Canada: Government Of Ontario Introduces The Ontario Electricity System Operator Act, 2012

INTRODUCTION

On April 26, 2012, the Minister of Energy, the Hon. Chris Bentley, introduced for first reading the Ontario Electricity System Operator Act, 2012 ("Bill 75"). This proposed legislation would amend the Electricity Act, 1998, to amalgamate the Independent Electricity System Operator ("IESO") and the Ontario Power Authority ("OPA") into one new non-share capital corporation called the Ontario Electricity System Operator ("OESO"). A number of other Acts governing the Province's electricity sector are also amended.1 The overall purpose of these amendments is to enable the functioning of the new OESO and provide for any necessary transitional arrangements.

GOVERNANCE OF THE OESO

Status of OESO

Part II of Bill 75 (which repeals Parts II and II.1 of the Electricity Act) outlines the responsibilities, corporate structure and the governance of the OESO. The OESO will be a non-share capital not-for-profit corporation, with powers to borrow and invest its funds and manage its financial assets that are to be more fully prescribed by regulation. The OESO will not be an agent of the Crown.

Objects of OESO

The proposed new section 6 of the Electricity Act sets out the 18 detailed objects of the OESO. Essentially, these are the same objects of the former IESO combined with a number of objects related to the functions of the OPA, including facilitating load management, conservation, and long term supply planning. Some of the objects of the OESO include:

  • To exercise the powers and perform the duties assigned to it under the Electricity Act, the regulations, directions, the market rules and its licence;
  • To enter into agreements with transmitters to give it the authority to direct the operation of their transmission systems;
  • To direct the operation and maintain the reliability of the OESO-controlled grid; and,
  • To engage in activities related to contracting for the procurement of electricity supply and capacity.

Board of Directors of OESO

The IESO and OPA boards of directors would be eliminated and the OESO would be comprised of a Board of 8-10 independent directors that do not represent any class of persons. The OESO will also have a single Chief Executive Officer. The Minister of Energy has the power to appoint the directors.

Governance and Structure By-Law of OESO

The Board's activities are regulated by the Governance and Structure By-law which is outlined in the proposed new section 21 of the Electricity Act. Key features of the by-law are: the appointment of the Chief Executive Officer and Chair; remuneration of the Chair and the Board; conflicts of interest; delegation of powers; the establishment of panels and the circumstances in which a director ceases to hold office. Each director is to hold office for two years and may be reappointed for successive terms not exceeding two years.

Separation of Functions

The Board of Directors of the OESO will be required to ensure that there is an effective separation of functions and activities of the OESO relating to its market operations and its procurement and contract management activities. How this separation will be achieved remains to be determined. The OESO will be prohibited from conducting itself in a manner that could unduly advantage or disadvantage any market participant or any party to a procurement contract; or interfere with, reduce or impede a market participant's access to the transmission or distribution systems. The OESO will be required to provide transmission related information on an equal basis and in the same manner to all market participants.

OESO STAKEHOLDER CONSULTATION

The new section 17 of the Electricity Act would provide that the OESO may, or when directed by the Minister of Energy shall, establish processes to obtain advice and recommendations from consumer groups, distributors, generators, transmitters, and others who have an interest in the electricity industry for consideration by the OESO. This replaces subsection 13.2 of the Electricity Act that directed the IESO to establish processes by which these groups may provide advice for consideration by the IESO. The key difference is that the OESO will now be directed by the Minister to establish these stakeholder input processes.

BUSINESS PLANS

As with the OPA and IESO, the OESO must provide its business plans to the Minister of Energy at least 120 days before the end of the fiscal year for review. The Minister may approve the plan or refer it back to the OESO for further consideration. In addition, the OESO is required to submit to the Minister its proposed expenditure and revenue requirements 60 days before the end of each fiscal year. Once the Minister approves the OESO's business plan, the OESO will also have to provide to the Ontario Energy Board ("OEB") its expenditure and revenue requirements and the fees it proposes to charge during the fiscal year for approval. The OEB has the power to approve the proposed fees or refer them back to the OESO for further consideration with the Board's recommendations

OESO FINANCING

The Minister of Finance, as authorized by cabinet, may purchase securities or make loans to the OESO. However, the OESO can recover its costs through rates as the OPA and IESO presently do.

ENERGY PLANS AND ASSESSMENT ACTIVITIES

Section 25.30 of the Electricity Act that deals with the Integrated Power System Plan would be replaced with a new energy planning process. In the proposed new subsection 25.30 (1), the Minister may, in consultation with the OESO or any other person, develop and, with the approval of cabinet, issue energy plans. In addition, in developing the energy plan and before issuing it, the Minister shall consult with the OEB on the impact of the implementation of the energy plan on a consumer's electricity bill and the methods for managing the impact. In addition, the Minister shall refer an energy plan to the OEB for the review of its estimated capital costs and the Minister may require the OEB to review any other part of the energy plan in the referral.

Consulting the OEB on the potential impacts of the energy plan on consumer bills will impose a new process for analysing the impacts of any energy plan on consumers. Moreover in a change from the original Integrated Power System planning obligation which was placed on the OPA, the Minister of Energy is now directly responsible for energy planning.

As part of the transition from the IESO and OPA structure, the new OESO will now have to report to the Minister of Energy in respect of its assessment activities related to short, medium and long term energy planning. Regulations may also be developed that may prescribe one or more assessment periods for energy supply planning.

PROCUREMENT CONTRACTS

The OESO will be responsible for procurement of new electricity supply as directed by the Minister. The definition of procurement contracts will mean "a contract, entered into or assumed by the OESO pursuant to a direction of the Minister issued under section 25.32 or 25.35 for the procurement of,

  1. electricity supply or capacity;
  2. reductions in electricity demand; or
  3. measures related to the conservation of electricity or the management of electricity demand."

Exceptions to this provision would include transactions, arrangements or agreements entered into by the OESO based on market rules. These are deemed not to be procurement contracts for the purposes of Bill 75.

Specific transition amendments are also included for procurement contracts. The proposed new subsection 2(11) of the Electricity Act states that procurement contracts include contracts entered into by the OPA or the IESO comes into force.

The Minister is empowered to direct the OSEO to enter into or undertake various procurement activities or enter into various procurement contracts. The Minister also has the authority to direct the OSEO to assume the role of the Crown or an agency of the Crown in respect of various procurement activities.

TRANSITIONAL ISSUES

The cabinet may make regulations governing transitional matters necessary or useful to facilitate amalgamation of the OPA and IESO. This includes the merging or segregation with the new OESO of various functions performed by the OPA or IESO.

AMENDMENTS TO THE ONTARIO ENERGY BOARD ACT, 1998

The OEB Act would be amended in order to facilitate the implementation of the energy plans the OESO brings forward. These include short term, medium term and long term energy plans. In addition, other amendments would enable the OEB to specify as a licence condition for local electricity distribution companies that they meet (at their discretion) part of their conservation targets by contracting with the OESO.

NEXT STEPS

Bill 75 was tabled for first reading on April 26. Second reading occurred on May 3 and the Bill will likely move to a Standing Committee of the Legislature for debate and stakeholder input. Depending on other legislative matters and the priorities of the government and opposition parties, the Bill may be passed by the end of the current session in mid June.

OTHER NEWS: HYDRO ONE'S CREDIT DOWNGRADE

Moody's Investor Services downgraded Hydro One's senior unsecured rating to A1 from Aa3 (outlook stable). Moody's notes that this rating action is being taken in conjunction with the downgrade of the Province's senior unsecured rating to Aa2 (outlook stable) from Aa1 (outlook negative). The rationale for Hydro One's downgrade is the slow growth expectations for the provincial economy. The concern, as expressed by Moody's, is that the Ontario government may address its major budget challenges in a manner that negatively impacts Hydro One's financial performance.

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