WIXLIB

ABCDReport on P&OPEB CostsMay 2, 20167. We have prepared for consideration methods for recovering P&OPEB costs and relatedInformation Requirements that, if adopted, should lead to greater consistency in the regulatorytreatment of P&OPEB costs that are included in rates. KPMG is not responsible for determiningwhich, if any, of these methods for recovering P&OPEB costs and related InformationRequirements get adopted by the OEB. It is also possible to have variations to these methodsand Information Requirements or a different combination of individual methods andInformation Requirements.DisclaimerThis report has been prepared and is intended solely for the OEB and OEB staff. It is ourunderstanding that the OEB may conduct a public consultation on the issues that have been identifiedin this report; in which case, this report may be made available for ‘information only’ to theparticipants of that public consultation. The report may not be edited or relied upon by any otherperson without the express written permission by KPMG, which permission will not beunreasonably withheld.The accounting guidance contained in this report is general in nature and is not intended to apply toevery fact pattern. Like other issues relating to reporting in general purpose financial statements, itis possible to make different judgments based on specific facts and circumstances and materiality ofthe amounts involved.The accounting guidance contained in this report also does not deal with any specific fact pattern orrate proceeding that is currently before the OEB. However, the accounting guidance may inform andinfluence the OEB’s approach to P&OPEB costs in the future. The OEB (not KPMG) determineshow the issues identified in this report are dealt with for purposes of setting rates and relatedregulatory reporting. However, any and all decisions regarding how the issues identified in thisreport are addressed in a regulated entity’s general purpose financial statements are made by theregulated entity’s management, and auditors opine on those financial statements.Accounting pronouncements and interpretations are subject to revision by the relevant authoritativeaccounting bodies. The accounting guidance is based on our understanding of pronouncements andinterpretations at the date of this report. As such, the accounting guidance may change materially inresponse to subsequent changes or, revisions to, the pronouncements and/or interpretations. KPMGassumes no responsibility to update the accounting guidance.KPMG will not assume responsibility or liability for damages or losses suffered by anyone as aresult of circulation, publication, reproduction, or use of this report contrary to the provisions of thisdisclaimer. The information contained in this report is based solely on the purpose and scope ofwork set out herein, and is subject to the limitations set out in Section 1.3 of this report.3

ABCDReport on P&OPEB CostsMay 2, 2016AcknowledgementsKPMG wishes to acknowledge the assistance of others in the preparation of this report. In particular,the survey participants in Canada and internationally were most helpful in ensuring a fullunderstanding of their regulatory practices with regard to P&OPEB costs, and we thank them.KPMG benefitted particularly from the generosity of William McKenzie, Senior Manager TechnicalAccounting Regulatory Finance, Smarter Grids & Governance, of the Office of Gas and ElectricityMarkets (“Ofgem”), the regulator for Great Britain based in London, England. He responded toseveral follow up calls as the team evolved its understanding of the Ofgem framework and theparticulars of the regulatory regime in Great Britain.Staff of the Financial Services Commission of Ontario also assisted in providing understanding oftheir oversight role with regard to pension plans in Ontario and staff at OMERS, through OEB staff,provided insight into utility participation in the OMERS pension plan.Lastly, the staff of the Ontario Energy Board contributed to the development of this report,particularly with regards to the understanding of regulatory principles and the rate regulatory regimein Ontario. KPMG thanks them all for their assistance.This report reflects the results of significant collaboration and teamwork and KPMG gratefullyacknowledges the contributions of all participants.4

ABCDReport on P&OPEB CostsMay 2, 2016Executive SummaryThe OEB engaged KPMG to identify methods of recovering P&OPEB costs and develop associatedInformation Requirements for potential adoption by the OEB as a framework for addressing the rateregulatory treatment of P&OPEB costs for the electricity and gas utilities in Ontario and for usewhen reviewing rate applications.This report does not address specific criteria that can be used to assess the reasonableness ofP&OPEB costs in rate applications. The report outlines certain information requirements that maybe considered during the Consultation as a starting point for discussion on how to approach theassessment of P&OPEB costs. The bulk of the report focuses on alternatives for cost recoverymechanisms. This report also includes a jurisdictional review on the treatment of P&OPEB costs.A key finding of that review is that none of the regulators surveyed reported that their regulatorypractice for the treatment of P&OPEB costs is based solely on the application of the requirementsof accounting standards.Methods for Recovering P&OPEB Costs and Information RequirementsThis report summarizes KPMG’s work and identifies methods of recovering P&OPEB costs as wellas a set of Information Requirements for consideration by the OEB. The methods of recoveringpension costs and related Information Requirements are set out in Section 2 of this report. Methodsof recovering OPEB costs and related Information Requirements are set out in Section 3 of thisreport.There are two primary methods that have been used by regulated utilities in Ontario to recoverP&OPEB costs in the rates charged to customers – legislated funding contribution (for registeredpension plans only) and/or accrual accounting costs (for registered and unregistered pension plansand OPEB plans). A third method, ‘pay-as-you-go’ cash payments, is currently only used by a fewregulated utilities in Ontario.We have identified an additional method for pensions that is an alternative to the above-mentionedlegislated funding contribution method, i.e. the “Modified Funding Contribution method”. TheModified Funding Contribution amount represents the minimum amount of contributions requiredto be made by a sponsor of a registered pension plan that is subject to the requirements of pensionlegislation under the Pension Benefits Act, Ontario (“PBA”), modified by the fact that only anemployer’s normal cost contribution and going concern special payments using the 15-yearamortization period are included in the current period’s rates. Any other special payments requiredunder the PBA and other additional payments beyond the minimum funding contributions requiredby the PBA that an employer chooses to make would be recorded in separate deferral accounts, andbe recovered in the rates in a future period as determined by the OEB. The overall result is that theamount calculated under the Modified Funding Contribution method would be less volatile than theamount calculated using the (traditional) funding contribution method that is described above.5

ABCDReport on P&OPEB CostsMay 2, 2016For OPEB costs, we have also identified an additional method that is an alternative to the, ‘pay-asyou-go’ cash payments method, i.e. the adjusted ‘pay-as-you-go’ cash payments method. Under thismethod, ‘pay-as-you-go’ cash payments are the starting point (foundation) for determining theamount that is included in rates. However, such ‘pay-as-you-go’ cash payments are increased by anadditional amount that is established by the OEB.We have also identified Information Requirements that would support the regulatory review ofP&OPEB costs. In some instances, the Information Requirements represent codification of existingrequirements that have not been previously codified as part of the OEB’s regulatory requirements.However, in other instances, the Information Requirements do result in new regulatory filing andreporting requirements. The impact may be significant; details of the extent of the changes andimpact of those changes can only be determined on a case by case basis.The proposed public consultation may wish to consider the methods for recovering P&OPEB coststhat have been identified in this report as well as some, or all, of the accompanying InformationRequirements. If the OEB were to adopt the methods for recovering P&OPEB costs and theInformation Requirements identified in this report, this would have the following impact onregulated entities: Pension plans accounted for as DC plans: No change to existing regulatory treatments. Thisincludes costs with respect to multi-employer pension plans such as OMERS which are definedbenefit plans but are accounted for by participating employers as DC plans. Registered pension plans accounted for as DB plans: The OEB may wish to considerchanging the method of recovering these costs to the Modified Funding Contribution method.Any special payments or other additional payments not included in that period’s rates (i.e.“excess payment”) would be included in deferral accounts pending the OEB’s decision ondisposition of the amount and would attract an appropriate return.There are a number of reasons that suggest using the funding contribution rules as opposed tothe accounting rules: transparency and greater objectivity in setting assumptions, the fact that itis easier for stakeholders to understand the inclusion in rates of ‘cash costs’ and, as the amountsincluded in rates do not depend on the accounting framework that is adopted by a utility, greaterconsistency and comparability between regulated entities and thus more equitable treatment ofcustomers, and the avoidance of excess/(under) recovery of cash which can occur when accrualaccounting costs are included in rates. By modifying the amount that is included in the currentperiod’s rates to comprise only an employer’s normal cost contribution and going concernspecial payments using the 15-year amortization period, this would significantly reduce thevolatility of amounts determined using the funding contribution rules of the PBA. On the otherhand, the OEB would retain flexibility regarding the timing and period of recovery of anyamounts that are paid by a utility in excess of the Modified Funding Contributions. [Adoptingthis method for recovering pension costs will result in change for some large electricity andgas utilities in Ontario that previously used the accrual accounting cost for DB plans in settingrates]6

ABCDReport on P&OPEB CostsMay 2, 2016Non-registered P&OPEB plans: No change to existing regulatory treatment for non-registeredpension plans and OPEB plans if the accrual accounting cost method is adopted. However, ifthe accounting framework that is used by a utility does not periodically reclassify to net incomethe component of P&OPEB costs that is recorded in OCI, a utility would be required to recordthat amount in a deferral account that is amortized and included in rates based on the expectedaverage remaining service life of the members of the plan. Further, if cost recoveries are basedon accrual accounting cost, the considerations for a set-aside mechanism that is discussed furtherbelow would be relevant to any P&OPEB costs that are recovered using this method.On the other hand, if the adjusted ‘pay-as-you-go’ cash payments method is adopted for nonregistered P&OPEB plans, this would represent a significant change for most regulated utilities.[Adopting these methods for recovering P&OPEB costs for non-registered plans will resultin significant change for the industry] All P&OPEB plans: The identified Information Requirements introduce increased regulatoryfiling requirements for P&OPEB costs in rate applications and additional reporting requirementsfor ongoing monitoring by the OEB.Details of the extent of the impact of the changes vary from utility-to-utility and can only bedetermined on a case-by-case basis.Accounting guidance for P&OPEB costs based on ASC 980 (US GAAP)US GAAP includes special accounting provisions that are applicable to entities with activities thatare subject to rate regulation. The result is that regulated entities are required to recognize regulatoryassets and liabilities provided certain specified criteria are met. This analysis was conducted in orderto assess the impact of deferring costs for rate-making purposes (under the methods discussed in thisreport) on utilities currently under US GAAP. This analysis is also informative for utilities thatelected to apply the regulatory accounting guidance that was recently introduced under IFRS asIFRS looks to the US GAAP standard for guidance on this matter1.In order to capitalize an incurred cost (including amounts recognized in Other ComprehensiveIncome) as a regulatory asset, a regulated entity is required to assess whether it is probable thatfuture revenue in an amount at least equal to the capitalized cost will result from inclusion of thatcost in allowable costs for rate-making purposes. Determining whether it is probable that incurredcosts will eventually be included in rates is often the most difficult part of applying the accountingrequirements for regulatory assets. Actions by the regulator can greatly influence the recognition ofregulatory assets.The level of judgment involved is much more significant for P&OPEB costs as the period ofrecovering these costs from customers can extend well into the future. As such, subject to it being1Refer to Section 2.4 of this report for details.7

ABCDReport on P&OPEB CostsMay 2, 2016probable that the costs will be included in future rates, US GAAP has the following specificrequirements for P&OPEB costs:a) Pension costs: as detailed in Section 2.4.2 of this report, regulatory assets and liabilities aregenerally recognized. US GAAP does not specify any time limits for the recovery of the pensioncosts in future rates; andb) OPEB costs: US GAAP explicitly prohibits the recognition of regulatory assets when OPEBcosts are recovered on a ‘pay-as-you-go’ basis. For those OPEB costs that are not recovered inrates on a ‘pay-as-you-go’ basis, and subject to certain specified criteria being met (see detailsin Section 3.5.2 of this report), regulatory assets and liabilities are generally recognized. Assuch, regulatory assets may be recognized for OPEB costs as long as the method of recovery isnot ‘pay-as-you-go’ and the other specified criteria are met. There is no requirement under USGAAP for OPE

KPMG LLP Bay Adelaide Centre 333 Bay Street, Suite 4600 Toronto, ON M5L 1B2 Canada Telephone (416) 777 -8500 Fax (416) 777-8818 Internet www.kpmg.ca KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent