Why the OEB Modernization Panel is so timely
In story after story, technology changes are enabling enterprising newcomers to move into fields that have traditionally been dominated by stable long-standing businesses. Time and again upstarts have shown an ability to completely bypass established corporate giants and their traditional markets. Most of the changes are likely to benefit consumers in the end. However special attention may be needed to ensure the benefits stand a chance of being available to consumers in an equitable way.
We are entering a crucial time period. The energy sector may well be undergoing the most fundamental period of change in its history, at least the most fundamental since the construction of the electric power grid. Regulators will likely determine the pace if not the scope.
In this context, the announcement of a new panel to modernize the OEB is very timely. Wide ranging and critical questions are in the air. What exactly should the OEB regulate as the new market structure emerges? What should be handled lightly and what requires new degrees of diligence, oversight and public scrutiny? Does a regulatory model designed for long term stable utilities still work in an era of rapidly changing technology, business models, and intense multi-directional competition? If not, what should replace it?
In some kind of logical sequence, participants will need to examine which market functions need regulatory oversight, which entities need to be regulated, what the aims of the regulatory agency should be, whether new laws are needed, and how to ensure the new regulatory process continues to evolve effectively in future.
Like the regulation of financial services, the energy industry could become too extensive to fit under the control of a single provincial regulator. When moment-by-moment decision making affecting the operation of a facility can be transferred electronically to physically and strategically distant entities, the key players may not be the same ones who are currently subject to regulation.
Standing still is not an option
As with the regulation of the financial services industries, current models need to be updated. Standing still could leave the system unprepared. The conservative approach is fraught with risk.
Although the OEB has powerful legal tools to set the rates of regulated and largely monopolistic wires companies, beyond that the scope of its formal authority is relatively limited. It can set license conditions on regulated market participants, but it doesn’t review the big plans of the main actors, and it doesn’t have authority to regulate outside its predefined turf. The current regulatory tools may be insufficient to fully protect consumers in an era of rapidly evolving service offerings as new technologies impact the financial viability of the wire delivery services model. For example, if the market evolves to a point where it consists of an array of service aggregators who repackage DERs into consumer-oriented offerings completely separate from the originators, while maximizing revenue opportunities through complex balancing and optimizing trades along the way, which of these many functions should (or could) be regulated in the interest of consumer protection? More problematically, might heavy handed regulation delay technological change, cause consumers to miss out on system improvements, and possibly drive innovators to seek opportunity in other friendlier places?
Regulating the wires companies will no doubt remain important, but it could be a sideshow compared to the massive commercial activity possible in the unregulated areas. Quite likely, competitive forces can be employed to a large degree in the new sectors, providing most of the necessary economic discipline on the key players. However, as with other software enabled industries, it is possible that unfair or uneconomic returns will accrue to the owner-operators of certain software platforms. Remember when Microsoft was forced by anti-trust regulators to un-bundle certain parts of its operating system? The energy sector has had that problem in the past. The modernization panel may need to consider the extent to which regulators should be given the tools to at least monitor, if not regulate, the wide range of commercial activity enabled by new technology. It may also need to be given tools to support, or alleviate impediments to, technological change.
Anticipating alternative scenarios
There’s a significant risk that the industry will bifurcate into two distinct parts. On the one hand, a relatively predictable sector characterized by regulated utilities providing assured types of service to conventional consumers is conceivable. On the other hand, an active set of unregulated service providers meeting a wide range of service needs for customers could emerge, with potential for great innovation and financial gain, but little or no consumer protection. What is the role of a regulator in such disrupted times? Would it have to assess cost-shifting or manage the risk of asset stranding in such cases? The panel is well-positioned to address these questions.
The government’s new panel may not be only about adapting regulators to new conditions, but also asking broader questions about how regulatory systems can evolve quickly enough to recognize the changing boundaries of the very sectors they regulate and, indeed, facilitate change and the attendant economic benefits that come with it as well.
Current laws may not be adequate for highly disaggregated, transactive energy markets, but the principle of consumer protection is not going out of style, and consumers will need protection more than ever in an era of DER’s and increased complexity.
Considering the economic drivers in a high tech sector, there could actually be an incentive to continually design new types of operations that are outside the bounds of regulatory law. Technology almost always moves faster than the legal system.
Sketching viable steps forward
In a world where much of the generation, storage and consumption occurs behind the meter, a major component of the regulator's work would likely be focused on ensuring that the upstream infrastructure for managing imbalances and disruptions is adequate and properly financed and that the social policy objectives of the energy system are protected along the way. Conceptually that’s not terribly different than regulating the current systems. It’s largely a matter of figuring out which aspects of wholesale grid regulation need to be applied at the distribution level.
On the strategic level, should the regulator be a visionary and leader, helping to set out the models for new development in the sector, or should it be responsive, watching what happens and focus on ensuring that impediments to investment and innovation are kept to a minimum? Useful questions for debate.
The greatest current challenge may be in deciding whether any of the new sectors require regulation of any sort, and if so, of what sort. The emerging energy-based business ecosystem, and the consumers who will enjoy the benefits and bear the costs, will need to know where they stand.
— Jake Brooks, Editor
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