By Glenn Zacher, Stikeman Elliott
Electricity in Ontario has historically been treated as a public good, with development in the sector driven largely by government social and economic policy. A change was signaled in 2002, with the opening of the competitive electricity market and the establishment of the Ontario Energy Board (OEB) as the regulator of the sector. The competitive market, however, was short lived and soon gave way to today’s hybrid market. As former Ontario Power Authority (OPA) CEO Jan Carr remarked, the sector has since then remained caught “in a transition between a market-based approach that was never fully implemented and a public-good-based approach.”1 While it may initially have appeared that the hybrid market would transition to a competitive marketplace, public policy goals have re-emerged as the primary driver of electricity sector development, signaling a potential swing back towards a public good model.
This shift raises fundamental questions about whether Ontario’s existing regulatory framework, originally designed for a competitive marketplace, remains appropriately aligned with current policy direction. At its core, the OEB is an economic regulator mandated to promote economic efficiency and cost effectiveness and to balance the interests of utilities and ratepayers. The OEB, however, is now overseeing a sector in which development is being driven less by cost and reliability and more by broad public policy. Likewise, it is debatable whether existing environmental assessment requirements for electricity projects, the roots of which can be traced to Ontario Hydro and the early days of the Ontario market, remain appropriate for addressing today’s policy challenges. Nowhere is the clash between these broader policy goals and the existing regulatory structure more pronounced than in the area of transmission development. Transmission development is a fundamental prerequisite to enabling the government’s electricity policy goals; yet it is the area where the regulatory burden is the greatest.
The New Policy Drivers
Like many other jurisdictions in North America, Ontario is facing a significant electricity infrastructure gap. The OPA has forecast that approximately 25,000 MW of generation will need to be replaced or refurbished over the next 20 years. Achieving this will require an unprecedented commitment of resources. The OPA estimates in its Integrated Power System Plan (IPSP) that over $40 billion will need to be spent on new generation and an another $4 billion on transmission to enable it. 2
The factors driving development, however, are not simply traditional concerns about reliability and cost. At stake are broader economic, environmental and social policy goals such as reducing harmful emissions, addressing climate change, creating “green collar” jobs, encouraging technology innovation, promoting First Nations and Métis development and promoting energy self-sufficiency. These goals are reflected in the government’s Supply Mix Directive mandating the OPA to plan for dramatic increases in conservation, renewable energy, replacement of coal-fired generation, maintenance of nuclear base-load power and the construction of transmission facilities to enable these supply mix goals. The government’s supplementary directive to the OPA and its promise to enact a new Green Energy Act in 2009 reinforce the importance of these goals. Without a massive increase in transmission capacity, however, many of these goals cannot be achieved. Indeed, the OPA’s ongoing review of its Renewable Standard Offer Programs illustrates just how critical the development of new transmission infrastructure is to attaining such goals.
The Current Regulatory Regime
Yet while the needs for new transmission capacity are principally policy-driven and pressing, this is not reflected in existing regulatory processes. A transmitter seeking to build a new transmission line in Ontario must obtain leave to construct from the OEB and complete an environmental assessment. Each of these processes, to some degree, entails consideration of the “need” for new transmission and “alternatives to” transmission. As part of the leave to construct process, the OEB considers whether a project is required to meet reliability goals and whether it is economic over the long term, compared to other alternatives. The environmental assessment process also compares transmission projects to other alternatives, albeit from an environmental and socio-economic standpoint. Depending on the nature of the projects, many additional permits and approvals may be required, adding further time and complexity. As a result, timelines for building new transmission facilities are lengthy and uncertain: from five to ten years to construct new transmission lines, with regulatory approvals typically accounting for three years or more. These processes also present opponents of transmission projects with multiple opportunities to delay projects through political appeals or judicial reviews/appeals.
The OEB’s approval of the IPSP will go some way towards streamlining transmission approvals by identifying the transmission needed to enable the supply resources identified in the IPSP, but it does not remove the requirement to prove need or to make the case for transmission over other alternatives. The OEB panel hearing the IPSP application confirmed that it cannot bind future panels of the Board or other administrative tribunals. 3
Regulatory Reform
The challenge therefore lies in adapting regulatory processes to the new policy environment without forsaking regulatory independence or abandoning traditional concerns related to reliability and cost. To be credible and effective, regulatory processes cannot be beholden to political decision-makers. 4 On the other hand, regulators require clear mandates — there must be a clear delineation between what matters are subject to regulatory review and what lie within the purview of government. When there is overlap or confusion, problems invariably arise. Certainly, when governments believe their responsibilities are being encroached upon or slowed by regulatory processes, they are apt to change the rules of the game; and they may do so precipitously. This creates uncertainty and instability, something all too familiar to participants in Ontario’s electricity sector.
Reasonable people can disagree where the line should be drawn between government decision-making and regulatory oversight. While many proponents of a more competitive market are undoubtedly dismayed by the re-politicization of Ontario’s electricity sector, that is the present reality in Ontario (and elsewhere). Political choices are defining electricity infrastructure needs and how to solve those needs. In light of this, government policy and regulatory processes have to become re-aligned. A clear understanding of where political decision-making ends and where regulatory review starts is essential both to fulfilling government policy and to providing independent and effective regulation.
As discussed, current needs for new transmission are primarily being driven by policy considerations — e.g., transmission lines to enable renewable development. In these cases, “need” — having already been decided by government — should not be wholly revisited as part of OEB leave-to-construct or environmental assessment review processes; nor should these processes necessarily compare transmission (to enable renewables) to other alternatives. That is not to say that these processes should be abandoned and left entirely to government decision-making. They should continue to focus on important matters of detailed routing, siting, costing, mitigation of effects and so on — albeit within a context where many of the decisions on need (and how to address need) have already been made. Regulatory bodies like the OEB will, of course, also continue to apply their industry and economic expertise to developing the rules, codes and guidelines that are necessary to give effect to government policy. The OEB’s Transmission Connection Cost Responsibility Review (TCCRR) proceeding is a prime example of where the OEB is using its expertise to develop appropriate cost-allocation rules and other procedures to facilitate government renewable energy policies.
Many of the same socio-economic and environmental policies that are driving electricity development in Ontario are also behind legislative and regulatory change in other parts of North America and throughout the world — e.g., renewable portfolio standards, cap and trade regimes, emissions standards and feed-in tariffs for renewable generation. Moreover, in some of these jurisdictions, decision-making processes are being re-cast in a manner that more clearly recognizes that threshold decisions about need are largely political decisions and should not continue to be subject to the same level of regulatory review. For example, the United Kingdom is currently seeking to enact legislation to vest major infrastructure planning decisions in a national Infrastructure Planning Commission that will be guided by National Policy Statements. In this respect, contentious issues concerning need will no longer be reviewed at the local council level. Closer to home, the Ontario government has unveiled a streamlined environment assessment process for new transit projects. This initiative was, in part, driven by government climate change goals. The new process fast-tracks eligible projects and is intended to reduce the environmental assessment process from two to three years to six months. Underpinning the regulations is the Ontario government’s Transit Priority Statement, which summarizes the rationale behind the streamlined process and serves as a determinant of need for future transit projects. Proponents using this process, therefore, “do not have to rationalize the need for transit or look at alternatives (only alternative construction methods).”
Streamlining
The inefficiency and length of current regulatory review processes pose a further impediment to the achievement of government policy goals. Ambitious promises to encourage renewable and distributed generation will not be fulfilled if proposed projects become bogged down in overly long and complex transmission approval processes. For that reason, it is important for government and regulators to explore options for streamlining existing regulatory processes.
Of particular concern is the environmental assessment regime for transmission projects, which dates back to Ontario Hydro and the early days of the Ontario market, and is not integrated with the OEB’s leave to construct process. Initial efforts to update the environmental assessment regime for transmission to account for changes in the sector appear to have been abandoned. Consideration should therefore be given to exempting transmission from the Environmental Assessment Act and expanding the leave to construct process to encompass a review of the environmental and socio-economic effects of projects. The overall aim of any reforms should be to preserve the proponent-driven nature of the existing environmental assessment process while integrating oversight of that assessment with the OEB’s leave to construct process. The OEB’s role in this process could be similar to that of the National Energy Board in approving inter-provincial transmission projects; and/or a co-ordinating body like the Ontario Pipeline Coordination Committee (OPCC) could be created to address and coordinate the review of environmental issues as part of the leave to construct process. While neither of these models offer ready-made solutions, they do provide examples that can be drawn upon.
Lessons may also be drawn from recent streamlining initiatives at the federal level. These include the establishment of the Major Projects Management Office (MPMO), which is intended to serve as a single point of entry into the federal regulatory system with the goal of ensuring collaboration and coordination between applicable federal agencies. Similar initiatives have been introduced in other jurisdictions including recently in California through the signing of Executive Order S-14-08, a measure aimed at facilitating the state’s aggressive renewable portfolio standard.
If designed and implemented properly, a single transmission approvals process, or at least a single window for all provincial approvals, could reduce duplication, save time, increase certainty and reduce the prospect of delays occasioned by judicial review and appeal proceedings. This would both improve regulatory efficiency and ultimately assist the provincial government in achieving its policy goals in a timely manner.
The proposals outlined in this article are conceptual and admittedly, as with all such proposals, “the devil is in the details” — a principle that applies in spades to the electricity sector. That said, there is presently an obvious disjunct between government electricity policy and the regulatory processes for approving major transmission projects. Sober recognition of that fact has to be the starting point for any thoughts of reform.
Glenn Zacher is a partner, and Patrick Duffy is an associate, in the Litigation and Energy Groups of Stikeman Elliott’s Toronto Office. Messrs. Zacher and Duffy are co-authors of “Energy Regulation in Ontario.”
Footnotes
1 Overview of Transmission Systems in North America and Ontario, presentation by Jan Carr to the 39th Annual HG Acres Seminar, May 2, 2008.
2 Ontario Power Authority, Integrated Power System Plan, Exhibit G-2-1.
3 Ontario Energy Board, Integrated Power System Plan Issues, Decision with Reasons, EB-2007-0707 (March 26, 2008).
4 See Beecher, Janice A., The Prudent Regulator: Politics, Independence, Ethics, and the Public Interest (2008) 29 Energy L.J. 577, for a recent discussion on the importance of regulatory independence.