Recent changes enacted in Bill 112 in Ontario are being seen by some to sound the death knell of our existing, highly successful, consumer representation system in energy regulation. In a past (and perhaps more genteel) time, you would say that customer groups are having “conniption fits”. They pay more than $12 billion annually for energy costs regulated by the Ontario Energy Board, so how they are represented before that Board should matter to them.
This may be a good time to take a more dispassionate view of how consumers should be represented, and whether the current system should be changed. I am volunteering for that most certainly thankless task, since in this my final year of energy representation, I no longer have a horse in this race (or dog in this fight, if you prefer the more traditional, but disgusting, metaphor).
There are many, I should point out, that think Ontario’s grassroots system of energy consumer representation is the best in the world. When I talk to consumer representatives from other jurisdictions, and describe how our model works, they universally (I have yet to find an exception) view the Ontario approach as being “the gold standard”. If I’ve heard the phrase “OMG, I’m envious” once, I’ve heard it a dozen times.
I admit up front that, having seen the Ontario system work up close for many years, I am largely in agreement with those sentiments. But the fact that our system is applauded by consumer representatives (or by me) doesn’t mean it’s the only system, or even the best system. Consumer representatives have a particular point of view. There are other points of view – the regulated utilities, the government, the regulator, and even the general public. Let’s not jump to the conclusion that envy necessarily equates to excellence.
Right now, the Ontario Energy Board is putting the final touches on a supposedly secret (except that it is widely known) proposal to replace the current representation system with a roster system, one of the options discussed below. This is in part because the OEB has toyed with variations on the consumer panel, another of the alternatives. After running that idea up the flagpole, the OEB has concluded that it is not a strong enough approach to satisfy the general public, or the government.
While the OEB is designing the new roster system, there is a group within the Ministry of Energy that believes a utility consumer advocate, another of the options described below, and probably the model most commonly seen in North America, is a more effective approach.
Either of these options – if approved – would replace all or part of the current system. In both cases, there is likely to be stakeholder pushback, but it is not clear how much. Neither the OEB nor the government will want to proceed with a change in the face of any widespread opposition from customers, but both assume that customers are not very aware of this issue, and so will not consider it a high priority.
Against this backdrop, let’s look in a more disciplined way at the options for consumer representation.
In the several hundred or more jurisdictions around the world that regulate energy prices, there are almost that many ways for the interests of the customers to be represented in the process. However, it is probably fair to say that there are five main models for those systems:
1. Do Nothing. In many places around the world, there is no system of consumer representation at all. The government, or a government body, sets prices for monopoly utilities, in a completely top-down and administrative manner. Any consumer input is restricted to the political process. This is most popular in those jurisdictions with more autocratic systems of government, but it is not limited to those places.
2. Consumer Panel. This is a group of individuals whose role, usually a part-time one, is to consider utility rate and other proposals, and provide general comments to the regulator from a consumer perspective. They are often appointed by the regulator, and their credibility is based mainly on their personal credentials.
3. Utility Consumer Advocate. I have used this common term, but the category really covers any government-appointed individual or agency whose mandate is to represent consumers in energy regulatory processes. That person is, in many places, called a utility consumer advocate, or UCA, so I will use that acronym as a handy-dandy way of describing this option.
4. Roster System. Rather than have a single government body representing consumers, some jurisdictions allow law firms (usually) to bid to be on the consumer representation list. The government, or the regulator, then selects one of the law firms to be the designated consumer representative for each individual utility application.
5. Grassroots Model. The Ontario system allows organizations of customers (a seniors’ association, for example) to select their own representatives, sometimes lawyers and sometimes engineers or economists, to intervene in energy proceedings on their behalf. The representatives answer only to the customer groups they represent, although if they become overly adversarial in their positions they can and will be restricted by the regulator.
The cost of representation is, in every case except the first, borne by the customers as a whole, either through payments by the regulated utilities (which are then recovered through their rates), or through payments by the government (which are then recovered through taxes). In the first option, of course, there is no representation, so there is no cost except the political one. With that exception, this discussion is entirely about funded consumer representation systems.
It is tempting to compare the options on the basis of cost alone, but if you do that you find that the results are not as intuitive as you may think.
The consumer panel approach is, as expected, the least costly in most places in which it has been implemented. However, as soon as you try to make it effective by giving it a more active role (and therefore more resources), it can quickly become the most expensive approach. It also starts to look more and more like the UCA.
The utility consumer advocate is the easiest to assess, partly because it is so widely used. It is a government bureaucracy. No matter how much you try to control the cost, it will be greater than planned, and higher than most other choices.
The roster system, less common, is generally also pretty expensive. Although sometimes the hourly rates of the advocates are controlled, the numbers of hours billed can be quite high for each individual proceeding. Of course, the cost also correlates with effectiveness.
Surprisingly, the cheapest actual representation system appears to be the grassroots model in Ontario.
However, cost is not really a relevant issue anyway. No matter which system is used, the cost is small relative to the overall cost of the regulatory process, and miniscule relative to the actual rates being charged to consumers. The whole regulatory process costs perhaps half of one percent of rates. The portion that is consumer representation is rarely more than 10-20% of that already small amount, with Ontario being at the low end of that scale.
The utilities, for example, typically spend three or four times as much on the lawyers, consultants, and others that present their point of view to the regulator. That is also, of course, paid for by the customers. Amidst the clamour to rein in consumer representation, you don’t hear anyone talking about controlling the cost of utility representation. (Lobbying, eh?)
What are important, then, are two things: effectiveness, and control. The various consumer representation systems have a number of strengths and weakness, each of which can usually be put in either the effectiveness box, or the control box.
The easiest way to consider the options, therefore, is looking at each in turn in light of those two issues.
In the discussion below, I refer to “consumer representation”. This usually means representation of the interests of residential customers, although sometimes it also includes small businesses. Any of these options can be expanded to include industrial, commercial, institutional, and specialized customers, but that brings with it additional complications. In most cases, these options are limited to the smaller customers, who make up the bulk of the customers by numbers, but a minority by usage, and by the total bills they pay.
An unfortunate collateral disbenefit of some models is, however, that effective representation of other customer groups is also curtailed. Despite that, to keep this manageable I have limited the discussion below to the options for representation of residential and small business customers.
Don’t laugh. Of course we have to consider this option.
Keep in mind that in most jurisdictions around the world, and in Ontario for electricity until 1999, this is the system that is and was used. The essence of the system is that utility rates are a political issue, and consumer concerns should be expressed at the ballot box. Whether there is a formal regulator like the OEB, or rates are just set by a government department, the primary avenue for customer input – aside from directly to the utilities themselves – is to the responsible governments.
This has actually happened in Ontario’s past, so it is not pie in the sky. Higher hydro rates? Kick the bastards out, whether the “bastards” are municipal councillors, or provincial MLAs.
This has the obvious advantage that the popular will is delivered directly to those whose job it is to answer to the public, their elected representatives. It has the obvious disadvantage, on the other hand, that concerns about regulated energy rates have to compete for attention with concerns about many other aspects of government and society. As a practical matter, energy issues will rarely percolate to the top of the pot, and when they do it will not necessarily be because those particular aspects of energy rates are objectively important. They may just represent the best sound bites for opposition politicians.
Populism can and does cut both ways.
There is another, and perhaps more important, problem with the do nothing option. If energy issues are political issues, then any time the public does get upset about them, the politicians have to wear them. Since the politicians can never predict which of the many energy issues will capture the public’s attention, energy becomes a political risk that they have limited ability to control.
Many people cynically believe that the whole point of independent regulation is to insulate politicians from responsibility for increasing energy costs. If consumers don’t feel they have a real voice in energy regulation, that insulation is reduced, and the political risk is increased.
For this reason, in most jurisdictions with a strong democratic tradition, and with upward pressure on energy costs, there is a formal system for representation of customer interests.
There is one other pragmatic aspect to this. When there is already a system in place for consumer representation, it is virtually impossible to remove it, unless a new (and improved) representation system replaces it. Whether or not the old system was actually effective, there is little likelihood that the public will accept replacement of their existing “protection” with nothing.
This option can be seen as a kind of “consumer representation lite”.
Basically, the government or the regulator establishes a committee or other forum in which respected members of the community look at regulatory proposals from the point of view of the consumer. Public input for conservation and renewable energy spending in Ontario (at the IESO) largely follows this model, even if the IESO is not technically a regulator.
In the most common example, the utility will prepare a summary of their rate proposals, for example, which is provided to the panel members. Sometimes they will also provide utility “witnesses” to answer questions about the summary. Then the panel members retire to discuss the proposals, and how they will affect consumers. This normally results in some sort of report or other communication raising potential issues with the proposals.
In this plain vanilla approach the consumer panel has limited resources, and no power. They are therefore not in a position to look under the hood and see whether the utility proposals really stand up to review. That is left to the regulator, assisted by the lawyers and consultants of the utility. What the consumer panel can do is identify issues that are apparent on the surface, or flag areas in which they feel the regulator should take a closer look. Lacking the ability to do a thorough review, they will typically miss many of the important issues.
The effectiveness of a consumer panel is dependent on the expertise of the members of the panel (as with all of these options, it is heavily driven by the individuals involved), and on the resources made available to them. For example, the panel can be constituted a “consumer challenge panel”, with the responsibility to challenge the positions and assumptions of the utility. This can involve the power to demand additional information. In some cases, the consumer challenge panel will have staff resources available to assist them.
These things all add to the effectiveness of the panel. However, as you add expertise and resources, you get closer and closer to either a Utility Consumer Advocate, or the role of the regulator itself. You also add to the cost. With few exceptions, the effectiveness and cost of a consumer panel march hand in hand.
Control can also be an issue for consumer panels. In some jurisdictions, the regulator requires the utility to set up the panel (“customer engagement”, it’s called), and the utility controls both information and resources. Where the regulator or the government appoints the members, those members rely on satisfying the appointing body if they want to keep their position. Even if the regulator or government is driven by fairness, they will rarely support consumer panel members who advocate vigorously for consumers. The fact that the utilities have people advocating vigorously for them is not seen as needing a counter-balance.
Consumer panels are mostly a kind of “for show only” consumer representation. Lacking sufficient power, and usually lacking sufficient resources and independence, consumer panels can create an illusion that the consumer is being heard, but they rarely make a material difference to the results of the regulatory process.
Utility Consumer Advocate
Politicians like to set up agencies to defend their constituents. The reason we have an ombudsman for this or that, or an auditor-general, or a Parliamentary budget office, or any of a number of such entities, is that adding a protection for the public is politically saleable.
A utility consumer advocate is a government or regulatory agency charged with the responsibility to speak on behalf of residential and/or small business customers in energy regulatory proceedings. While one person is usually appointed as the UCA (like one person is appointed as ombudsman), they will have a whole department of people actually delivering on the mandate. That will usually include not just lawyers, but also economists, engineers, accountants, and other specialists with energy industry knowledge.
Unlike a consumer panel, a UCA actually intervenes in utility rate applications as a party representing the interests of consumers. The UCA typically engages fully in written and oral discovery, and usually is a key participant in any oral hearing and argument on the merits of the case.
Because the people in the UCA work full-time on energy regulation, they develop a significant expertise, and get very good at it. There is nothing like seeing ten utility applications every year to get a very nuanced understanding of what to look for.
The effectiveness of a UCA can of course be influenced by the resources available, and it will certainly be influenced by the identity of the person leading the agency. If the UCA chosen is timid or bureaucratic, then the representation of consumers will also be timid or bureaucratic. Conversely, a crusader can make a UCA office into an important component of the energy industry.
The biggest issue with a UCA (aside from cost) is control. To whom does the UCA answer?
In some structures, the UCA is appointed by the regulator, and answers to the regulator. The unfortunate result is that the decision-maker is also controlling the positions taken by one of the sides in the dispute before it. This can create a bias, in which the interests of the utility are presented more forcefully than the interests of the customers. Further, the regulator would control what positions the UCA could take in negotiations with utilities, or could even prohibit negotiated settlements. The line between the regulator’s independent adjudicative role, and its role as the “client” of the UCA, can become blurred.
Another UCA model has the UCA reporting to the government, usually through the Attorney-General or a similar office. The theory is that the government is more likely to give a green light to forceful consumer representation than the regulator might. There is a problem, though, when the government is the shareholder of key regulated entities, as is the case in Ontario. This creates a conflict of interest. It may never be realized, but the conflict is still a risk.
The strongest UCA structure makes the UCA an independent role, not actually “reporting” to anyone. Just as the Auditor-General or the Ombudsman have a statutory mandate, and are (in theory) unsupervised except by the Legislature in pursuing that mandate, so too the UCA would be charged with a mandate, period. In some cases, the UCA in fact sets up a committee like a consumer panel, to guide their work, although unlike the standard consumer panel the information and resources are controlled by the UCA in pursuit of the interests of the customers.
Where UCAs have been effective in other jurisdictions, they have been run by top people, and given substantial, even complete, independence. In most of those cases, they have also been quite expensive, as one would expect.
Most UCAs do not reach that level of effectiveness. The tendency to bureaucracy is sometimes the problem, but more common is the inability of the government or the regulator to allow the UCA the independence they need to do a good job. The sad case of Alberta, where the UCA position was for a while a revolving door, is an example of a UCA system that was simply not effective in defending consumer interests.
The model preferred by the Ontario Energy Board is a roster system. Law firms would respond to an RFQ (Request for Qualifications) to demonstrate their ability to represent consumer interests in rate and other proceedings. The RFQ would normally include the financial parameters under which each firm would accept consumer representation work, and those parameters almost always include sharply discounted hourly rates compared to their rack rates. This is much like firms that bid for government work, and accept lower rates to get it. This is government work, after all.
After the RFQs are assessed, the regulator (or the government, in some other jurisdictions) then develops a list of law firms authorized to be consumer representatives. In theory, the list could include consulting firms as well, although I am not aware of any roster systems that include firms other than lawyers. (Why it makes sense to limit this to law firms is beyond me.)
Once the roster is set, the regulator or the government appoints a firm from the roster to represent consumers in each rate proceeding before it. If there are, say, fifty applications every year, as in Ontario, then there are fifty appointments of law firms, one for each of those cases.
There are two main issues with a roster system: expertise (a subset of effectiveness), and control.
Unlike the UCA, a law firm that gets on the roster will rarely be able to have a team that works full-time on energy representation. They will simply not get enough assignments for that. As a result, in places where this method is used, consumers are mostly represented by lawyers who are primarily commercial or administrative litigators, but have some knowledge or history with energy regulation. This tends to mean that they approach the task in a more adversarial way, as their skillset is “fighting” for their clients.
Contrast that with the UCA, or the grassroots model, where the recurring role of the consumer representatives means that it is important for them to develop longer term relationships with the utilities and other stakeholders. This makes for a less adversarial system.
Over time, roster firms can develop a kind of sub-specialty in energy regulation, since a few cases a year can still build knowledge. It takes a little longer, and in the meantime there is a learning curve for each new firm brought onto the list.
The roster system for consumer representation in Ontario will, if approved, work in much the same way as the current roster system for energy mediators. Just as with that system, new people can end up being good, but that is not immediate. Inevitably some expertise is lost.
The bigger problem with the roster system is control. If a law firm is representing consumers, who is the client? From whom do they take instructions, and whose interests are they assessing when they craft their positions, strategy and tactics? They can’t be independent, as with the best UCAs, because they don’t have that overall statutory mandate. Someone has to act as their client.
In the OEB model about to be released, the real client will be the regulator itself. The regulator will hire them, and their positions and strategies will be subject to the approval of the regulator and its staff. In effect, the interests of consumers will be only those interests decided by the regulator. Further, the rare law firm that decides to be independent, in pursuit of the interests of the ultimate client, the consumers, will presumably never be appointed to take another case again. Why would the regulator appoint someone who won’t do what they’re told?
This approach thus has the problem that the regulator is both independent adjudicator, and client of one of the sides. Typically, this means that the case for the utility is argued more forcefully than the case for the customers.
At the other end of the “roster” spectrum, you could have a consumer panel, as in the model described earlier, that selects the roster law firm for each case, and then acts as their instructing client. The consumer panel could even decide on the roster in the first place. While I don’t know of any jurisdiction in which this approach is used, it would certainly provide for a greater level of connection between the representative and those they represent, and sidestep the problem of the regulator’s two conflicting roles.
The roster system is not common. Properly designed, it should avoid the bureaucracy risk of the UCA, but it has obvious drawbacks as well.
Ontario may be unique in having its own, made in Ontario, grassroots system of consumer representation.
Under a grassroots system, any organization that represents an identifiable group of energy customers can elect to be a party to an application by a utility for rates (or anything else, for that matter). In most cases, the organizations are not energy-centric. Rather, they exist to represent a definable group in many areas, of which energy is one of their common concerns. In Ontario, these groups represent seniors, tenants, homeowners, landlords, schools, universities, industrial companies, etc. They may also include groups of people with an interest in common, such as environmental groups, or unions. In each case, the members of the organizations are stakeholders in the regulated energy system, and have decided to participate as a group in the regulatory process.
The ability for customer groups to intervene is not unusual, but in most jurisdictions they have to pay for their participation themselves. Thus, rarely are any other than the biggest customers represented. Who can afford that? Only big companies, and that is what in fact happens in most cases. In a few cases, blocks of funding are provided for consumer groups, but it is usually small and sporadic (as well as bureaucratic).
What we are considering in this article, however, are funded consumer representation models. In each of these cases, we are considering models in which the regulatory process, in addition to funding the utilities to make their case, routinely funds some form of consumer representation as well.
The uniqueness of the Ontario model is that there is a built-in, reliable structure for funding consumer representatives. Any customer group (as well as some other groups) that is willing to select lawyers or consultants to represent them in regulatory proceedings, and participates responsibly in those proceedings, can expect to have their costs to do so reimbursed.
There are limits to the reimbursement levels, which are well below normal market rates, and there is no ability for the organization to recover any of its internal costs, but within those restrictions the only criterion for reimbursement is that the participation must be constructive and valuable to the process.
This system has been in place in Ontario for the last twenty years or more, but has been at its most effective over about the last 10-12 years. In a typical rate case, there are as few as two, or as many as eight, customer groups represented by experienced counsel or consultants. The overall cost has been, year in and year out, lower than any jurisdiction that has a UCA system.
All is not roses, however.
The grassroots system has effectiveness problems of two main types.
First, not all consumer groups select the very best representatives, and some of those representatives, once good, become complacent over time. This is similar to the problem with every one of the models: it all depends on the people. This is both more and less of a concern with the grassroots system.
It is more of a concern, because not every consumer group has as good a grasp as it should of the quality of its representation, but those who know of weaknesses – like the regulator – are not in a position to do anything about it. The responsibility to select and instruct their representatives lies with the groups. Some are simply better at it than others.
It is also less of a concern, though, because there is not one representative for all consumers. Usually there are two or three, sometimes more. Some will be weaker, and some stronger. One bad apple doesn’t spoil the whole bunch.
Second, the grassroots system sometimes suffers from a “coverage” problem. If you leave it to consumer groups to decide to participate, some groups will end up not being represented in all cases. Maybe in this one the small business owners will be unrepresented, and in the next one the smaller residential customers, etc. No-one has the specific mandate to represent all consumers.
This has not been as much of a concern in Ontario as it could be, because of the particular groups that are regularly involved. It is, however, a risk that is always there.
The grassroots model also has issues of control. It is essentially self-selected, so there is no-one directing the participants to march in a particular direction.
This is both good and bad. Because the parties to any proceeding are independent of the process, and answer only to their constituencies, most rate proceedings end up with negotiated settlements. Lawyers and consultants with independent clients are free to negotiate compromises in ways that government or regulator-supervised bodies are not.
On the other hand, the system relies heavily on the involved consumer groups and their representatives. If they don’t take it seriously enough, or they go off on a frolic, the system can devolve to a highly adversarial process that serves no-one.
Those who participate in the grassroots model – consumer groups, and their lawyers and consultants – think that it is superior to any alternative. Consumer groups in other jurisdictions invariably agree. The truth is that, like the other models, it has strengths and weaknesses. Ignoring the weaknesses because we like the strengths is not, frankly, productive.
Many jurisdictions have a system that, while based on one model, incorporates elements of other models.
For example, some jurisdictions with a consumer challenge panel provide funding for the panel to hire lawyers and consultants to participate in regulatory proceedings. This brings in elements of the UCA, or the roster system.
Several places with a UCA also have some form of consumer panel – operating as an advisory board – to assist the UCA in identifying issues.
In Alberta, where the UCA turned out to be somewhat of a disappointment (to put it charitably), one or more grassroots organizations are also funded to participate in cases. This has also happened in jurisdictions that have consumer panels, but are facing contentious issues, with significant utility positioning. Sometimes these are one-offs (often with a bitter behind-the-scenes fight with the utilities over the appropriateness of funding the customer groups), while in other cases the regular addition of funded grassroots organizations is used to fill in the gaps in the other systems.
If the system in place is a grassroots model, as in Ontario, you could conceive of the addition of government-appointed participants (from a roster, or on a permanent basis) to represent groups that are not otherwise represented.
Whatever the system, it has to be monitored to ensure that customers are being defended in an effective manner. Adjustments to add to the existing system can then be more surgical, responding to an identified need.
There is no magic in any of the consumer representation models. As one can see quite plainly, the right people, with the right resources, can properly represent most customers, most of the time. Each of the models can be set up to succeed, usually by adding in a component of one of the other models.
In Ontario, a debate has gone on, and will probably continue, about the grassroots model customers rely on today. I make no bones about the fact that I believe – agreeing with consumer representatives in many other jurisdictions – that Ontario has an excellent system. Customers are well served by that system.
Could it be better? Of course, but that is not the question that is being asked. The question now being raised is whether to throw the Ontario grassroots system out. It is not clear why that would make sense, when the current system is working well. And, it is not clear which of the other systems could reasonably be thought of as inherently better.
– Jay Shepherd, February 27, 2016