The latest Supply Mix Directive (SMD) from the government of Ontario may not be perfect, but it is an example of increasingly prudent and reasonably mature governance in the energy sector. Although built on an ambitious base, its relative modesty actually strengthens the planning process and reinforces the power system’s reliance on the existing body of professional expertise, and the predictability of the system as a whole.
Whatever your view, the February 24 SMD (see “Supply Mix Directive underpins LTEP,” page 8) is recommended reading for anyone interested in the power sector.
The SMD is essentially a policy document, and comments on it, like those above, are almost always based on a certain amount of subjective judgment and opinion. As always, IPPSO FACTO invites readers who differ with such views to share them with other readers by submitting your own thoughts, potentially for publication in this magazine and on our website.
Over the last few years many participants and observers of the provincial energy business have grown increasingly concerned that the culture of government and central agencies in the power sector may be becoming overly influenced by the politics of the day. As directives piled up, one on top of the next, and the latest policy objectives began to overshadow long-term responsibilities of managers and regulators, some began to wonder if the balance between political oversight and independent regulation was shifting. (See, for example, Robert Warren’s commentary, “The impact of the GEA on the regulation of Ontario’s energy sector” in IPPSO FACTO, August 2010.)
Today’s SMD however, shows signs of a shift towards more modesty and realism. Although continuing the general direction set by the McGuinty government over the last 8 years, the 2011 SMD takes a more nuanced approach. There is little mention of the aggressive mandates of 2009, written and unwritten, that created uncertainty in and of themselves – partly because they seemed to make later adjustments almost a certainty.
The bevy of transmission projects listed by George Smitherman, when he was Minister of Energy in September 2009, are now placed in a more realistic long-term framework. And by extension, the Feed-in Tariff program is now circumscribed by more clearly understood mandates within the systematic, rational processes of T&D development. Although the FIT program had always operated on the understanding that connection capacity would act as a practical limit on new generation contracts, it has not been clear just how far and how quickly current policy priorities would drive the expansion of grid capacity. It’s now more evident just how fully the normal development processes and prudent standards of pacing will control development.
Although the outcome of the ECT is still a major variable, with the SMD and related developments clarified there is less uncertainty around the degree to which central agencies and distributors will be expected to become champions of government policy, particularly green energy policy. Some had wondered if transmitters and distributors would be expected to outstrip all past records for system expansion and start building infrastructure at a breakneck pace, a question that the OEB has wisely offered to help resolve.
In particular the extent to which ministerial directives are likely to be deployed to expedite transmission development is somewhat less of an unknown now: Transmitters and distributors are planning and building ambitiously but with caution, going through their normal processes of regulatory review, with a formative long term energy plan as a guide. Most importantly, Minister Smitherman’s to-do list of 2009 is being broken down into more manageable pieces, spread out over a longer time frame. The OEB has even begun a process to clarify the pace of new development, something that will likely further reassure transmitters and distributors on how fast to build. Although there’s no legal impediment to issuing a new directive at any time, the government’s actions since last November are falling into a pattern, largely based on the LTEP, all of which makes sudden change much less likely.
Directives are more complicated than they appear – they usually carry a significant amount of subtext. Leaders must know the difference between instructions that are likely to encounter problems because they call for change and instructions that are likely to encounter problems because they are inherently difficult to implement. It is the government’s right to seek change, but it is only sensible to do so where the change is manageable for those charged with follow-through. Directives are often read by the managers and operators of the system in a two-part fashion: First they read the instructions to be followed and then they think through the full picture of what realistically needs to happen to the system, to carry out the instructions along with meeting other needs of the system. If the instructions handed down line up reasonably well with their realistic implementation plans, there is a good chance of success.
Warning: If there is a lack of alignment, it may not be immediately obvious to anyone outside the agencies. Staff are not likely to speak frankly about serious disconnects of this sort, for fear of appearing off-side with their masters. Any sort of acknowledgement of difficulty could be a sign of internal priority conflicts. A wise government anticipates these problems and makes sure any directives it issues can be readily implemented. Of course getting that kind of alignment is particularly challenging when the action on the ground requires the active engagement of more than 80 transmitters and distributors. No one expects 100% concurrence, but directives need to be reasonably implementable.
Assuming that directives are crafted in such a way as to be largely manageable for those doing the implementation, there is another level of “subtext” to consider. Looking at each directive from the perspective of John Q. Public, what are its high-level optics? Is this something people can get excited about and “take ownership” of? Ideally, directives should fit into a reasonably supportable program of public policy, and possibly even be an expression of a vision or long-term plan. Some kind of over-arching motive is usually present in any directive, whether it’s about improving efficiency, service, environmental performance, or some combination of high-level objectives. Without judging the choice of high-level objectives, one has to consider whether there is a large difference between what the actual instructions say that certain government agencies must do, and what people in the industry are likely to voluntarily accept – whether participants are likely to take the underlying objectives to heart and really run with “the program.” In other words, do the directives have a life of their own, beyond the instructions on paper? These are challenging requirements for directives to meet, and provide a sense of why directives are best if used only with great caution.
There is wide agreement that the electricity system depends on the continued operation of a number of market-driven functions in order to maximize efficiency and predictability. (See for example another report finding that minimizing the amount of government intervention in the power sector is a good idea: “Non-interference makes for good governance, report says,” page 15.) The SMD is, among other things, a method of characterizing the key areas where government intervention is needed, and potentially of circumscribing it. Directives need to be implementable, durable, attract a significant amount of natural support, and be in sync with natural market functions.
With a reasonably solid long term plan, a regulatory oversight process, and a carefully crafted SMD consistent with the above principles, the need for directives and other forms of intervention should decline. The latest SMD, with its modesty and realism, stands a good chance of being implemented in a form reasonably close to the original intentions behind it.
— Jake Brooks, Editor