When the Ontario government announced a review of the structure of agencies in the electricity sector a year ago there was a lot of heated debate about perceived duplication and overlap between the public agencies that operate in the sector. Now that the panel has delivered its final report, much of that debate has been deflated and even the panel itself acknowledges that the perceived problems of waste and overlap were minor in scale, so minor in fact that remedial action is unlikely to save any significant amount of money.
Perhaps it should be reassuring to know that when a public review was done, it found no glaring problems with the system. But that would be a mistake. The Agency Review Panel has delivered a thoughtful report that deserves careful consideration across the sector for other reasons than the obvious. Although the Panel made one big mistake, its recommendations on the whole serve to highlight a number of second-level issues that definitely warrant attention over time. Even if it didn’t find the hidden elephant that some were looking for, it did discover a few dozing dogs that will be need to be handled with care.
On the central question of whether there are too many agencies in Ontario’s complex constellation of public regulators and players, the Panel’s conclusions have a distinctly lukewarm feeling. After acknowledging that the agencies are functioning reasonably well on the whole, and that its mandate required it to look for overlaps and duplication, the Panel could only bring itself to say that “sector effectiveness is probably reduced, and costs increased” by duplication and overlap. Yet, in the same breath it pointed to other problems that could well be more serious, such as outdated approval processes for transmission and generation projects, uncertainty over OPG’s role and direction, and the need for further LDC consolidation. Its one major recommendation on agency restructuring, a misguided suggestion of combining the IESO and the OPA, suffers from the self-admitted weakness of delivering “no measurable impact on rates to the consumer.” Other problems with this recommendation are more serious, but if it won’t save money, then the point of the whole exercise is questionable.
The wisdom of the panelists was evident when they premised their recommendations, and returned to the same theme later, saying “this is not the time for major restructuring of the sector or the hybrid market.” Acknowledging that they received similar advice from stakeholders across the sector, one of the report’s key comments is simply that the authors “support the need for organizational stability.” You can read what you will into this kind of comment, but many will take it to mean that the report’s recommendation on agency consolidation should be given less weight than its recommendations in other areas. Another view is that while it’s timely to look at well-developed options for modest reform, it would be unwise to jump on a bandwagon for sweeping change, especially if there is only a short term agenda in mind.
Indeed, many in the industry will be struck by the clarity and relevance of the Panel’s key recommendation on approval processes. Drawing attention to this issue is timely and well deserved. It’s only a shame that this question wasn’t at the centre of the Panel’s mandate from the outset. We examine their findings more closely in an article “Panel recommends new approval system,” page 10.
The report’s one big mistake is its recommendation to bring the IESO and the OPA together under one roof. This unfortunate suggestion, weakened as it is by the report’s own findings, may not be the fault of the panel. Its mandate was written in such a way that to have found otherwise might have appeared to be a rejection of the review initiative as a whole. Nonetheless, it is now up to the industry and the rest of the sector to let it be known that such a recommendation can not stand. Not only would the combination of the IESO and the OPA be an impediment to competition, but it would raise the cost of capital across the sector, far outstripping any savings that might flow from reducing the number of agencies and CEOs.
It is doubly unfortunate that the panellists chose to try to bolster their recommendation by saying that the merger would be justified on non-financial grounds. Perhaps that also was necessary given that the financial justifications were non-existent. The suggestion that transparency and accountability would be improved in a larger organization runs counter to all experience in the industry. That it could produce “more robust and integrated forecasting and planning processes,” is potentially attractive but seems to be a solution in search of a problem, since Ontario doesn’t appear to be suffering from inadequate or disconnected planning and forecasting.
Perhaps sensing a key weakness in its own recommendation, the Panel said that perceived conflicts of interest resulting from having system operation and procurement functions under the same roof could be averted by the OEB’s Market Surveillance Panel (MSP). Perhaps this is the recommendation’s fatal flaw: Once the MSP finds a problem it will have been too late. The damage will already have been done by months or years of investor anxiety over the risk that someone would be playing favourites without being discovered. And who knows how long it would take to regain credibility for the system after such an incident? The risk premium that would be placed on power sector investments across the province would be unreasonable, even if no conflicted behaviour was ever exposed.
Similarly, it was disappointing to see a recommendation for an additional layer of review over Power Purchase Agreements (PPAs). These arrangements are already subject to review by the OPA, and at a higher level through the OEB’s review of the OPA’s procurement process. Further review of PPAs would add time and cost to the system, increasing burdens on the consumer for little if any practical benefit.
The calls for senior executive compensation packages to be trimmed back are almost perennial. It was not surprising that a Panel such as this would be asked to find economies amongst the multiple executive suites that often seem inexplicable to those outside the sector. But the inconvenient truth is, it doesn’t matter much. Even if there is waste and inefficiency at those levels, and even if entire executive suites could be done away with, the difference on power bills would be negligible. That’s not to say that a bright light shouldn’t be shone on executives and their doings from time to time, but that cost reductions need to focus elsewhere.
Separation of functions is a time-tested way of improving transparency and accountability. Public sector agencies that make important decisions on a day to day basis operate better when there are fewer layers of insulation between staff and the public. When trying to instill accountability and discipline, separate balance sheets are much more effective than a single balance sheet which inevitably has to use consolidated figures to represent results from unrelated activities. The value of having multiple independent agencies was explored in these pages a year ago under the heading of “Too many agencies?” and the need for independence hasn’t changed appreciably since then.
If the main conclusion of the Agency Review Panel seems a little anticlimactic, perhaps that’s a sign that the panel members came close to an unspectacular truth, rather than succumbing to the call of a few attention-seeking critics that might have made the Panel’s work seem more exciting and important. More than anything else, the misperceptions that gave rise to the entire exercise seem to have stemmed from an article in the Toronto Globe and Mail of December 15 2006 with a headline that read “Hydro costs soar 50%.” The article claimed that, “Costs associated with operating Ontario’s electricity agencies have soared more than 50 per cent since the old Ontario Hydro was dismantled in 1998. ... The ballooning costs are a legacy of successive governments’ failure to come up with a comprehensive electricity policy, leaving the province — and ultimately hydro consumers — saddled with a hugely inefficient system.” Other critics and journalists jumped on the bandwagon and some even recommended “putting Ontario Hydro together again.” It was poor advice based on misleading data then, and it’s pretty much discredited now. But it’s living proof of the power of the media, who sometimes need their own facts checked.
You might describe the Agency Review Panel as a prudence check. It did draw attention to some key issues in the approvals process and the definition of OPG’s role. If it didn’t find the major threats that some people feared, it was nonetheless a useful exercise as much for what it didn’t find as for what it did.
— Jake Brooks