Canada: Competition Vs. Control: (Another) Fork In The Winding Road Of Ontario's Electricity Policy

Edited by Paul Harricks

Though it has been more than a decade since the "competitive electricity market" in Ontario opened, and then closed, there are believers who continue to talk about competition as the way forward. The current drivers for such sentiments are strikingly similar to those which prompted the Ontario government of the day to try to open the market in the first place. Competitive market advocates are touting the funding sources, cost disciplines and risk assumption and management benefits that new investors can bring to the Ontario electricity sector.

Michael Nobrega, President and Chief Executive Officer of OMERS Administration Corporation, for one, has consistently advocated a competitive model as a way to move Ontario's electricity sector in the right direction. OMERS Administration Corporation runs Ontario's public service pension plan, and wields significant investment clout both within and outside the province. Mr. Nobrega's publicly expressed view is that the electricity infrastructure renewal challenges currently facing Ontario cry out for participation by private equity, such as that which his organization allocates. The alternative – government funding and centralized control – results in costs higher than they need to be, sub-optimal investment decisions, and ratepayer and/or taxpayer risks.

Whenever a potential investor like Mr. Nobrega describes the features of investment capital friendly markets, figuring prominently on the list of "must haves" are:  transparency, regulatory independence and government restraint.

For those like Mr. Nobrega, there is a glimmer of hope in Ontario. After years of discussions, indeed urgings, by electricity industry experts, Ontario's relatively new Minister of Energy, Chris Bentley, has convened a "blue ribbon" panel to review Ontario's electricity distribution sector.

Ontario's electricity distribution sector is somewhat unique. It is composed of no less than 80 individual "local distribution companies", or LDCs. Most of these are municipally owned. While some are large, others are very small. One, Hydro One Networks Inc., is huge, both financially and geographically. Hydro One is owned by the province, and distributes electricity where no one else does – throughout rural Ontario in the gaps between municipally-owned LDCs. To be sure, it also distributes electricity in relatively densely populated regions like parts of the Greater Toronto Area. (Hydro One Networks is also the largest, by far, of a very few electricity transmitters in Ontario. More on that later.)

For many, the plethora of LDCs of various sizes and levels of commercial and operational sophistication is inefficient. Particularly when one considers the infrastructure renewal and "smart grid" costs looming on the horizon, the ability of the current LDC structure in the province to move forward is legitimately questioned.

The Ontario government has struck a panel of three industry experts, and tasked them to examine the savings, operational efficiencies, and risks of LDC consolidation.

It is appropriate to pause here for a moment and note why, in addition to the attraction of much needed investment capital and commercial acumen, LDC consolidation would be important to moving towards a more competitive, less government controlled electricity market. A competitive market needs a number of buyers. In Ontario's current electricity sector structure, there is only one: the government. More accurately, the current buyer is the Ontario Power Authority (OPA). The OPA was created, in part, to contract for, and thus support investment in, new generation facilities. In that respect, the OPA has been exceedingly successful. But at what cost? With only one buyer, market advocates question the economic efficiency of the structure. Further, with the OPA being a creature of statue and effectively an arm of the Ontario Ministry of Energy, the objectives of this one buyer are often not clear, are not necessarily driven by economic efficiency, and are subject to change with the vagaries of the electorate and the challenges of the political opposition. This structure does not give investors much confidence. In such an inherently changeable and risky market, sellers generally require a premium price.

If our 80 plus LDCs were consolidated, down to say five, we could see creditworthy balance sheets in the LDC sector which would enable these entities to contract directly with generators. With five informed, moneyed, independent buyers, we would actually have a market. The provincial government could get out of the procurement business, and economic efficiency rather than government policy would induce decisions to invest in new generation and perhaps other electrical infrastructure. In addition, the stronger balance sheets of these five better resourced LDCs would enable investment in innovation. Consolidation could also result in administrative and regulatory efficiencies, ultimately lowering the cost to consumers of electricity service.

So Ontario's decision to review the LDC sector is potentially good news to market advocates. And they would be well advised to make their voices heard.

There is another glimmer of hope for Ontario's competitive market advocates. In March, 2011 the (then) Ontario Minister of Energy referred a discrete piece of Ontario's transmission infrastructure to an Ontario Energy Board (OEB) process that was designed to be competitive. The OEB's Framework for Transmission Project Development Plans policy is aimed at instilling transmission network infrastructure planning and development with the cost control, innovation and risk assumption benefits of competition. The Minister has recommended that the OEB engage its newly developed process to designate a transmitter to develop the East-West Tie Line. This line is an addition to Ontario's electrical transmission system that would reinforce electricity supply to north-western Ontario as some large coal plants currently feeding that part of the province are shut down.

Interest in the designation process has been strong. A number of new entrant transmitters have registered to participate. While the process has just begun, indications are that, if it stays on course, at least a few robust, competing applications for designation to develop this transmission line will be filed with the OEB by year end.

There is, however, a problem. Hydro One, the Ontario government-owned wires behemoth, has decided to compete for the line. Through a partnership that includes the six First Nations communities located along the most likely route for the new transmission line, Hydro One is gearing up to compete for the one piece of Ontario's electrical transmission infrastructure that the Minister has indicated should be subject to competition. Why the government – Hydro One's shareholder – has permitted this is a puzzle. What is clear, however, is that the move by Hydro One to maintain its virtual monopoly in electrical transmission, utilizing decades of First Nations relationships built through its monopoly position, has caused potential new entrants to question whether Ontario is worth the investment risk. This is not good news for those advocating competition as a salve for Ontario's increasingly cash constrained electricity sector.

There is another problem looming on the horizon for potential Ontario electricity investors - Bill 75. Introduced in the Ontario legislature in late April, Bill 75 (provisionally called the Ontario Electricity System Operator Act, 2012) has been broadly reported as a reaction to recent pre-election rhetoric regarding the so called "alphabet soup" of Ontario's electricity agencies. One of the objectives of the legislation is a merger of the OPA and the Ontario Independent Electricity System Operator (IESO). The first thing apparent in this Bill is the removal of the term "independent" from the rubric, which should itself be a troubling sign for competition advocates. More substantively, the inherent conflict of interest in being both an electricity system operator and a generation owner does not bode well for attraction of investment capital to assume some of our electricity infrastructure development risks.

However, there are two largely unreported aspects of the Bill that present even more concern.

If enacted as drafted, the Bill would remove any remaining vestiges of transparent, independent electricity system planning. Currently, one of the three primary functions of the OPA is to develop an Integrated Power System Plan (IPSP). In the current legislation the plan was to be approved through a public review process by the OEB. Refreshed every three years, the approved plan would guide the actions of Ontario's energy agencies, and provide the transparency and predictability that investors seek. Unfortunately, we have never had an approved IPSP. The first plan was filed with the OEB, and the public review was well underway, when the then Minister of Energy issued a directive that effectively halted the process, and pulled the plan back. Years later, a second attempt was made to provide a plan for public review, but that revised plan has been stalled at the Ministry since last summer.

Pending approval of an IPSP, the Ministry has been directing the actions of the OPA and the other sector agencies through formal directives and informal requests or referrals. Those advocating planning transparency and predictability have continued to hope that an IPSP might, one day, be reviewed and approved through a public process, and then become an objective guide for electricity system development in the province.

Bill 75, if enacted as drafted, would kill that hope.

Under Bill 75, the IPSP provisions in the current legislation would be replaced by a discretion for the Minister to develop and, with cabinet approval, issue energy plans. The Minister would be required to consult with the OEB on the impact of the implementation of the plan on consumers' electricity bills. While the plan would also have to be reviewed by the OEB, the scope of that review would be legislatively limited to the estimated capital costs of the plan, unless the Minister decided to expand that scope. Further, the Minister would have free reign to "give such directions and impose such conditions on the referral [of the plan to the OEB] as the Minister considers appropriate".

Many would argue that these new Ministerial authorities over planning would not materially change what has been happening anyway. That may be true. Seeing the change enshrined into law, however, sends what for some is a disturbing message regarding the continued politicization of Ontario's energy sector. It is not a good sign for would-be investors.

The other troubling feature of Bill 75 is the demise of any vestiges of independent procurement of generation. Part of the IPSP public review and approval process was to include OEB approval of an OPA procurement mechanism which would then regularize the way new generation and demand response was contracted. Bill 75 would sweep away these provisions as well. Again, while many would say that nothing would practically change, the new legislation would enshrine the Minister's role in directing the new OESO what to procure, and how and when to do it. The Minister could direct that the procurement be competitive, or not, what the pricing should be, or any other "economic factors" to be used by the OESO in carrying out the Minister's bidding. There could be a role for the OEB, but only if the Minister saw fit. The Minister could (though need not) ask that any procurement (or any specified part thereof) be reviewed by the OEB. Again, however, a tight rein could be held by the Minister on what the Board would review, and how the Board would conduct that review.

Bill 75, if enacted as drafted, would formalize and finalize (until the next change of policy direction) the government's control over the minutiae of energy planning and procurement in the province. The Ministerial authorities proposed in the Bill would cement the ability of the Minister of the day to use the government's agencies – the OESO and the OEB – in politically expedient ways. To be sure, these Ministerial authorities could be exercised "for good", in a manner that preserves agency independence. But the temptation to use these authorities to fend off criticism, or avoid a politically unpleasant situation, would be great.

While the current OPA is not structured as independent of the government, and is expected to carry out the government's program for the sector, that is not the case with the OEB. Throughout, and despite, the vicissitudes of Ontario government energy policy, the OEB has maintained its independence, under the strong leadership of the Board's (then) Chair and the independent judiciousness of its members. The spectre of the government overtly using the Board for its own policy (even political) ends should be truly disturbing to those investors watching our electricity sector and those of us who want those investors to enter our "market" and bring their capital, innovation and risk assumption and management acumen with them.

There are changes afoot in our electricity sector. For those of us who care, now is the time to get engaged, and make our views known. Either speak up, or don't complain later. We are, again, at a crossroads. The paths being laid out lead in opposite directions. It is time, again, to choose.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
19 Sep 2019, Seminar, Birmingham, UK

Providing GCs, Heads of Legal and senior in-house lawyers with timely, topical and practical legal advice on a variety of topics.

26 Sep 2019, Seminar, London, UK

Providing GCs, Heads of Legal and senior in-house lawyers with timely, topical and practical legal advice on a variety of topics.

8 Oct 2019, Seminar, Birmingham, UK

Supporting the development of paralegals, trainees and lawyers of up to five years' PQE by providing valuable knowledge and guidance together with practical tips.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions