When investors and potential new competitors examine Ontario, or any market, to determine whether it’s a good place in which to commit their capital, human and otherwise, they are invariably looking for one thing: Will each player have essentially the same opportunity to sell their product at a reasonable price? In a complex system like the electricity grid, where a high degree of technical administration is necessary, this is a critical question. If the system is unnecessarily at risk of being run like a black box, with administrative decisions made, and rules changed, without proper explanation or input from the participants, then everyone is left wondering whether next week a unilateral ruling will come down that impedes their operation and in effect, their access to the market.
That’s why APPrO and others have taken a strong position on the IESO’s latest proposal to change the structure of the IESO Technical Panel. Renewing the panel makes sense, but not all options are equal. It’s crucial to make sure the approach taken to renewal enhances the operation of the market.
Over the last few years in Ontario, the market has played a declining role in supporting investment decisions. Most such decisions have been based on contract arrangements funded through the Global Adjustment Mechanism. Market mechanisms are largely limited to dispatch and related settlement, including notably import and export mechanisms. The shifting of DR from a contract mechanism to a market mechanism is relatively unusual – a move to restore the importance of the market in supporting a class of investment decisions. In principle, the actual and perceived integrity of the market rule amendment process centered on the Technical Panel is essential to economic investment in necessary resources. Any weakening in the governance of the market rules would impair the potential utility of future market-based based systems in supporting investment, including any capacity market mechanism that arises from present discussions.
An important component of the credibility of Ontario’s wholesale market design is that it is fundamentally a dependably rules-based system, designed to facilitate open competition. Aside from public policy dictates handed down by government, changes are supposed to be made only through a well-defined process of proposals and review that includes all affected market participants. The process of inviting and considering informed, reasoned discussion of stakeholder concerns before recommendations are formed or choices made is foundational. These principles of operation are designed to reduce uncertainty and maximize transparency. In addition to its many other benefits, such an approach minimizes unnecessary costs of participating in the market and thereby reduces the ultimate cost to consumers. No system is perfect of course, but the commitment to maintaining a transparent rules-based system has made it possible to see incremental improvement, and it may assist Ontario in securing the commitments of informed investors from across the sectors and around the world.
The rules in Ontario are very specific, and the change process is very well-defined, precisely because that creates confidence.
The origin of the IESO Technical Panel (TP) goes back to the early days of Ontario’s market design. It was critical to the Market Design Committee in 1998 that stakeholders would have confidence in the structure and the process by which the market is run, and over how change is managed. The high-level purposes of the TP therefore include facilitating the operation and development of a healthy market for electricity, with all the complications that entails. This is core to the credibility of Ontario’s market, both practically and perceptually. In many respects, the TP was tagged with the responsibility of carrying on with the mandate of the Market Design Committee itself.
It was time for renewal
Although numerous suggestions had been made in recent years that it might be time to look at changes to the structure of the IESO TP, including a review of the TP in 2014, there had been no IESO communications or formal discussion on the question for more than a year, and the issue appeared to have gone dormant. On November 24, 2015 however, this all changed. IESO staff released a proposal to redesign the fundamental basis on which the TP is constituted. A briefing memo from Alexandra Campbell, Manager of Stakeholder and Public Affairs, explained that the proposed changes were reasonably straightforward in concept:
a) Maintain the voting provisions of the Panel, but clarify that the Panel’s primary purpose is to advise the Board
b) Restructure the composition of the Panel in a way that reflects the current situation of Ontario’s electricity sector but also allows flexibility going forward
c) Enhance transparency and awareness, and
d) Maintain the “warrants consideration” vote, except in cases where a formal stakeholder engagement initiative has already been launched.
Proposals of this nature were seen by many as reasonable matters for discussion amongst concerned parties. APPrO and others thought they could be dealt with properly and effectively through existing mechanisms that provide for open consultation and if necessary, changes to the Technical Panel bylaws.
However, the method proposed by the IESO to implement these changes was to completely discard the governing bylaws of the Technical Panel and to replace them with a new Terms of Reference document that would re-make the very basis of its existence. No information was included about how these governing Terms of Reference would be reviewed or changed in the future. In fact, no opportunity for stakeholdering the entire proposition was even provided for, until members of the Technical Panel and others objected to a change so important being prepared without careful development and full consultation. It was heavily ironic that a body that took part in so much of the critical stakeholder review and comment processes for the IESO might itself be fundamentally reconstituted without similar attention to process.
True to form, market participants began to bring forward suggestions, starting in December 2015. The TP meeting of December 2015 discussed options for organizing a process of consultation.
Issues raised with the Terms of Reference
APPrO President Dave Butters wrote to the IESO on January 8 raising a number of concerns with the proposals. First was the provision in the proposed TP Terms of Reference that would authorize the Chair of the TP and the Chair of the IESO Board to make decisions unilaterally on any “circumstances not covered in this document.” Because the Terms of Reference document is worded very generally, almost any particular circumstance could be construed by them as not covered by the Terms of Reference. A provision of this nature inevitably raises concern because no one, aside from those two individuals within the IESO, would be able to ascertain in advance whether or when the Technical Panel might be completely circumvented. APPrO’s letter also objected to the apparent intention of the Terms of reference to limit the TP’s scope to questions of language only: “As the only body within the IESO where sector representatives vote to make recommendations to the IESO Board on proposed market rule amendments, the TP is a vital forum for a discussion of all elements of the IESO rule making process, including design, language, and from time to time, issues of policy.”
The proposed Terms of Reference document said that categories of market participants (i.e. generators, consumers, transmitters, distributors, and “energy related businesses and services”) should be represented on the TP in future, but left uncertainty in terms of how many representatives should be allocated for each category. It also appeared to suggest that in future, the Secretary of the TP would prepare only a meeting summary, rather than a full set of detailed minutes after each meeting. This would seriously impair the ability of stakeholders to understand and contribute to the work of the TP, APPrO suggested.
The IESO had indicated that in its view Terms of Reference were preferable to bylaws for the TP because it can be cumbersome to change bylaws. APPrO stressed, in its January 8 letter, that “if, after careful stakeholdering, it is agreed by all parties that changes should be made, then the existing bylaws can be amended accordingly and without undue difficulty.”
Principles that need to be enshrined
For critical functions like those performed by the Technical Panel, bylaws are necessary for transparency. The original designers put a lot of thought into what is required to foster an effective market. Part of their reasoning was that it is appropriate to have certain characteristics of the system be firmly entrenched, and not become subject to change without full consideration and in effect “substantial consensus.” Although the circumstances of the market may be different today, and changes probably need to be considered, we are a long way from substantial consensus on the specifics of such change.
Quite likely, when the Ontario electricity market was designed, the structure of the Technical Panel was defined in part to clarify the distinctions between the views of the market operator and its owner, from those of the actual market participants. While the market operator and its owner have a vital interest and are entitled to a strong role in overseeing the system, governance of the system must serve broader needs than their interests alone. Free operation of the market, and equitable treatment for all participants, is what allows for confidence and innovation to grow in all corners. Within the guiding parameters set by public policy, governance in the electricity system should be designed to achieve what’s best for the market as a whole. For these reasons, although the needs of the market operator are essential considerations, it’s important not to place undue priority on the convenience of the market operator, if it comes at the expense of the market as a whole.
No doubt these developments have prompted active discussion in many quarters on what principles should operate when change seems to be ever-present and accelerating. Fortunately, people have been thinking about the management of change for some time, and many have identified useful principles with some durability. Some of the principles run along the following lines:
1. Maintain the transparency and credibility of governance processes - even more important in turbulent times when change is occurring in multiple contexts.
2. Maximize certainty where it is practical to do so, such as through established bylaws with clear definitions on what they cover, how they are set and how they are changed, creating stability in the perceived structure of the sector and confidence in the process of responding to change.
3. Ensure that open processes with well-functioning broadly-based critical assessment procedures are the norm, and seen to be the norm, before any significant decisions are taken. Avoid any procedures that unnecessarily lead to ambiguity, uncertainty, and/or perceptions that key deliberative bodies are a department of a central agency or have an interest in operating as little more than a rubber stamp for preferences of the central administration.
4. Take no action that would leave room for these bodies to be perceived as an appendage of central agencies controlled by their staff. It is important for market confidence that deliberative and consultative bodies retain their function as the locus of meaningful debate and careful consideration.
5. Retain as an over-arching priority recognition of the principle that functional markets are good for society. They reduce costs for consumers, they create predictability for market participants, and they support the development of long term structures on which to design the sensible forms of public policy necessary to achieve a wide range of public objectives.
APPrO’s letter to the IESO, along with the IESO’s proposal for the TP, are posted on the What’s New page of APPrO’s website, so that all concerned parties can become engaged in the discussion. APPrO’s comments and those of others were not available on the IESO website until late January, likely because the standard stakeholdering engagement processes had not been initiated on this question. The IESO subsequently posted stakeholder comments and its responses.
Finding the appropriate steps forward
One of the greatest worries amongst market participants, especially considering that the IESO has been amalgamated with the OPA, is that decisions might be made within the bureaucracy with little consideration for their impact on the sector or the market as a whole. Market integrity and functionality should be paramount, not just in the decisions made, but in the process used to make changes.
With Generators being counter-parties to major contracts, and given that the overwhelming percentage of rule changes are directed at the generation community, it’s not hard to see why generators are quite concerned with the proposed changes. The current rule-making process has been well thought-out and painstakingly refined over many years. It reflects a key distinction between the function of the Technical Panel and that of the SAC (Stakeholder Advisory Committee) in that the TP is very involved in the rule making process, with its own mechanism to collect and process stakeholder comments.
Fortunately, the process of TP review has not been completed. There are general indications that the IESO is prepared to discuss the issue further, and stakeholders are no doubt preparing to show just how effectively they can contribute to the development of constructive proposals for evolution of the market and the TP.
Maintaining the credibility and trust placed in Ontario’s electricity market is key not just for the market participants, but for everyone who uses the energy system, and for the effectiveness of all public policy based on it.
To quote from APPrO’s letter, “The activities of the TP represent a vital step in the rule making process. We thus strongly support the need for a robust and clearly-defined set of rules governing its activities.”
— Jake Brooks, Editor