The regulatory systems being used for the electricity sector in Ontario will face significant stresses and strains in the next few years – and regulators will have no end of issues ensuring their arrangements continue to remain current considering the rapidly-changing nature of technology and public expectations. Gordon Kaiser, a former vice Chair of the Ontario Energy Board, and Mike Richmond, a leading regulatory lawyer at McMillan LLP, appearing at the APPrO 2014 conference on November 18, were among several experts with similar words of relatively urgent advice for the energy industry and the officials who regulate it.
A central feature of the regulatory system is that it helps to create stability and continuity in decision-making despite short-term changes that may take place in government and public opinion. This key aspect of the system can be compromised if the regulatory system itself changes rapidly. However it appears that change is necessary and likely in the short term, for the regulators as well as the regulated. As a result, participants in the energy sector will likely need to watch the sector closely and be prepared to make adjustments in their expectations of how the regulatory system will affect them.
Mr. Kaiser argued that unanticipated forms of deregulation will take hold in the electric sector in the next year or two in Ontario, even if regulators and the public do nothing to prompt it, primarily because technology is changing. Increasingly significant parts of the electric system may soon be operating outside the regulated sphere, he said. For example, “By 2020, 20% of Toronto Hydro’s residential customers will be generating their own electricity with or without regulatory guidance. But given the broad scope of section 29 of the Ontario Energy Board Act and the savings the new technology offers customers, we can safely predict that a major deregulation case will be before the Board in the next 12 months.”
There are few regulatory obstacles to such evolution, Kaiser said, with respect to single-family homes and condominiums. “Unlike the early telecommunications industry, customers don’t require regulatory relief to establish their own generation. The customer owns the wires in the building. The condominium market is a huge market in Toronto – but the real efficiencies from deregulation may lie in the commercial market. The real regulatory challenge there arises when the customer wants to distribute the energy from his generator over a wider area. That will likely require access to the wires of the electricity distributor.”
The core problem for the regulator, Kaiser believes, is that “declining volumes mean declining revenues. Declining revenues with fixed costs mean increased rates.” For the utility, “Industry boundaries are being changed by technology. The distinction between gas and electricity will disappear. The distinction between generation and distribution will disappear. Demand for distribution lines declines.”
Regulators will likely respond with fixed charges in the short run, but that solution is “bad economics” and “bad public utility law,” Kaiser contends. “Fixed charges are stranded asset charges. ... Fixed charges merely transfer the technology risk from the utility to the consumer. As the National Energy Board said in (the Mainline decision) utilities are not guaranteed a rate of return and are not protected from all risk. As the Board noted, utilities have been compensated for risk over many years. Once a risk materializes they are expected to deal with it and not simply pass the cost on to the consumer.”
Kaiser believes constructive options are available for dealing with these new circumstances. “If we don’t want to subsidize utilities we have to allow them to compete in the new market. If we expect utilities to bear technology risk we have to allow them to manage that risk and participate in new markets. Regulators can and should manage the process. The market will deregulate on its own regardless of what regulators do. And electricity customers will seek lower-cost solutions regardless of what the regulator does.”
In particular, Kaiser noted that “the regulator can establish rules, particularly those related to cross subsidization. Through a regulatory process the regulator can deregulate within meaningful timelines based on a generic facts and professional evidence.”
Mike Richmond of McMillan LLP pointed to an additional set of challenging developments in other aspects of electricity regulation. Describing how public outcries have sometimes caused changes that completely bypassed the normal regulatory channels, Mr. Richmond argued that in many cases, “Hearings are no longer the place to be heard.” This is a fundamental problem for regulators and poses a question about how to ensure that regulatory proceedings are more often seen as the primary forum for systematically raising and resolving questions of energy sector rules. “The social license to regulate has suffered and we need to get it back,” he said.
The “activist minority” has often taken leadership and driven the agenda on energy issues and this trend may accelerate if regulators aren’t able to regain their position, he suggested. Mr. Richmond presented the following major recommendations on “how to regain social license” from the activist minority:
1. Be transparent. Make information easily available.
2. Regulate, don’t mediate.
3. Enforce, don’t negotiate. Don’t cut deals on a regular basis.
4. Be independent.
5. Re-imagine your processes so that they will work in the future, and not be limited to purely what’s on the record.
6. Move away from adversarial structures, in the direction of fact-finding processes. The adversarial process does not work well for making value judgments or for considering the perspectives of multiple parties, particularly in cases where all of the proponents have some validity to their positions.
Mr. Richmond presented a number of examples in which regulators had allowed their status to be eroded by focusing on accommodation and compromise. Firm actions, effectively setting long-term principles and directions, are key to credible regulation and enforcement he suggested.
The most interesting questions ahead, Kaiser said, include the following:
• Will household generation become community generation?
• Who will be the providers of private power systems?
• Will generators get access to LDC local lines?
Many observers will see comments like these as direct challenges to the status quo of energy regulation in Ontario. No doubt they will provoke a significant amount of discussion amongst participants across the energy sector. No doubt regulators have identified similar concerns themselves and have begun to address them.
For further information, copies of the presentations by Mr. Kaiser and Mr. Richmond are available from APPrO.