British Columbia Utilities Commission in its Interim Report:

   To be effective, the BCUC needs to have credibility, public confidence, and independence within the exercise of its mandate as set by government.6

   Governance is essential to ensuring that regulatory agencies have those qualities. The OECD indicates...