Ontario is in the midst of a major overhaul of its methods and approaches to regulating the electricity sector. The Renewed Regulatory Framework for Electricity, or RRFE as it’s known, has become one of the central and most important initiatives of the Ontario Energy Board in recent years. Beginning in late 2010 and now in its second phase, the comprehensive RRFE consultation and policy making process is considering changes to many aspects of the electricity sector, including ratemaking, cost recovery, performance incentives, funding the smart grid, and approaches to distribution network and regional grid planning.
Although the process may appear to be moving slowly, a measured approach is likely prudent in order to ensure careful consideration of all policy options and that all stakeholders have a meaningful opportunity to be heard. “These are wide-ranging changes with long-term consequences,” says APPrO President Dave Butters. “There are a lot of options and perspectives to consider.” Ontario’s distributors and transmitters represent close to $27 billion in assets and are investing nearly $3 billion annually in new capital, a good portion of which is related to connecting new generation.
The primary reason that regulatory reform is needed at this point is that the electricity sector has undergone and continues to undergo so much change. Energy lawyer Lisa DeMarco of Norton Rose, who represented APPrO during the first phase of the RRFE proceedings, notes that the Ontario Energy Board (OEB) is responding to “over a decade and a half of unprecedented change.” In recent years Ontario has gone from what was effectively a vertical monopoly, to a fully competitive system, to a mixed or hybrid market with a high percentage of new renewable energy. At the same time, its neighboring jurisdictions have become more savvy abut cross-border trading, new technology, and emission reductions. A myriad of options and issues that were unheard of when the regulatory system was last restructured are now available to consumers and industry. These new considerations include competitive generation and transmission supply, renewable energy, intelligent micro-management of a two-way grid, wholesale and retail trading, and much more.
Gordon Kaiser, a former Vice Chair of the OEB, believes that the RRFE “represents the most significant regulatory reform in this sector in 32 years.” In truth, regulators probably need to review their systems whenever there are capital expenditures on the scale currently foreseen for Ontario. Citing a February 2012 report from the Conference Board of Canada, Kaiser observed that $300 billion dollars of new investment in power infrastructure is projected to be needed in Canada between 2010 and 2030. That is “$850 per year per customer for the next 18 years,” he warned. Few people would be comfortable having such investment overseen with outdated regulatory tools developed for a previous era.
At a high level, three main factors appear to be driving the need for regulatory change:
1. The massive volume of electric system investment anticipated and required over the next decade
2. A desire on the part of the public and the government to move to a more efficient, cleaner and smarter grid, and
3. Expectations of investors and regulated entities for more flexibility and responsiveness from the regulator.
The Renewed Regulatory Framework for Electricity (RRFE) is intended to establish principles and practices for performance-outcome-based regulation that will be better suited to the current circumstances and more flexible for regulated entities and stakeholders. OEB Chair Rosemarie Leclair highlighted key priorities in her comments to the APPrO 2012 conference on November 6, 2012. One of the primary objectives of the new planning framework, she said, is “to achieve a sustainable network long term,” not just for the rate-setting time frame. Although the Board is highly focused on fostering economic efficiency, Leclair made it clear that the regulator is also responsible for facilitating the achievement of public policy objectives. Currently those objectives include the connection of renewables, the implementation of a smart grid, and the furtherance of conservation and demand management (CDM).
The OEB released its report on Phase 1 of the RRFE process on October 18. It identified a set of priorities, tabled initial recommendations, and set out many of the basic parameters on which the next phase of consultation will be based. Following further consultations in the coming months, the Board expects to have many of the necessary regulatory tools developed by spring 2013 so that it can implement its new “outcomes planning based approach” in time for the 2014 distribution and transmission rate applications.
Leclair said that the Board has identified four key areas of focus that will be reflected in ongoing performance monitoring of distribution companies:
• Customer service: ensuring services are provided in a manner that responds to identified customer preferences;
• Operational effectiveness: facilitating continuous improvement in productivity and cost performance; and ensuring utilities respond effectively to system reliability and quality objectives;
• Public policy: ensuring utilities deliver on obligations mandated by government (e.g., in legislation and in regulatory requirements imposed in relation to Ministerial directives to the Board, such as renewable energy connections); and
• Financial performance: ensuring that the financial viability of the sector is maintained; and that savings from operational effectiveness are sustainable.
In order to achieve these outcomes the Board has set out new rate-setting models that emphasize fundamental principles of responsible asset management - coordinated, longer-term optimized planning, a common set of performance expectations, and benchmarking.
Speaking to a conference of renewable generators in October soon after releasing the report, Leclair stressed that the Board intends to place significant reliance on utility investment plans in setting rates. “We believe that good planning encourages long-term thinking and builds in immediate and future considerations and results in the most economically efficient decisions for customers. The Board will be looking for integrated plans that span a minimum of five years and that consider network sustainment, expansion, smart grid investment and renewable connections.”
Regional Planning becoming an important issue for generators
Leclair focused in particular on the reasoning behind the Board’s recommendations on Regional Infrastructure Planning (RIP): “Recognizing that the electricity network operates as a system and investment needs are not always defined by a utility franchise, the Board is adopting a more structured approach to regional infrastructure planning to encourage the development of optimal solutions for investing and expanding the networks that we all rely on.
Under the RRFE, the Board expects that network planning will include the transmitter, system operator, planner, distributors, and others as needed to encourage the most cost-effective development of Ontario’s electricity network infrastructure.”
In a recent briefing for its members, APPrO said that, “in summary, the Regional Infrastructure Planning consultations are expected to establish the basic terms under which distributors and transmitters will work together on a regional basis to plan the deployment of equipment that will affect the availability, location and timing of connection capacity for generators and consumers in a region. In some cases it may have an indirect effect on the cost of generator connections as well. Although the applications for regulatory approval to include any individual investment in the rate base will continue to come from an individual distributor or transmitter, a key objective of the initiative is to ensure that the proposals coming from utilities are co-ordinated and rationalized on a regional level. This has the potential to significantly improve the predictability of future connection capacity for generators.”
The report of the Board on October 18 recommended that lead responsibility for preparing the regional plan be given to the transmitter in the region. The Board is proposing a system in which the transmitter works with the OPA to identify potential conservation and demand management (CDM) and/or distributed generation solutions. The integrated regional planning process is expected to consider the full range of investment options to meet the system’s needs to ensure that there is an appropriate balance of transmission, distribution, generation and CDM to ensure efficient investment. In certain cases it is possible that there is no role for generation or CDM, and the related regional plan will consist purely of transmission and distribution, rather than being a fully integrated resource plan.
A good part of the OEB’s current consultation process is expected to focus on the options for the definition of regions for regional planning purposes. It will also look at protocols for sharing information among relevant parties, which could include distributors, transmitters, municipal officials and stakeholders like generators and consumers.
To help achieve resolution on the structure for future Regional Infrastructure Planning, the Board has set up working groups in several areas. The Regional Planning Working Group has been asked to prepare a report which will address at least the following key questions:
- What information should LDCs be required to provide to the transmitter and how frequently will that information be updated?
- What are appropriate evaluative criteria to compare potential solutions?
- What are the circumstances under which the OPA should participate in regional infrastructure planning?
- What is the appropriate form of broader consultation before a regional plan is finalized?
- What are the appropriate regional boundaries and the relevant criteria for establishing them? and
-What other key elements does the working group believe should be addressed to facilitate a move to more structured process?
While the OEB has said it expects regional plans to focus on transmission and distribution infrastructure, it is clear that at least some regional plans will deal with the need to enable new generation, and the extent to which generation or CDM solutions are alternatives to transmission or distribution investments. Generators are particularly interested in how these assessments will be made on a regional basis, and how individual generation projects may enter into consideration. The interaction between regional planning and generation procurement will also need to be considered.
Generators are represented on the Planning Process segment of the Regional Infrastructure Planning Working Group by Rob Cary, a member of APPrO’s Board. APPrO has established a working group of generators to provide input to Mr. Cary. The OEB is also running a parallel working group on “Appropriate redefinition of Line Connection assets.” That working group is expected to develop criteria for Line Connection asset redefinition purposes and identify assets that meet the proposed criteria. The working group input must take into account the function the asset performs and reflect the “beneficiary pays” principle. Generators are not represented by a technical expert on this group, but may participate to the extent that transmission or distribution line investments provide service to loads and generation sources. Once this working group phase has been completed, generators will have an opportunity to provide input on the issues and cost responsibility through the Board’s code amendment process identified below.
The Board expects the overall process to operate on the following general schedule:
November/December 2012: Working Group meetings & reports
February 2013: Proposed Code amendments issued
April 2013: Final Code amendments issued
June/July 2013: Board expects Code amendments come into force
APPrO said that it “encourages generators with any interest or concern about these issues to become involved in APPrO’s internal working group. The organization is ready to listen to concerns of generators and to try to integrate them into the discussions at the OEB.”
Wider developments
In a related development in early December the OEB released a set of documents to support upcoming consultations with distributors and other stakeholders on questions related to the performance measures that will be used to assess the work of distributors and transmitters in Ontario. This will take place in the context of another Working Group on performance measures. Lisa DeMarco notes that “key performance outcomes can be written to include proactive initiatives to ensure the connection generators and other services.”
Leclair also said, “The Board recognizes that generators are customers of the transmission and distribution companies we regulate, and that includes the rules and cost responsibility for connecting to the network. This is relevant to the Renewed Regulatory Framework, particularly as we devise the outcomes used to evaluate utility performance.” The Board will need to consider what, if any, performance measures related to the connection of generation it might include in the framework. Leclair indicated that the input of generators on this issue is very welcome in this process. The Board’s work on RRFE has already included considerable contributions from generator stakeholders lead by APPrO.
As the RRFE process unfolds, a range of broader questions have begun to take shape, including some about the review process itself. Given the scale and timeline for the process, some people may be asking whether regulation of this scope and scale is getting too complex. Is it realistically possible to collect the kind of input required, to have meaningful involvement of concerned parties, when the issues are so wide-ranging and detailed at the same time? Is the new system trying to integrate too many considerations at once, or might it be better to deal with regulatory questions in smaller isolated pieces? Without a doubt, cases can and will be made on both sides.
The OEB is managing some very complex questions and will likely be looking for input as to whether it is achieving the right balance between long and short term, specificity and generality, direct applicability and longevity, among other things. One of the more contentious issues is finding the appropriate balance between being responsive to government policy and establishing investment certainty and continuity. While being consistent with government policy has obvious benefits, some experts feel the Board has already become too much of an agent for government policy-makers, and not enough of an independent actor. See also "Regulatory Independence: The Impact Of The GEA On The Regulation Of Ontario's Energy Sector," By Robert B. Warren, Weir Foulds LLP, IPPSO FACTO, June 2012, and "Competition vs. control: A(nother) fork in the winding road of Ontario’s electricity policy," by Ian Mondrow, IPPSO FACTO, June 2012. Although the two are not always in opposition, the tension between encouraging green development and minimizing consumer costs will likely be played out in many places for a good while to come.
The OEB will likely be at the centre of some interesting debates in the coming years on what are the most appropriate ways of assessing economic efficiency in making these kinds of choices.
As the RRFE process approaches its conclusion, some will be asking themselves whether, by trying to be so all-encompassing in its review, has the OEB made its own work too difficult, and made effective stakeholder participation too challenging? Or could it be that the difficulties of the RRFE are the inevitable consequences of an increasing pace of change in the energy sector? While such regulatory reviews may be challenging for stakeholders to become engaged with, are they not more manageable when structured in a consultative regulatory context?
Describing the RRFE as the OEB’s “proposed new compass,” DeMarco notes that “This particular proceeding is novel in that it allows for shaping change.”
The proposals are complex and will likely require more engagement from affected parties than many of them are used to. Key questions lie ahead: Where is this process and other regulatory review processes heading? What will the implications be for generators, investors and other energy sector stakeholders? What will market participants be doing to adapt to the new framework? All are valid questions which the RRFE if nothing else, has brought capable minds together to reflect on in an organized way.
No doubt generators will become increasingly engaged as the OEB and other stakeholders continue to develop and refine their proposals. It’s an area in which APPrO is encouraging its members and all generators to inform themselves, become more involved, and let their concerns be known.
Background documents:
The OEB’s report on Phase 1 of the RRFE process
Link to full background documents on the RRFE
OEB Web page on the Regional Infrastructure Planning initiative