Blog Post

Ontario Energy Board Addresses Potential Issue of Retrospective Ratemaking

We have previously written about a decision of the Ontario Energy Board in which the Board approved the revenue requirements of an electricity transmitter, B2M Limited Partnership, for the five years from 2016 to 2020. One of the issues considered by the Board in the decision was the appropriate treatment of start-up costs for B2M.

B2M is substantially owned by a subsidiary of Hydro One Inc. and by Saugeen Ojibway Finance Corporation and was created to acquire a section of an electricity transmission line between the Bruce Nuclear Generation Complex and the Milton Switching Station from Hydro One Networks Inc. B2M proposed to recover $7.7 million of transaction and startup costs in equal annual amounts over each of the four years from 2016 to 2019. These costs were incurred from 2012 to 2014.

The Board said that the proposed recovery, starting in 2016, of costs incurred between 2012 and 2014 would not constitute retroactive ratemaking, but that it would raise a potential issue of retrospective ratemaking. Retrospective ratemaking, the Board said, is ostensibly prospective in that it sets rates only for the future, but involves future rates designed to meet not only future costs, but also past costs.

The Saugeen Ojibway Finance Corporation had been given advance tax rulings indicating that it would receive net profit from B2M without paying income taxes. The Board found that the tax benefits from the ownership structure of B2M would benefit the same ratepayers who, under B2M's proposal, would pay the transaction costs required to create that ownership structure. While concern about retrospective ratemaking arises when there may be a mismatch between revenues and expenses, no mismatch would occur because the payors of the transaction costs would be the beneficiaries of the tax treatment afforded to the Saugeen Ojibway Finance Corporation.

The Board went on to make clear its expectation that, in similar future transactions, better cost tracking and control measures will be put in place and that experience in structuring such a transaction will result in lower startup costs.