The following report summarizes key comments made at the APPrO 2014 conference November 18 on the subject of governance and transition issues with respect to the new IESO during and after its merger with the OPA.
Mr. Bruce Campbell, who will be CEO of the new IESO starting from its merger with the Ontario Power Authority in January 2015, noted that he was speaking only two and a half weeks after he had been asked to accept the role of CEO at the new IESO. He was both honored and enthusiastic to take on the position and is completely focused on bringing the two organizations together to deliver value for the public and province.
Mr. Campbell thanked Colin Anderson for his leadership of the OPA, noting the great positive impact he has had on the electricity sector through enhanced reliability from added generation, management of Ontario’s investment in renewables, and having advanced a culture of conservation in Ontario.
Before discussing the merger, Mr. Campbell summarized the current position of the energy sector with a few key points:
• There is a positive supply outlook over the next 1.5 years
• A healthy supply margin is expected over the coming winter
• Natural gas storage is currently at a 5 year high
• 25MW of new supply is to be brought online over the next 18 months, most of it renewables.
Management of surplus baseload generation (SBG) is a priority for the IESO, now and likely for the next few years. In the IESO’s experience, SBG conditions can occur any time, including Monday through Friday. Mr. Campbell thanked Bruce Power, OPG, and the wind generators for their cooperation in finding solutions to help manage these issues. Although IESO operators initially had some apprehension about the addition of wind into the system, the things that they have been able to do with the additions have been impressive. It has been interesting to watch how operations have transformed with the new dynamics wind energy has introduced to the system.
The IESO has a number of market initiatives underway including:
• Development of options for a capacity auction
• Development of a demand response auction
• Development of an initiative to enable capacity exports and imports.
Mr. Campbell expects a healthy debate about elements of these initiatives, as there can be many details to work out.
He also pointed to several important initiatives of the OPA. One example is the 10 year old conservation fund. The fund helped Temporal Power develop its flywheel technology to the point that they have been a successful applicant in the IESO’s procurement processes for regulation service and storage. The OPA has worked closely with the LDCs and the OEB to develop a new contractual framework to support conservation first and ambitious conservation targets. The framework allows LDC’s to use conservation efforts best suited to their customers. Also, last summer, the OPA published a comprehensive technical report and business case for the connection of remote First Nations communities to the grids.
Turning to the merger, Mr. Campbell explained that the board of directors of the new IESO will be comprised of members from the existing IESO and OPA boards including both of the existing chairs, Tim O’Neill and Jim Hinds. The new executive leadership team and their roles were also detailed:
• Kim Warren, COO & VP Market and System Operations
• JoAnne Butler, VP Market and Resource Development
• Doug Thomas, Chief Information Officer & VP Information and Technology Services
• Kim Marshall, CFO & VP Corporate Services
• Terry Young, VP Conservation and Corporate Relations
• Michael Lyle, VP Planning, Law, and Aboriginal Relations
• John Rattray was identified to continue his role as General Counsel and report to Michael Lyle.
Mr. Campbell suggested that building a new team in these circumstances has required difficult decisions. He acknowledged the contributions to the IESO, OPA, and the sector, of retiring staff members Amir Shalaby, Ted Leonard, Kristin Jenkins, and Andrew Pride.
The current focus of the merger team is to get the new organization in place for January 1st, 2015. There are many integration efforts taking place and they are expected to continue for several months beyond that date. One of the efforts underway is the amalgamated Stakeholder Advisory Committee and the associated process for stakeholder engagement. Both Stakeholder Advisory Committees from the current organizations will continue to exist in the new year and will collaborate starting in early February to develop a new structure for engagement processes.
Mr. Campbell elaborated that the scope of the new IESO’s activities will encompass the entire Ontario electricity sector. Some of the major responsibilities he identified are:
“• Ensuring the reliable operation of the province-wide electricity grid every second of every day;
• Maintaining the focus on conservation first as a key element in planning to meet Ontario’s electricity demand today and into the future; and
• Achieving better co-ordination between market and contract solutions – driving more efficient outcomes that help keep electricity affordable.”
Mr. Campbell also expanded on a number of benefits that will result from this OPA/IESO merger. For one, approximately $5 million in savings will be realized in the first year due to elimination of duplication and overlap in the organizations. Other benefits will include the ability to apply the IESO’s experience with market operations into the process of designing capacity auctions, contract terms, and the evolution of the market. The result of these benefits should be more efficient contracts and markets.
A key issue he has heard about from stakeholders is the importance of functional separation between contract management and market operations. The government legislation initiating the merger addressed this issue and obliges the board of the new IESO to ensure “the effective separation of functions and activities of the IESO related to its market operations and its procurement and contract management activities”. Mr. Campbell indicated that this will be addressed by means of a stakeholder working group and a discussion paper has already been developed to consider options for the treatment of commercially-sensitive information.
Another question that has been raised is in regards to how new capacity will be procured going forward. The answer is that both markets and contracts will be used for procurement. Mr. Campbell sees the new IESO looking to use the flexibility of market approaches while also relying on the long-term assurance available with contracts. He hopes that moving forward, we will better understand how markets and contracts can work together.
Mr. Campbell noted that this approach is consistent with recent comments from Minister Chiarelli. One of the key points of a recent speech contemplated capacity auctions unconstrained by Government supply mix objectives being a potential part of a more optimized and reliable system.
Mr. Campbell summarized by saying that the IESO intends to follow this direction, supporting market evolution “to create a system that is more reliable, cleaner and more affordable” within the policy framework enunciated by the government, using all of the available tools. The province’s Long Term Energy Plan outlined a direction for the sector and the new IESO. He is excited to begin executing the plan under the new structure. He concluded by saying he looks forward to next year’s APPrO conference when he will be able to report on what has been achieved.
Following Mr. Campbell’s keynote, three experts spoke on governance and transition issues.
Linda Bertoldi, a leading energy lawyer and National Chair of the Energy Markets Group at Borden Ladner Gervais LLP, focused on the details of the legislation that drives the merger, its terms, and discussed some resulting implications. She started her presentation by summarizing the legislation surrounding the IESO-OPA merger. The original rationale for the merger was to eliminate duplication, thereby saving up to $25 million per year and to allow for a more integrated approach to planning. The merger to create the “New IESO” was put in motion by Bill 14, passed as part of the budget on July 14, 2014.
Ms. Bertoldi reviewed the objects and powers of the New IESO noting that the majority of the objects are combinations of previous objects from the OPA and the existing IESO. There are 2 notable additions:
• To engage in such other objects as may be prescribed by the regulations
• To exercise the powers and duties assigned under the regulations and directions.
Ms. Bertoldi explained that these additions mean the government is retaining its ability to modify the objects and directives in the future.
Bill 14 addresses some of the details of the merger itself:
• Rights, property, assets of Predecessor IESO and OPA become rights, property, assets of New IESO
• Outstanding debts, liabilities, and obligations of the former agencies will be assumed by the New IESO
• The new IESO is substituted for either of the original agencies under agreements, security, licenses, approvals, permits, and other instruments
• New IESO substituted as a party in any on-going legal proceedings
• By-laws of the predecessor IESO become by-laws of the New IESO
• A new Governance and Structure By-law is contemplated
• Minister’s previous directives bind the new IESO
• New board of directors and CEO
• Regulations may be passed governing transitional matters.
In summary, the “new IESO” is substituted for the IESO and OPA in substantially all matters and the government has retained the ability to govern all transitional matters through regulation.
The former objective of the OPA to develop the Integrated Power System Plan (IPSP) for Ontario is not included in the new IESO’s powers. It’s not clear what is intended by this change. The New IESO will continue to be subject to the ability of Minister of Energy to request the preparation of an IPSP, which could be reviewed by the Ontario Energy Board.
As Mr. Campbell mentioned before, the new IESO must ensure effective separation of market operations from procurement and contract management functions. Ms. Bertoldi thinks that the combination of these responsibilities has been seen by the market as a potential conflict of interest. Accommodation has been made for this potential but Ms. Bertoldi notes that the required standard for effective separation is only set to a level that the new IESO board considers necessary, not necessarily to the level that would be most satisfactory for the market. Major requirements of the new IESO in this area are to:
• Ensure effective separation of market operations and procurement and contract management
• Conduct administered markets operations in a fair manner
• Provide transmission related information on an equal basis
• Establish procedures to ensure confidential information is not inappropriately communicated.
Ms Bertoldi notes that neither “confidential information” nor “inappropriate communication” are defined in the legislation. However, as Mr. Campbell mentioned, a working paper is being developed and stakeholder comments are being invited up to November 21st, 2014.
Ms. Bertoldi largely concurred with the multiple approaches to procurement identified by Mr. Campbell noting that the legislation makes accommodation for both market-based procurement and contract procurement.
In regards to the New IESO’s finances, one change is that the business plan of the New IESO must be approved by the Minister. There is no deemed approval. The OEB will review the organization’s revenue and fees annually and the Auditor General may audit the New IESO’s accounts and transactions.
Ms. Bertoldi believes that oversight is a fairly large unanswered question for the New IESO. For example, the process or processes to resolve disputes between the New IESO and market participants is still unknown. One mechanism for review is that “Enforceable Provisions” of the Electricity Act are reviewable by the Ontario Energy Board upon complaint to determine if the New IESO has complied with its own by-laws and legislation. Interestingly, the provision that prevents the IESO from disclosing confidential information is not currently designated as an “Enforceable Provision”. Consequently, it is not subject to that form of review.
Ms. Bertoldi concluded her presentation by identifying other outstanding questions that remain unanswered and warrant consideration. The questions cover:
• Governance and Structure Bylaw for New IESO
• Organisational Structure of New IESO
• Credit rating of new IESO
• Further transitional details.
Peter Wallace, the Ontario Visiting Fellow with the School of Public Policy and Governance at the University of Toronto, joined in congratulating Mr. Campbell on his new role and thanking Colin Andersen for his contributions to the energy sector.
The central question Mr. Wallace addressed throughout his presentation is whether or not the powers of the new agency are appropriate and necessary. Mr. Wallace began by answering yes to this question, believing that the powers are mostly appropriate and that they will help to ensure incremental progress and stability for the sector. Mr. Wallace expressed his belief that the core priority of the new IESO is to begin implementation and get on with its job, in line with Mr. Campbell’s earlier comments.
Mr. Wallace supported his answer first by establishing some context. There has been a lot of upheaval in the Ontario energy sector over the last twenty years. He characterized the policy changes as sometimes exhibiting excessive speed, overreach, and long periods of settling in and working out how changes will operate through the system. He believes this has made the tasks of energy market participants and regulators more problematic. Adding to that is the fact that the challenges of the new IESO are already inherently difficult.
A core responsibility of the new IESO is to maintain reliability. This responsibility stems from the unique role electricity plays in society and because of the physical characteristics of electricity, namely that it must be consumed as it is produced. He finds this reality can be at odds with the commercial or political thinking that sometimes drives policy. These contrasts between physical reality and policy thinking makes the current IESO’s, OPA’s and the New IESO’s challenges more difficult in the short run.
Mr. Wallace identified additional challenges the new IESO faces including aligning incentives to efficiently secure supplies and minimize price, mitigating carbon externalities, supporting economic development, and strengthening commercial and other ties with other regions. Mr. Wallace believes these tasks are ones that all government parties have found important.
Mr. Wallace noted that the only challenge the New IESO faces that was not faced by the OPA and IESO separately has been discussed by both Mr. Campbell and Ms. Bertoldi: The prevention of conflicts of interest between the those who manage the system and those who contract with external parties to supply the system. The familiarity of all the other challenges gives Mr. Wallace reason to believe that the New IESO is in good shape to implement incremental improvements.
Mr. Wallace’s personal view is that energy agencies should be able to work to achieve their goals independently from day to day policy direction. He is particularly keen on markets and market signals to drive incentives and achieve efficiencies. This is often difficult for governments to implement as they feel direct accountability to the public for energy decisions. Mr. Wallace believes that the breathing room created by the IESO-OPA merger will allow the government and IESO to work together to re-establish a greater degree of independence.
Mr. Wallace expects that the New IESO will be able to put reliability first, to find efficiencies, prevent conflicts, capitalize on synergies, and provide the best policy advice possible to governments.
George Vegh, who heads the Toronto energy regulation practice at the law firm of McCarthy Tétrault, defined the topic of his presentation as regulatory and oversight issues associated with the new IESO. He believes that the “New IESO” will be trying to accomplish a very complex task, operating a competitive market as a government agency implementing multidimensional policy goals.
Mr. Vegh began by identifying 5 key tests of good regulation:
• Is the action or regime supported by legislative authority?
• Is there an appropriate scheme of accountability?
• Are procedures fair, accessible, and open?
• Is the regulator acting with sufficient expertise?
• Is the action or regime efficient?
He focused on one in particular, “Is there an appropriate accountability”. He also addressed “Is the action or regime supported by legislative authority”.
The two accountability schemes from the old legislation have been combined to form the single accountability scheme for the new legislation. Mr. Vegh noted that the old legislation was put in place with no experience to indicate how effective it would be. [Slide 4] Experience with it since then has shown that there have been some serious challenges. The IPSP for example has been replaced by the LTEP with no OEB review. Unfortunately the old scheme of accountability is still in the new legislation. In addition, the OEB’s review of the OPA and IESO fee cases in Mr. Vegh’s view, have not been very effective. This is evidenced by a history of virtually no fee disallowances and the cancellation of the IPSP review. Additionally, the reviews of IESO market rule amendments have also been less effective than might be preferred. For example, the requirement that the review take no longer than 60 days makes it virtually impossible for the OEB to perform a meaningful review for any complex matters.
Mr. Vegh feels that the lesson from the current system is that the mechanisms for oversight and review didn’t work very well. This is because the current system is both too ambitious and too constrained. The system was too ambitious because it presumed that the government would leave development of an IPSP to the OPA and OEB. Mr. Vegh believes that governments see these instruments as policy choices and the current oversight system didn’t take this into account. The current system was too constrained because, for example, it didn’t allow for effective review of fees and market rules as mentioned above.
Mr. Vegh advocates for a middle ground, which he described as a focused approach. He believes that such an approach offers the potential for fact-based review, including capture of societal value, and takes into account the context of the agency and its decisions.
To develop such an approach, Mr. Vegh recommends first looking at why there is a need for regulation. In the New IESO’s case, the IESO controls access to the transmission service and spends public money for services it provides on a monopoly basis. [Slide 8] This suggests that IESO could be looked at as a public utility, similarly to Hydro One, which also controls access to the transmission system. The OEB is used to regulating public utilities and has expertise in that area. Mr. Vegh suggested that the IESO be regulated like other public utilities, on a tariffed basis and subject to OEB review. This is the practice commonly used in the US. Ontario’s current IESO oversight mechanism is, in fact, an outlier.
Mr. Vegh noted that this form of review could be implemented using current mechanisms without legislative change. He also identified areas where he believes there is room for legislative change. The development and approval of the IPSP by the OPA and OEB could be removed. This IPSP process is not being used and is therefore inappropriate to retain in legislation and raises a number of issues. The restrictions on the timing and scope of market rule amendment review processes could also be removed.
To conclude, Mr. Vegh does not believe that legislative change is necessary. His key oversight recommendation is to treat the “New IESO” as a public utility for regulatory purposes that he believes can be accomplished under the current legislation.
Moderator Valerie Helbronner addressed a question to Mr. Wallace, asking him to expand on why he feels sanguine that a modest amount of de-politicization of the sector may take place in a the coming period he described as relatively stable.
Peter Wallace related several reasons for his assessment. The first is that it seems apparent from the Ontario Energy Minister’s latest speech that de-politicization is his policy intention. In addition, Mr. Wallace believes that the reason governments intervene is because they are under pressure. The new IESO’s expected strength, expertise, and governance structure should help relieve some of the pressure and allow the government to take a more hands off approach.
George Vegh added that his observation has been that the government does not intervene in the energy sector only in response to pressure. Rather they sometimes treat the energy sector as an aspect of public policy. He is unsure that the government’s actions in policy are as predictable as was suggested by Mr. Wallace. Mr. Vegh’s perspective is to look at how regulation can be accomplished, taking the expected intervention of the government as a given, and to look at where government intervention have the most benefit.
Ms. Bertoldi pointed out that the current level of regulatory certainty in Ontario has been identified as a strength by the finance industry. She believes that what people are really looking for is stability and predictability of the rules, more than one particular set of rules. While the government has a role in energy, what the sector really needs is certainty and consistency. This may come after the work to implement the IESO-OPA merger is largely complete.
Ms. Helbronner next noted that the OPA, while have having received criticism, has tried to manage contracts on a level playing field. Given the issues described above regarding separation of market operation and contract management and the New IESO, she asked how the panelists felt that contract procurement and management might change.
Ms. Bertoldi began by relaying that she feels it is well understood by the OPA and market participants that certainty and clarity around contracts is necessary. She believes the New IESO will have the same belief and expects the certainty and clarity surrounding contracts to continue going forward.
Mr. Vegh expressed his hope that this is the case although he does not believe it should be accepted as a certainty. The merger will be complex and it will be necessary to make accommodation to achieve proper separation between market operations and contract management. Mr. Vegh has heard the IESO express concern that the current separation is a little clumsy and that synergies might be achieved if more integration between the departments could be achieved. He noted that further integration could give rise to conflicts of interest, but at the same time it could also create opportunities for synergies. Mr. Vegh would be more confident about eliminating conflicts of interest if the separating mechanisms were more transparent and firmly established.
The next question posed to the panel asked how oversight of the procurement planning processes will be achieved given that the procurement process and associated review and approval of the IPSP is not used.
Ms. Bertoldi answered by noting the OPA’s current process, while not perfect, has indicated the types of contracts it will enter into and solicited feedback from the industry on drafts of RFPs and procurement contracts. While perhaps less transparent than the original concept for an OEB-reviewed procurement plan, the OPA’s current process is, on the whole, fair, and has resulted in financeable contracts.
Mr. Vegh further noted that because the IPSP process was never used, the OPA’s actual procurement processes have been the result of directives. This has attracted criticism but it is a valid legal regime. The New IESO’s procurement plans regarding capacity auctions are essentially a procurement process. The New IESO will be governed by the new legislation and Mr. Vegh expressed his feeling that the processes the New IESO uses would need to benefit from oversight similar to the kind of close oversight FERC exercizes over US capacity markets.
Ms. Helbronner followed by asking the panel how they felt the use of directive powers may change and how they might be used with the new merged entity.
Mr. Vegh noted that he has not heard much discussion on this issue. The Minister has noted that RFPs could be technologically neutral but they generally haven’t been neutral in the past. Likely the answer to this question will only become apparent as the new circumstances play themselves out.
Mr. Wallace agreed with Mr. Vegh that politics can never be completely taken out of energy. There are good reasons for this given the accountability of ministers for decisions made by energy agencies. Mr. Wallace sees directives as often coming in flurries in response to policy objectives like the Green Energy Act or policy requirements like increased supply. As these directives work their way through the system and the sector becomes more stable, he expects fewer, less urgent, and longer time frame directives to become the norm.
Ms. Bertoldi’s view is that it is clear the government doesn’t want to give up the right to direct the sector. The directive power will therefore remain, as it is useful for that purpose. She believes we should recognize that directives will continue to be used and the idea of a completely neutral agency is unlikely. Governments of all parties want a say in the electricity sector and directives are a mechanism for them to have one.
Ms. Helbronner posed one final question to the panel, asking how they felt the merger of the OPA and IESO, which is really a merger of people, will play out given that the organizations are quite different and each has their own corporate culture.
Ms. Bertoldi noted that while the merger will be a big change on a personal level, the organizations are composed of competent, knowledgeable professionals and she expects it will result in a strong new organization that combines the strengths of its predecessors.
Mr. Wallace concurred with Ms. Bertoldi and noted that the legislation driving the merger is not new news – it has been under consideration in one form or another for more than 2 years. While this does not minimize the difficulties that will be faced, it means there has been considerable notice that should be helpful to those involved.
Mr. Vegh also agreed about the level of competence of staff in the new organization and noted that there are two very talented groups coming together. He wondered what the agency will look like in the coming years as the IESO has been primarily concerned with system operations and economic efficiency whereas the New IESO must be multi-dimensional, addressing public policy objectives such as conservation, renewable power, smart grid development and so on. Will it be more like an operational agency or more like a policy agency? Mr. Vegh is interested in seeing how the New IESO evolves and what the conversation will be at next year’s APPrO.
Copies of the speaking notes / slide presentations by Bruce Campbell, Linda Bertoldi and George Vegh are available from APPrO on request.
Report by Mitchell French with files from Jake Brooks.