Although major change in governance is not likely, the merger of the IESO and the OPA is causing market participants to examine the basic terms under which the IESO operates – including the underlying provisions that establish and define the structure and governance of the agency. Many involved in the process see it as a rare opportunity to adjust certain details of the system that do not normally come up for review. For example, in the near future various parties will need to determine the nature of the periodic regulatory proceedings that will be required, the design of the new agency’s bylaws, and how the consolidated stakeholder advisory committee will be structured.
Bruce Campbell, the CEO of the IESO, speaking at the APPrO 2014 conference in November, made it clear the depth of thought that is going into planning the merger. He noted that “Close to 100 mandatory deliverables for Day One have been identified ranging from a common letterhead and e-mail addresses for staff, to NERC-mandated employee training on cybersecurity and reliability, finance reporting processes, tax and regulatory registrations, and constructing our Day One website.” Integration activities will continue for some time after January 1 as well.
A key part of the new agency’s mandate from the government is to find efficiencies through consolidation. This is more complicated than may appear on the surface, and relies on a set of processes that will take some time to play out. As a consolidated agency, “the new IESO” as it’s being called, will be obliged first and foremost to continue to look after its core functions of maintaining grid reliability, overseeing a competitive electricity market, and fulfilling its various statutory and policy duties, at the same time as managing structural change. That amounts to four types of objectives to fulfil, before even considering cost savings.
Speaking at the same conference as Mr. Campbell, Peter Wallace, Ontario Visiting Fellow with the School of Public Policy and Governance at the University of Toronto and a former Deputy Minister of Energy, outlined how these core responsibilities of the agencies interact, and how they are likely to work in the context of the broader merger process. Primarily because of the merger plans and the presence of a majority government, Mr. Wallace anticipates a period of relative stability in provincial energy policy for the next few years. In fact, a stable policy environment is the best context in which to find efficiencies and achieve savings, he noted. Viewed from a long-term perspective, the merger of the IESO and the OPA is a relatively minor form of restructuring, compared to the more radical initiatives the sector has seen in recent years, Wallace pointed out. The merger is much more modest in scope than for example, the breakup of Ontario Hydro in 1999, the sudden closure of the retail market in 2002, or the Green Energy Act in 2009. As a result, prospects are reasonably good for the agencies to find cost savings in the coming years, as long as attention continues to be paid to the ongoing importance of maintaining basic policy stability.
However, even though policy stability may be expected in the near and medium term, changes at a lower level are afoot in the short term. Although the changes may appear to be relatively minor, the merger creates natural opportunities to adjust some details in the fundamental provisions that set the terms of operation for the new agency that will oversee the operation of the grid, system planning, procurement and other key functions in the Ontario electricity sector.
What kind of change is expected
Despite the significance of the government’s initiative to combine the two agencies, there is widespread tacit consensus that the merger should cause as little change as possible in the electricity system (or to how the IESO operates in the electricity sector), unless the change is sure to deliver cost savings. The previous responsibilities of the two original agencies will need to be covered much as they were before the merger, and apart from finding efficiencies through consolidation, there is no expectation that the nature of the combined set of responsibilities will change. However, the fact that everyone is trying to minimize disruption does not mean that fundamental structural issues aren’t being considered in the process. The net result is likely to be relatively modest changes in structure, arrived at somewhat ironically through processes that carefully consider a wide range of fundamental structural issues.
The most visible modifications are likely to be in the structure of senior management and stakeholder relations. The two boards of directors are being combined into one, and the senior management team has been announced. A number of retirements are underway. (See “Directors and senior staff appointed at the new IESO,” also in this issue, for details.)
Arguably stakeholder relations will be more important than ever with a larger amalgamated agency. As if to underline this point, the IESO has already published a paper and completed a round of stakeholder consultation on the separation of market operations and contract management functions in the new organization. (See “IESO invites input,” page 11, for details.) The IESO and the OPA each have their own Stakeholder Advisory Committee at the moment. The two bodies plan a joint meeting in February, and will quite likely move towards some kind of amalgamation at that point. The IESO’s stakeholdering procedures are very robust and its Stakeholder Advisory Committee has been operating for a much longer period than that of the OPA. It is therefore likely to take the lead in structuring the stakeholdering processes of the new agency going forward.
Unresolved questions
Speaking at the APPrO 2014 conference in November, prominent experts on electricity sector governance Linda Bertoldi, Peter Wallace and George Vegh outlined their views on the options for moving forward in these areas. A complete report is included in the companion piece, “What the IESO – OPA merger means for Ontario” also in this issue.
Key amongst the observations of those experts is the acknowledgement that in any change process there are certain questions that will not be resolved at the outset. The discussion did not dwell on these questions, but served to flag them as areas that will likely attract further attention in the near future. They included:
1. Will the government see fit to add, remove or change any of the objects of the new IESO? Will it release significant rules, regulations or directives affecting structure or governance?
2. What kind of additional arrangements will be necessary to ensure the market is comfortable with the system for separation of functions between the market operator and contract manager?
3. Related to the above, how will the terms “confidential information” and “inappropriately communicated” be defined within the new IESO?
4. What kind of regulatory oversight is appropriate for the new IESO – conventional public utility regulation, or something unique to this particular agency?
5. What kind of mechanisms are needed for appeal and dispute resolution in cases where market participants differ with decisions of the new IESO?
6. What will be the scope of the new IESO’s role in the preparation of system plans?
Underlying principles
George Vegh, a leading energy lawyer with McCarthy Tetrault, pointed out that the current regulatory arrangements for the IESO and the OPA have not met all the tests that are normally applied to assess the effectiveness of regulatory mechanisms. For example, one would normally expect in-depth review of market rule amendments by the regulator when needed. However, the current system limits such regulatory reviews to 60 days. The makes it impossible to carry out the kind of detailed analysis that can be required to review complex matters.
With a larger and more powerful agency, the need for general regulatory oversight is greater, all other things being equal. Yet regulatory reviews of both IESO and OPA matters to date have been limited in scope and have not resulted in significant changes to agency plans. To many this is a further indication that an expanded form of regulatory oversight would be justified as part of the merger. Mr. Vegh made the case that the new IESO could be treated like a type of public utility and regulated as such. This could be achieved with a periodic OEB review of IESO fees, charges, and uplift, which would be a modest expansion beyond the current review of administrative costs. This kind of oversight represents an effective and sustainable approach that can be implemented without legislative change, he said.
At a high level there seemed to be general agreement amongst these experts that the immediate transitional process for the merger stands a good chance of working efficiently and effectively. However, the broader question about how well oversight and governance of the new IESO will work under the currently anticipated governance framework remains largely unresolved. In light of the concerns raised by the speakers it appears that much will depend on where government policy goes and on how consistently the key players operate with respect to the principles of stability in public policy, regulatory independence, the integrity of market mechanisms, and robust stakeholder consultation.
See also the following related story:
What the IESO – OPA merger means for Ontario