OEB Approves 50/50 Sharing of Gain on Sale of Property by Electricity Distributor
We have written separately about the decision of the Ontario Energy Board issued on January 23, 2020 in respect of applications made by two electricity distributors, Brantford Power Inc. and Energy+ Inc. In the same decision, the OEB determined the appropriate disposition of a gain on the sale of real property by Energy+.
Energy+ realized a gain when it sold its operations centre in Paris, Ontario. It proposed a disposition of the net gain, which it had calculated so as to exclude a “fair value increase” paid when Energy+, then known as Cambridge and North Dumfries Hydro Inc. (CND Hydro), acquired the former Brant County Power Inc. The “fair value increase” included in the calculation by Energy+ was an amount above the regulatory book value of the Paris facility paid by CND Hydro.
The OEB said that when the regulatory treatment of the gain on the sale of a facility is determined, it is the regulatory book value that is relevant; any fair value increase in an asset as the result of a merger or acquisition must not affect rates for customers.
The OEB concluded that 50% of the net gain, calculated on the basis of regulatory book value, should, in these specific circumstances, be shared with customers, taking into consideration that no amounts for the Paris facility were included in the last approved rate base for Energy+.
More generally, the OEB said that it has no definitive policy with respect to the sharing of gains on the sale of property. While the OEB’s 2006 Rate Handbook contemplated that gains and losses on the sale of property would be shared on a 50/50 basis, it was issued solely for the purpose of setting 2006 electricity distribution rates. No subsequent policy has been established and the OEB has adopted various approaches depending on the specific circumstances, including no sharing, 50/50 sharing, 75/25 sharing and 100% “sharing”.
The OEB also addressed an argument by Energy+ that disposition of the gain on the sale of the property could be considered out-of-period ratemaking. (The gain on the sale of the Paris property occurred in 2018 and the application by Energy+ was for approval of rates effective January 1, 2020.) The OEB did not accept this argument. The OEB’s Accounting Procedures Handbook makes clear that a distributor is expected to identify gains and losses on individual assets separately in rate filings for review by the OEB; this means that the review and possible disposition of gains was contemplated by the OEB’s accounting requirements, so the amounts were “encumbered and not barred from rate regulation.”