Utilities must disclose contemplated corporate reorganizations

December 4, 2008

In a recent decision concerning Union Gas Limited (Union), the Ontario Energy Board (OEB) ruled that a utility has a duty to disclose, as part of its  rate application, any contemplated corporate reorganizations that have a "real prospect" of proceeding, even if the utility's board has not yet granted final approval.

The issue arose in an application to the OEB for approval to transfer a controlling interest in Union to a limited partnership.  The purpose of the transaction was to generate $50 million in tax savings for Union's parent, which in turn would reduce Union's annual revenue requirement by approximately $1.3 million.  As part of the application, Union requested the cost reduction not be factored in to its rates until after the expiry of its Incentive Rate Mechanism Plan (IRM Plan) in 2012.  Under the IRM Plan, which was approved by the OEB in January 2008, Union's rates are set by a formula that is tied to the cost of inflation and a productivity-improvement factor.

A number of intervenors objected to Union's proposed treatment of its cost reductions.  In particular, the intervenors argued that if Union had disclosed the transaction in a timely fashion, the cost reductions would have been factored into the IRM Plan.  In support of their position, the intervenors pointed to an internal Union memorandum from August 2007 that quantified the tax savings of the reorganization.  In response, Union argued the reorganization was "just a gleam in somebody's eye" in August 2007 and did not need to be disclosed until the plan received final approval from Union's board in September 2008.

In siding with the intervenors, the OEB stated that regulated utilities have a duty to disclose "all relevant information relating to Board proceedings it is engaged in" and should err on the side of inclusion.  Where information is not disclosed, the utility will bear the burden of establishing that "there is no reasonable possibility that withholding the information would impair a fair outcome in the proceeding."  With respect to Union, the reorganization should have been disclosed in the IRM Plan proceeding because the tax benefits had been quantified and there was a "real prospect" that it would occur.  The panel rejected Union's arguments on the ground that it was not believable that a sophisticated organization like Union would leave $50 million on the table.

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