The PULSE Report: Governance of Ontario’s Electric Utilities and Implementation of Required Changes

To listen to an audio recording of this article, click here.

Introduction

Last year, we prepared a series of three articles on governance issues relating to holding companies (“HoldCos”) and Ontario’s municipally owned electricity distribution utilities. In the first article of this series, we described how HoldCos can be used to increase corporate control, mitigate risks and maximize business synergies. In the second instalment, we reviewed the historical development and use of HoldCos within the electricity distribution sector in Ontario. In the third segment, we explored an array of corporate governance issues emerging from the use of HoldCos in this sector.

On October 27, 2026, the Ontario government released the final report of the Panel for Utility Leadership and Service Excellence (PULSE) together with a (partial) legislative and regulatory reform package. Legislative and regulatory amendments are contained in the omnibus Building Ontario Faster Act, 2026 (“Bill 140”),^[1] also introduced October 27. If adopted, it would amend the Ontario Energy Board Act, 1998 and related municipal legislation. The report makes recommendations, among other things, to “modernize governance practices”^[2] to facilitate investment in large-scale system expansion. In some areas, proposed legislative amendments go further than the PULSE report recommendations.

This article updates our series on governance issues and HoldCos in light of the proposals in the PULSE report and the draft legislative and regulatory amendments.

For an overview of the PULSE report and proposed legislative revisions, see David Stevens’ recent article, Ontario Government Releases PULSE Report and Related Legislative Changes.

It is notable that the report specifically states that references to “utility” in the report (and therefore governance recommendations discussed below) encompass both the electricity distribution utility and its associated HoldCo.^[3]

The Stated Rationale for Mandated Governance Reform

The Panel determined that local distribution companies’ (“LDCs”) ability to access external investment, particularly from Canadian institutional investors, will be critical to utilities’ ability to fund gross capital additions of up to $120 billion over the next 25 years, almost doubling the pace of historic capital investment.

How did the Panel identify the link between governance arrangements and access to capital? The report makes the following arguments, based on feedback from the investor community:

• Municipally appointed board members “face competing policy and fiscal considerations that can conflict with their fiduciary duties to act, solely, in the best interests of the distribution corporation.”
• “…[T]he perception of competing priorities between municipal and utility decisions are a concern for potential equity investors.”
• Institutional investors “place a high value on clear governance, independent decision-making and alignment of fiduciary responsibilities.”
• Addressing these perceptions “can directly influence investor confidence, risk assessment and the willingness of external capital providers to commit long-term investment in the sector.”
• Participation from Canadian investors in Ontario’s electricity distribution sector depends on “ownership structures, governance arrangements, regulatory clarity and tax policy that support long-term investment.”^[4]

The Panel concludes that regulatory measures are needed to address board composition, the role of independent directors, and clarity around fiduciary responsibilities and decision-making which, in turn, create more attractive conditions for investors.

Thus, the Panel doesn’t necessarily take the view “if you build it, they will come.” But “if you don’t build it, they won’t come.” And for the 43 “Tier 3” smaller utilities, mere governance changes will not be sufficient; “restructuring, consolidation into larger platforms, or alternative funding arrangements supported by municipal shareholders would likely be required.”^[5]

Governance Recommendations

1. Planning and Accountability

Each utility should be required to file a Certificate of Readiness with the Ontario Energy Board (“OEB”), jointly signed by the board chair and chief executive officer, that attests that the utility has:

• a 10-year comprehensive asset plan;
• a funding strategy developed in consultation with municipal shareholders for this asset plan, including equity investments, debt financing, expectation of dividends and other funding tools; and
• a workforce strategy addressing access to skilled trades, engineering, project management and other specialist expertise.

The Panel recommends that the OEB establish a “proportionate assurance” framework for Certificates of Readiness, including compliance reviews.

2. Dividend Policies

Utility boards should ensure that dividend policies are consistent with their funding strategy and are subject to regular stress-testing.

3. Municipal “Recognition” of Funding Requirements

By July 1, 2027, all municipalities should align their capital budgets with the funding strategies developed under Recommendation 1.

4. Adopt “Best Practices” for Utility Governance

By January 1, 2027, utilities would be required to update their governance arrangements “to ensure boards are equipped to provide skilled leadership, manage risk, oversee complex and long-term investment programs and, where relevant, support access to debt and equity capital.”

Specific recommendations include:

• skills-based boards encompassing strategy, finance, risk management, infrastructure delivery and stakeholder engagement;
• board size of seven to 11;
• an “appropriate balance” between municipal representation, investor representation (where applicable) and independent directors;
• municipal elected officials (and their delegates) comprise no more than one-third of board membership (but see the more restrictive legislative proposal below); and
• remuneration of directors should be disclosed by the utility.

Legislative Changes^[6]

Bill 140 generally contains provisions that would implement the above recommendations (generally through amendments to the Ontario Energy Board Act (“OEB Act”)), with certain details left for regulations to be issued in the future. Related regulatory changes have been posted separately for comment on Ontario’s Regulatory Registry (proposal 26-ENDM014), with comments due November 30, 2026. Notably, the proposal contemplates that the capital-planning requirements, including Certificates of Readiness, would take effect January 1, 2028, rather than the January 1, 2027, date recommended in the PULSE report.

The draft legislation also provides the following with respect to corporations incorporated under s. 142 of the Electricity Act that make PILs payments:

• Under amendments to s. 58.2 of the OEB Act, no municipal mayor, councillor, officers or employees, nor members, directors, officers and employees of a municipal local board, could be appointed as directors. However, each municipal shareholder could still nominate one non-voting, uncompensated board “participant” that could be a mayor, councillor, etc.;
• Amendments to s. 154 of the City of Toronto Act, 2006 and s. 203 of the Municipal Act, 2001 would permit regulations to authorize the imposition of restrictions similar to those under s. 58.2 of the OEB Act (board independence and municipally appointed board participant) to specified municipal corporations. Note that, generally LDC HoldCos will have been incorporated under s. 142 of the Electricity Act, 1998 (not s. 203 of the Municipal Act), thus there is some lack of clarity regarding whether the specified municipal corporations would include such HoldCos (although, as noted above, the intent of the Panel is that HoldCos would be included);
• The ban on “non-independent” directors is more restrictive than PULSE, which allowed up to one-third of the board to be municipally elected representatives or delegates;
• The board as a whole must have experience and expertise reasonably appropriate to the complexity, size and scale of the distributor’s operations. Regulations may also prescribe criteria for individual directors and further board-composition requirements;
• Transparency requirements include: a current list of directors must be posted online; remuneration paid to each director in the prior year, including expense reimbursement, must be published by March 31; and current dividend and director recruitment/retention policies must be published; and
• Local residency requirements for directors may be prohibited by regulation.

Next Steps for Ontario Electric Utilities

1. Shareholders’ Agreements and Directions

Shareholders’ agreements and directions for Ontario LDCs and HoldCos in many, if not most, cases contain provisions that provide for the rights of municipal shareholders to appoint “non-independent” directors (i.e., directors that may be mayors, municipal councillors or employees of municipal shareholders). In order to implement the new regulatory prohibition on such non-independent directors, utilities will need to commence the process of amending such shareholders’ agreements and directions.

This process would include the following steps:

(a)    Legal review of the shareholders’ agreement or direction to identify provisions that would be inconsistent with new independence requirements. Note that such review would not only encompass provisions that relate to non-independent directors but also restrictions on decision-making of a board (i.e., decisions that require shareholder approval) that may restrict the independence of a board. See also the considerations relating to board participants/observers set out below;

(b)    Recommendations as to necessary amendments to the shareholders’ agreement or direction;

(c)    Approval of amendments by the board of the LDC and/or HoldCo, as appropriate, with a recommendation to municipal shareholders;

(d)    Approval of amendments by council(s) of municipal shareholder(s); and

(e)    Execution of amended shareholders’ agreement or direction.

2. Recruitment and Appointment of New Board Members

Current board members who are not permitted to serve will need to resign.

As a first step in recruiting new board members, municipal shareholders should work with their HoldCos and LDCs to identify strategic priorities over the near and mid-term and adopt a skills matrix (with weighting) based on applicable regulatory requirements.

For non-geographic searches, the following may be appropriate:

• Public posting
• Search firms where appropriate
• Director databases
• Governance associations

For a fully independent board, diversity may play a greater role, including consideration of:

• Gender
• Ethnicity
• Indigenous representation
• Generational diversity

Finally, given the requirement of director independence, compensation levels may need to be revisited. Boards that in the past relied on non-independent directors to be compensated, in whole or in part, in their capacity as mayors or councillors, might find that budgets need to be increased.

3. Non-Voting Municipal “Participant”

As noted above, Bill 140 contemplates that each municipal shareholder may nominate one non-voting, uncompensated board “participant.” This role is often referred to as an “observer.”

A board observer is not a director and has no legal authority to vote, make board decisions or exercise directors’ powers. The role is contractual rather than statutory. The observer attends meetings to receive information, monitor proceedings and sometimes provide input if invited by the board.

Thus, while a director has statutory fiduciary duties to the corporation (as opposed to any shareholder), including duties that prevent conflicts of interest and duties of confidentiality, the observer’s rights and duties would need to be newly created in the shareholders’ agreement or direction and implemented in a contractual arrangement with the participant.

In particular, utilities and shareholders would need to consider such issues as the following:

• Information Flow to Shareholder: What rules should apply in terms of the ability of the observer to report to their appointing shareholder? Generally, good governance practices provide for the chair to be the key interlocutor with the shareholder to ensure consistency in content and timing of disclosure of information regarding board proceedings and information. How should the duty of confidentiality apply to the observer?
• Duty to Shareholder: In the absence of a fiduciary duty to the corporation, it should be recognized that the observer will have a duty only to their appointing shareholder. This will need to be taken into account in board deliberations.
• In-Camera Sessions: There may be occasions where the board will wish to convene in camera as this relates to the observer, due to the potential interests of the shareholder in relation to those of the corporation. However, s. 58.2(12) expressly gives the participant notice of, documents for, and the right to attend and participate in all board meetings, including in-camera meetings. The participant may only be excluded from discussion of matters prescribed by regulations, which have not yet been provided.

4. Timing

The proposed deadline for changes in governance arrangements is January 1, 2027.

Given the need to go through the process of amending, approving and executing a revised shareholders’ agreement or direction, recruit new directors, adopt a revised compensation scheme and create appropriate arrangements for the board participant/observer, a January 1 deadline for implementation may be quite challenging.

Conclusion

Bill 140 will place considerable demands on Ontario distribution utilities and their municipal shareholders in terms of restructuring of governance arrangements within a very short time frame. It must also be recognized that board restructuring is not an end in itself. Based on the PULSE recommendations, new governance arrangements are being imposed to facilitate external investment, including equity investment and further industry consolidation. In the context of these strategic transactions, additional rounds of governance changes can be expected. Fasten your seat belts and secure your tray tables; turbulence ahead!

The Energy Group at Aird & Berlis LLP will continue to monitor and report on developments related to the PULSE report and associated legislative changes. Please contact the author or a member of the group if you have questions or require assistance.