OEB Resource Guide

Energy Sector Regulation: A Brief Look

The Government of Ontario, through the Minister of Energy, sets the legal and policy framework – passing legislation and regulations – that govern the energy sector. The OEB has been given responsibility for implementing and overseeing this framework, ensuring that market participants comply with their regulatory obligations. In doing so, we balance various objectives, including protecting consumers’ interests and ensuring the viability of Ontario’s natural gas and electricity industries. A key part of achieving this balance is ensuring that the rules and regulations are fairly and consistently applied.

Mandate of the OEB
To regulate the province’s electricity and natural gas sectors and provide advice on energy matters to the provincial government.

How have the OEB’s role and energy sector regulation evolved?

Ontario’s energy sector has been regulated in some form or another since the early 1900s. However, the regulatory framework has changed dramatically in recent years.

For almost the entire 20th century, the publicly owned (Crown corporation) Ontario Hydro was the major force in Ontario’s electricity sector. Ontario Hydro dominated all aspects of the province’s electricity sector, serving as the dominant generator and transmitter of power. It also had the authority to regulate and set the rates at both the wholesale and retail levels. The OEB was created in 1960 with a limited mandate to set rates for the sale, distribution and storage of natural gas. Read more about the OEB's history...

In the late 1990s, the government decided to embark on the restructuring of the electricity sector. Among the regulatory reforms were the breakup of Ontario Hydro, the creation of a wholesale electricity market and giving the OEB responsibility for regulating part of the sector.

The natural gas industry has been evolving since the federal/provincial agreement in 1985 that deregulated the priced supply at the wellhead. In recent years the growth of natural gas marketers in the wholesale and retail markets has meant more choice for consumers when purchasing their natural gas commodity. The delivery of natural gas remains regulated by the National Energy Board and, within Ontario, by the OEB.

Why is the energy sector regulated?

Most, if not all, industries in Canada are subject to some form of regulation governing what they can and cannot do. The energy sector, however, is more closely regulated than many other industries because of the unique characteristics surrounding energy supply and delivery.

In a fully competitive market, there are numerous companies selling products and services. The drive to maintain or attract consumers not only motivates companies to keep their prices in line with other firms, but also to innovate and/or continually offer new products and services.

The characteristics of electricity and natural gas distribution and transmission are different. They are “natural monopolies.” Infrastructure industries, such as electricity and natural gas delivery, water, sewage and telecommunications, are all capital-intensive and vital services. There is a significant economic “barrier to entry” in initially constructing the infrastructure. Once one such firm is established, the economic barrier to entry becomes even higher. That firm could probably forestall others’ entry by enlarging its capacity, and at a cheaper cost. A firm in a natural monopoly position could also price its products and services significantly above costs since there is no competition.

The primary goal of energy sector regulation, therefore, is to ensure that the public good is served in a marketplace that is not fully competitive.

What is “economic regulation”?

Regulation of the energy sector is considered a form of “economic regulation.” Laws, regulations and other requirements have been designed to address the natural monopoly position of companies, acting as a substitute for the discipline that economic forces would typically exert on them in a competitive market. Economic regulation is also designed to provide oversight of the markets to protect consumers.

The OEB’s role as an economic regulator is to balance the interests of regulated firms, consumers and society:

The public is well served if both the pricing and the standard of service being provided are fair and reasonable. In this regard, the OEB’s objectives include regulating prices to levels that are “just and reasonable” for consumers and setting standards of conduct and conditions of service for firms to follow in their operations.
The regulated firms are well served if they are viable businesses, so that they can sustain these pricing and service levels in the longer term. Firms must have a reasonable opportunity of recouping costs and earning a fair return for the significant financial investment they make in the supply and delivery of energy to consumers.

Economic regulation plays additional roles in terms of ensuring appropriate treatment of all consumers. In a competitive market, consumers dissatisfied with a firm’s products or services have remedies for dissatisfaction. They can complain, switch to a competitor or do without. This is not really available to them for electricity or natural gas distribution. The OEB, therefore, also serves as a forum for hearing and attempting to resolve consumer complaints.

What are the benefits of regulation to energy firms?

Regulation helps foster market integrity and public confidence.
It provides legitimacy in matters such as rate increases because the public can be confident that such increases have been fully vetted, fully justified and fully explained.
Regulation also helps to reduce the business risk of firms through, for instance, the setting of rates and standards of conduct.