By Ian Mondrow, Macleod Dixon
The essential focus of the Green Energy and Green Economy Act (which I will refer to as the Green Energy Act) is the expansion of the generation of electricity from renewable resources, and the strengthening of electricity system infrastructure to facilitate such expansion. This comment focuses on the impact of the proposed legislation on the way in which the Ontario Energy Board regulates the electricity sector. It has been suggested1 that the legislation will test the boundaries of some of the key regulatory approaches used by the OEB, and that in more regularly confronting social and environmental issues the OEB will be challenged. I suggest that the OEB has already developed a strong facility for effective regulation in a sector whose complexity, and concern with social and environmental policies, has been increasing for some time. I further suggest that the policy clarity provided by the proposed legislation will in many ways make the OEB’s job easier.
Regulatory paradigm; evolution versus revolution
Electricity policy has evolved from a focus on affordability and reliability to broader incorporation of environmental, and now economic, concerns and objectives. So too has the role and functioning of traditional “economic regulators” been evolving in step.
A speech delivered on behalf of the OEB Chair by the Vice Chair in October, 2006 to the World Energy Forum2 references “dramatic change [over the past 10 years] in the role of environmental considerations in energy policy generally and the mandate of public utility regulators specifically”.
In public remarks delivered in May, 2007 the OEB Chair returned this theme: 3
“… as Thomas Friedman of the New York Times has recently stated, “Green has gone mainstream.” A decade ago only experts worried about global warming and climate change. Today, we all must focus on clean technology, and there is a considerable emphasis on the role of conservation and demand management in addressing the supply/demand balance in new and innovative ways. “Green” thinking and the scale of the environmental challenge are becoming a part of many of the decisions that we make. Nowhere is that more evident than in the energy sector.”
Clearly, the OEB has for some time been institutionally cognizant of its role, and that of other energy regulators, in the implementation through energy policy of broader environmental policy.
The broader theme of the OEB Chair’s May 2007 speech was that effective regulation addressing a broad range of social issues in an increasingly complex sector warrants a greater emphasis on the development of regulatory policy. Regulatory policy establishes a framework that guides specific regulatory outcomes to accord with government policy. Regulatory policy addresses the details required to implement government’s broad policy objectives. The OEB has been developing and expanding its use of regulatory policy for some years. In doing so, the OEB has expressly espoused the view that the role of the regulator is not confined to the historical role of economic regulation of promoting allocative efficiency (the allocation of money between investors and ratepayers). While this traditional function is still an important part of energy regulation, modern energy regulation is increasingly likely to have a wide variety of policy objectives.
One example of the use of regulatory policy is the guidelines developed by the OEB for cost recovery by electricity distributors of smart meter implementation costs, in response to government policy for rollout of smart meters.4 Another example is changes to the OEB’s Electricity Transmission System Code to implement an “enabler line” concept for transmission development funding similar to that recently approved by FERC, and subsequently incorporated by the OPA in its first Integrated Power System Plan, published in August, 2007. The OEB has also documented policy in the area of conservation and demand management (CDM) by electricity distributors, attempting to clarify how the OEB will consider CDM programs proposed by distributors within the context of government mandated OPA province wide CDM programs.5 In response to government encouragement of consolidation of municipally owned electricity distributors through provision of a transfer tax exemption, the OEB published policy clarifying the framework within which it would consider merger, acquisition, amalgamation and divestiture approval applications for distribution rate making purposes.6 These are all examples of the development by the regulator of policies that indicate how the government’s broader objectives for the electricity sector will be considered and facilitated in regulatory decision making.
In considering the impact of the Green Energy Act on the role and activities of the OEB, it is important to consider the distinction between government policy and regulatory policy. This distinction has been characterized by the OEB Chair as follows:7
“... Government policy is the means by which the government translates its political vision into broad structures, directions and mandates intended to deliver particular outcomes. Government policy is broadly set out in legislation, and further developed in regulations and directives issued under the legislation. … Acting independently, within the broad ambit of its legislative mandate and the public interest, the Board formulates regulatory policy which provides the details required to implement the law and the government’s broad policy objectives. Through various tools, the Board establishes the regulatory framework that shapes specific outcomes to accord with government policy objectives and sound regulatory principles.”
The growing emphasis by the OEB on the use of regulatory policy as a tool in the discharge of its mandate has been to the tremendous advantage of Ontario’s energy sector and its participants. The development and implementation by the OEB of regulatory policy has provided transparency and insight into the institutional thinking of the Board. In the words of the OEB Chair, it has served to “structure” the decision-making discretion of the Board, and thus enhance the predictability of regulatory outcomes.8 The Canadian Federal Court of Appeal has endorsed such regulatory approaches as a way to “shed light on agency thinking to assist those subject to the regulatory regime it administers”.9
One of the challenges that the OEB has faced to date in determining the appropriate regulatory policy is the evolutionary nature of government electricity policy. While some of that policy has been reflected in directives from the Minister, much of it has been developed outside of any legislative vehicle, in public statements or by implication from legislative or other government actions. The comprehensive crystallization of the government’s electricity policy in the Green Energy Act will provide important clarity, and the weight of legislative authority, for the OEB. In some important respects this will make the OEB’s job easier. It will, as has been suggested is necessary, provide “a clear compass for making decisions”.10 With passage of the Green Energy Act, the broader determinations that set the points for such a compass will have been made by those democratically accountable; the elected members of the Ontario legislature. The OEB will be well within its comfort zone in implementing through regulatory policy and particular adjudicative decisions the government’s broader, politically accountable policy determinations.
Government guidance vs. government intervention
Directive powers for the Minister or the government to provide the independent energy regulator with a policy “compass” are useful. Directive powers to dictate to the independent regulator a process, or override or supplant a regulatory rule, can be exercised in such as way as to be intrusive. Changes in Ministers, government and public sentiment can render such intrusive powers capricious if restraint is not exercised.
Based on the terms of the Green Energy Act as drafted, the government would have authority in a number of areas to dictate to the regulator whether to hold a hearing, the circumstances under which a hearing may or may not be held, and if a hearing is to be held the type of hearing to be held.11 In other areas, the Minister might supplant, or override, rules promulgated by the Board.12 Still other provisions would allow the Minister to set time frames and timing requirements for Board processes.13
It continues to be of critical import to stability and investor and other stakeholder confidence in the energy sector that the respective roles of the government and the regulator remain clear and distinct. The government should determine economic, environmental, social and energy policy for the province. The regulator can then act within its expert sphere to promulgate rules and make decisions to implement the details of that government policy. The regulator should, as the OEB does, act transparently and within the framework of its governing legislation and the legal principles of natural justice. How the regulator carries out its mandate within its sphere of responsibility should not be subject to government intervention.
Conclusion
The Green Energy Act as drafted presents a clear paradigm for the application of economic and environmental policy to electricity policy. It provides express direction on the economic, environmental and social policy trade-offs that are the purview of publicly accountable elected officials. It reflects the continuing evolution of provincial electricity policy that began some years ago.
In response to this continuing evolution of government energy policy, the OEB has demonstrated a facility for the effective development and implementation of regulatory policy that considers issues beyond those of traditional “economic regulation” (that is, beyond balancing returns to shareholders with low prices for consumers). The Green Energy Act as drafted would, in several key policy areas, provide a “compass” for the Board in the exercise of its policy and adjudicative functions.
At the same time, it is of it is of critical import to stability and confidence in the energy sector that the respective roles of the government and the regulator remain clear and distinct. The Green Energy Act is particularly striking in the degree to which it contemplates direct and detailed government intervention in the implementation of provincial energy policy. The government should exercise its new authorities in such a way that reflects a clear separation between the legislature and the regulator, by setting clear policy and then allowing the OEB to undertake its implementation.
The above article is based on a longer paper titled “The Green Energy and Green Economy Act, 2009: A New Regulatory Paradigm?” For the full version please see http://www.macleoddixon.com/images/IanMondrow.PDF.
Footnotes
1 The Green Energy and Green Economy Act: Green Energy Unbounded, George Vegh, McCarthy Tetrault LLP, University of Toronto Faculty of Law (Adjunct Professor), February 24, 2009.
2 October 11, 2006, Howard I. Wetston, Chair, Delivered by Gordon Kaiser, Vice-Chair, Speech, World Forum on Energy Regulation III.
3 May 9, 2007, Speech by Howard I. Wetston, Chair, Ontario Energy Board to the Ontario Energy Network Luncheon Meeting.
4 Several OEB initiatives to support smart metering implementation can be reviewed at http://www.oeb.gov.on.ca/OEB/Industry+Relations/OEB+Key+Initiatives/Smart+Metering+Initiative+(SMI)/Smart+Metering+Initiative+(SMI).
5 http://www.oeb.gov.on.ca/OEB/Industry+Relations/OEB+Key+Initiatives/Conservation+and+Demand+Management+(CDM)/Guidelines+for+Electricity+Distributor+CDM
6 http://www.oeb.gov.on.ca/documents/cases/EB-2007-0028/report_ratemaking_20070723.pdf
7 Supra, note 10.
8 Supra, note 10.
9 Canada (Commissioner of Competition) v. Superior Propane Inc., [2001] F.C. 185, para. 146, in addressing the practice of the Federal Commissioner of Competition issuing non-binding guidelines and other policy documents.
10 Supra, note 2.
11 Schedule D, sections 7 (CDM targets) and 8 (smart grid implementation and connection of renewable energy generation).
12 Schedule D, section 10 (priority connections for renewable energy generation).
13 Schedule D, sections 8 (with reference back to the Board’s new objective to promote green energy generation and associated smart grid development) and 13 (with respect to review of payments to the OPA or distributors for CDM programs).
14 Canadian Manufacturers and Exporters, “Manufacturing in Ontario”.