In this issue

• A review of the Ontario Government's Bill 100, The Electricity Restructuring Act, 2004

A review of the Ontario Government's Bill 100, The Electricity Restructuring Act, 2004

The Electricity Restructuring Act, 2004

On December 9, 2004, the Ontario Legislature passed the Electricity Restructuring Act 2004 (the “Act”), which will significantly restructure Ontario's electricity sector. The Act introduces a hybrid electricity market model -- a mixture of government regulation and private sector competition. Regulation will continue with respect to the price of electricity charged to certain consumers and the output of some of the plants owned by Ontario Power Generation Inc. (OPG), while other areas of the electricity sector will be subject to competition. The government has created a new agency, the Ontario Power Authority (OPA) to oversee and facilitate electricity supply adequacy and conservation.

The Act enacts many of the recommendations of the Electricity Conservation and Supply Task Force of the Ministry of Energy which reported in January 2004. The Task Force reported that Ontario would have to build over 20,000 MW of new generation by 2020 if the province is to meet rising demand and the requirement to replace phased-out coal fired generation and aging power plants. Depending upon the fuel sources for the power, it is estimated that an investment of $25 to $40 billion would be required to achieve this target. The Act is intended to facilitate the building of new required generation, as well as to dampen demand through conservation initiatives.

Summarized below are the key provisions of the Act. It principally amends the Electricity Act, 1998 (the “Electricity Act”) and the Ontario Energy Board Act, 1998 (the “OEB Act”). Other consequential amendments made by the Act are to the Assessment Act and the Corporations Tax Act.

I. Creation of the Ontario Power Authority

The Act creates the OPA, which is an independent, self-financed, non-profit corporation, expected to be operational by early 2005. It is charged with a mandate to ensure long-term supply adequacy in Ontario. Both the Minister of Energy and the Ontario Energy Board (OEB) will oversee the OPA. The Minister of Energy will (i) appoint the 11 members to the OPA board; (ii) set generation and conservation directives and goals; (iii) draft regulations for procurement contracts and settlement methodology; and (iv) approve both the business plan and the budget of the OPA 1. On the other hand the OEB will (i) license the OPA; (ii) approve its fees and charges (which allows the OPA to recover its costs and expenses); (iii) review its Integrated Power System Plan; and (iv) approve the OPA procurement process and settlement and variance mechanisms. The Independent Electricity System Operator (IESO), which is the former Independent Electricity Market Operator (IMO), has been designated to collect the OPA fees and charges.

The new agency, as outlined in Part II.1 of the Electricity Act, 1998, will undertake the following activities:

• developing creative solutions and approaches to achieve greater efficiencies in the wires sector;
• assess the adequacy and reliability of electricity resources for the medium and long-term;
• forecast electricity demand and the potential for conservation and renewable energy;
• prepare an integrated system plan for generation, transmission and conservation;
• procure new supply, transmission, demand management and conservation either by competition or by contract when necessary;
• promote the diversification of electricity sources through cleaner energy sources and technology and alternative and renewable energy sources; and
• stabilize rates for certain consumers.

The Act expressly states that the OPA is not a Crown entity. As a consequence, it will not have access to the Ontario government's credit; nor may the Province provide a guarantee. However, the Province may make loans to and invest in the agency by purchasing its shares. The OPA is to be a creditworthy entity that will be funded by market settlement mechanisms and may borrow on its own credit and charge its assets, namely account receivables of electricity consumers, to finance its activities. The Act also contemplates the establishment of a number of variance accounts where the OPA pays a greater amount to the electricity generators than the amount paid by electricity consumers.

The OPA's board is to consist of 11 directors with a chief executive officer and 10 additional members all of whom are to be independent of participants in the electricity sector and appointed by the Minister. A number of commentators have questioned the practicality, and the advisability, of requiring all OPA board members to be free of ties to the electricity industry.

The Act also introduces a Conservation Bureau, which is to be led by the Chief Energy Conservation Officer (CECO). The Conservation Bureau is to take a leadership role in planning and coordinating electricity conservation measures and load management. The Minister will appoint the initial CECO and subsequent CECOs are to be appointed by the board of directors of the OPA. Each year, the Bureau will be required to report its results to both the OPA board and the Minister. The report must describe the steps taken to implement the current year's proposal for energy conservation and the results achieved and becomes public seven days after it is filed with the OPA and the Minister.

The OPA's obligation to assess electricity resources with respect to supply, capacity, reliability and demand is to be carried out for each assessment period. The “assessment period” has yet to be established by regulation. In furtherance of its mandate, the OPA will be required to develop an integrated power system plan to meet the Ontario government's goal of adequacy and reliability of electricity supply. The OPA is empowered to enter into generation and transmission and procurement contracts where necessary. The OPA is enabled with a broad ability to recover its costs and payments associated with procurement contracts. The integrated power plan created by the OPA will be presented to the Minister may be reviewed by the OEB to ensure that it is compliant and addresses the directives set by the Minister as well as being economically prudent and cost effective. The OEB may approve the plan or send it back to the OPA with comments for further consideration and resubmission to the OEB.

The Act calls for the OPA to develop appropriate procurement processes to manage electricity supply, capacity and demand and develop a simpler procurement process for the generation of alternative and renewable energy. The OEB must review and approve all procurement processes established by the OPA. The Act transfers the provincial government's Request for Proposal (RFP) process for new electricity generation or demand side management to the OPA and includes RFPs already in process such as the RFP for 300 MW of renewable energy capacity (recently awarded) and the RFP for 2,500 MW of new generation capacity and demand-side initiatives. The Act also allows for the transfer to the OPA of contracts that the Ontario Energy Financial Corporation (OEFC) has entered into, which would include the non-utility generator contracts.

II. Electricity Price Adjustments

Regulations under the Act will require the IESO, electricity distributors and retailers to make adjustments to their billing systems so that payments made by consumers are equal to the payments made to the generators, the OPA and OEFC. The Act introduces a blended electricity price from various generation sources. The following consumers will be exempt from the new blended electricity price:

• low-volume or designated consumers paying the current fixed electricity price;
• low-volume or designated consumers whose rates are to be set by the OEB in 2005; and
• consumers described by the regulations.

The Act maintains a regulated price for some classes of Ontario since the concept of the “low-volume” and “designated” consumer is retained. The OPA will make the adjustment payments that are now made by OEFC, and is required to make up the difference for low-volume, designated consumers and electricity retailers prior to November 11, 2002.

III. Renaming and Redefining the IMO

As mentioned earlier, the IMO is renamed the IESO and is continued as a non-share corporation. The IESO will continue to operate the wholesale market and be responsible for the operation and reliability of the power system. However, the IESO's duties in relation to the forecasting of electricity demand will be reduced to short term forecasting. The role that the IMO played in medium and long-term electricity planning is transferred to the OPA. The IESO will continue to provide information to the public regarding the current and short-term electricity needs of the Province and the ability of the integrated power system to meet those needs and the Act will also require that the IESO provide this information to the OPA.

To remove any appearance of conflict of interest, the responsibilities of the Market Surveillance Panel of the IMO, which conducts surveillance and investigates abuse of the wholesale electricity market, are transferred to the OEB. The Act introduces immunity from liability for officers, employees and agents of the IESO acting on behalf of the Panel.

The IESO must submit its business plan and budget to the Minister 90 days prior to each new fiscal year and, once approved by the Minister 2, the business plan and budget must then be submitted to the OEB. The OEB continues to be responsible for the review and approval of the IESO's expenditure and revenue requirements but will not approve the remuneration of the IESO's board of directors.

The Act also introduces changes to the board of directors of the IESO. The IESO board will consist entirely of independent directors, not employed by the energy industry or its stakeholders 3. The Act amends the Electricity Act, 1998 to provide that the IESO board is to consist of 11 directors, while the IMO board had to consist of between 10 and 20 directors. The IESO's board, including the first Chief Executive Officer (CEO), is to be initially appointed by the Minister, however subsequent CEOs may be selected by the then current board. The current board of the IMO will be dissolved on the date the Act comes in force. The Act removes a right of recourse for dismissal for the IMO's current directors but does allow them to apply and be appointed to the new board of the IESO should they meet the new qualifications.

The IESO will be required, through its billing and settlement systems, to ensure that market participants will, over time, pay the true cost of electricity, taking into consideration the mix of regulated and market prices payable to generators, the OPA and OEFC. Temporary differences between amounts paid to generators, the OPA and OEFC and amounts paid by consumers will be recorded and cleared through variance accounts established by the OPA.

IV. The Expanded Role of the OEB

The Act makes a number of amendments to the Ontario Energy Board Act, 1998 (OEB Act). The OEB objectives listed in the OEB Act are reduced from a list of seven objectives to two. The objectives which have been notably deleted are for the OEB (i) to facilitate competitiveness in the generation and sale of electricity; (ii) to facilitate a smooth transition to a competitive market; and (iii) to provide non-discriminatory access to transmission and distribution systems for generators, retailers and consumers. This leaves the OEB with two primary functions:

• To protect the interests of consumers so that consumers have access to quality electricity that is reliable, adequate and economical; and
• To support the generation, transmission, distribution, sale and conservation of electricity that is cost-effective so that Ontario can maintain a financially viable electricity industry.

While the OEB will continue to play a role in consumer protection through licensing and rate regulation 4, its role as discussed below has been expanded to ensure the economic efficiency, cost-effectiveness and financial viability of certain elements of Ontario's electricity system.

The Act also changes the manner in which the amounts payable to generators in the province are determined. Currently they are determined through the operation of the IMO-administered markets. While some generators will continue to be paid on this basis, all of OPG's generators will be paid amounts initially determined by regulation. On a date prescribed by regulation, these generators will then be paid amounts determined by the OEB. This arrangement leaves a modest portion of the province's generators selling electricity on the IESO-administered market.

At present, low-volume consumers and designated consumers (primarily municipalities, universities, schools and hospitals) pay electricity prices, which are established by regulation. In the short-term future, these consumers will continue to pay electricity prices set by regulation. However, at some point the OEB is to assume responsibility for setting electricity prices for certain classes of consumers outlined by regulation. While it is not yet known what class of consumers will be paying the regulated price, it is expected that all residential and small business consumers will qualify for it. When determining what this regulated price will be, the OEB will likely consider such factors as contract prices, forecasted market price and the expected cost of electricity consumed by consumers to whom the rates apply and take into account the balances in the OPA's variance accounts. The OPA variance accounts will track the difference between accounts receivable and accounts payable by the OPA for its purchases and sales of electricity. Consumers that are entitled to participate in the regulated rate plan will have the option of purchasing their electricity from energy retailers. The Act states that contracts between consumers and retailers entered into or renewed on or after June 15, 2004 cease to have effect on a date still to be determined by regulation. Consumers are required to reaffirm the contract in accordance with the regulations and where consumers have paid a retailer after June 15, 2004 then, they will be entitled to recovery of any amounts paid.

A Ministry of Energy Backgrounder suggests that medium and large size businesses will not qualify for the OEB-regulated price. These consumers will be subject to prices which reflect the prices received by generators whose prices are set by the OEB, generators who contract to sell electricity to the OPA and generators who sell electricity directly into the IESO-administered market.

The OEB's role has expanded in that it is now responsible for approving the integrated power system plans and procurement processes developed by the OPA. If the OEB considers the proposed plan to be financially unsound or non-compliant with the Minister's directives, the OEB has the authority to send it back to the OPA for reconsideration.

Proposed amendments to the IESO-administered market rules will no longer be reviewed by the Minister, but will be reviewed by the OEB who may revoke the amendment and refer the matter back to the IESO for further consideration.

V. Distributors, Transmitters and Retailers

Section 71 of the OEB Act is amended to allow transmitters and distributors of electricity to carry on business activities other than the transmission or distribution of electricity. Prior to the introduction of the Act, a transmitter and a distributor could only carry on other business activities through an affiliate of the transmitter or distributor. Now, transmitters and distributors may also provide services related to the promotion of energy conservation, demand management and alternative, clean and renewable sources of energy. In this regard, the Act adds the definitions of “alternative energy source” and “renewable energy source” to the Electricity Act, 1998. The former is defined as a source of energy to be defined in the regulations and that can be used to generate electricity through a process that is cleaner than certain other generation technologies in use in Ontario before June 1, 2004. The latter is defined as a source of energy that is renewed by natural processes, but only if such source satisfies criteria that will be defined by regulation.

The Act also amends the Electricity Act, 1998, which allows a distributor not to sell electricity to a person who purchases electricity from a retailer. A distributor will now be required to sell to every person connected to the distributor's system. Therefore, a consumer may in one billing period purchase their electricity from a retailer and then for the balance of the billing period purchase electricity directly from a distributor.

VI. OEFC Contractual Obligations

The Act now requires that the IESO make payments to OEFC with respect to its contractual obligations for power purchase agreements (NUG contracts) entered into by the old Ontario Hydro. Prior to the introduction of the Act, these obligations were funded directly by the Ontario Government. The amounts of the IESO payments are to be prescribed by regulation and the contractual obligations are approximately $3.9 billion.

VII. Inspectors

The Act permits inspectors to require specified persons to produce documentation related to transactions to ensure that the payments by consumers represent the true cost of electricity. The Act also permits inspectors to request and review payments made by the OPA for retail contracts.

VIII. Energy Targets

The Minister of Energy is now authorized to set various targets for Ontario's electricity sector in the areas of conservation and renewable energy and to set guidelines for the diversity of supply. The Minister of Energy, Dwight Duncan has announced some of these targets: for example 5% of Ontario's electricity capacity should be from renewable sources by 2007, 10% by 2010 and electricity demand should be reduced through conservation by 5% by 2007.

IX. Rights of Expropriation

A significant amendment is made to the Electricity Act, 1998, and provides OPG with broad rights of expropriation for land, water and access with respect to Niagara-area facilities and ancillary works.

X. The Application of the Municipal Freedom of Information and Privacy Act (MFIPA) to Municipal Electricity Distributors

The Act removes the exemption in the Electricity Act of the application of municipally owned electricity distributors from MFIPA. Therefore, all municipally owned electricity distributors, their holding companies and affiliates will be subject to freedom of information requests made under the MFIPA.

XI. The Regulations

Some draft regulations have been made public to date: two dealing with the Electricity Act and one dealing with the OEB Act.

a. The Electricity Act, 1998

The first draft Regulation requires the OPA to carry out certain activities in developing its integrated power system plan:

• Consult with interested parties, stakeholders and consumer groups to ensure that their views are considered in the development of the plan;
• Identify and develop strategies to accelerate conservation, energy efficiency and demand management;
• Identify and develop strategies to encourage a competitive market-based response and options for meeting energy needs;
• Identify measures to reduce reliance on the OPA to procure supply and capacity;
• Identify factors necessary to enter into procurement contracts for supply, capacity or demand side management; and
• Ensure that the plan is safe, economic and environmentally stable and sound.

The Regulation requires that the OPA publish all integrated power system plans approved by the OEB on a website accessible to Ontarians and approved by the OEB.

The second draft Regulation establishes four principles that the OPA must comply with in developing its procurement process:

• The process and criteria must be fair, open, clear and accessible;
• The procurement of supply, capacity and reductions in demand must be achieved through competitive processes;
• The selection process shall not be unfair or have conflicts of interest; and
• The evaluation process and criteria must be transparent and clear for bidders.

The OPA must consult with the OEB and the IESO before beginning the procurement process. It must assess the capability of the IESO-administered markets to meet electricity supply and capacity and take into consideration alternative and renewable energy sources and demand side management initiatives that would justify the need to proceed with the procurement process. The OPA must also ensure, to the extent possible, that any contract it enters into does not have the effect of restricting entry into the IESO-administered markets by generators who are not parties to a procurement contract with the OPA.

b. Ontario Energy Board Act, 1998

The Act adds a new section 78.1 of the OEB Act that requires the IESO to pay prescribed generators an amount in respect of output determined by Regulations. The Regulation prescribes the OPG as a generator and the following generation facilities as prescribed generation facilities:

• Sir Adam Beck I
• Sir Adam Beck II
• Sir Adam Beck Pumped Generating Station
• De Cew Falls I and II
• The RH Saunders Hydro-Electric Generating Station on the St. Lawrence River
• Pickering A and Pickering B Nuclear Generating Stations
• Darlington Nuclear Generating Station

The Ontario Government has issued a Consultation Paper, which considers the methodology for setting prices for the designated generation facilities and can be found on the Ministry's website address at:
http://www.energy.gov.on.ca/index.cfm?fuseaction=electricity.regulations.

For further information please contact Gowlings professionals:

David McFadden, QC
Chair, Gowlings Energy and Infrastructure Group
416-369-7243
david.mcfadden@gowlings.com

Paul Harricks
Partner
416-369-7296
paul.harricks@gowlings.com

Tom Brett
Partner
416-369-4628
tom.brett@gowlings.com

Sean Conway
Public Policy Advisor
416-369-4654
sean.conway@gowlings.com

Kelly Murray
Associate
416-369-4612
kelly.murray@gowlings.com

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