There are three bodies that oversee the regulation of electricity in Ontario: the Ontario Energy Board (OEB), the Independent Electricity System Operator (IESO) and the Ministry of Energy (MOE) itself. This blog will be a quick look at their operations.
Ontario Energy Board
The OEB is responsible for regulating much of the electricity industry in Ontario. This includes electricity distributors and transmitters. It also includes, to a significantly lower degree, sub-distributors, retailers, the IESO and Ontario Power Generation (OPG). As these are all monopoly service providers this regulatory oversight is appropriate and was created through legislation by the Government of Ontario.
There are two parts to the OEB: the adjudicative and the administrative. The adjudicative part, formerly called Board members and now called Commissioners, hear the actual rate cases and other hearings and make the final decisions. The administrative part manages the relationships with all the organizations they regulate and enforce the rules. They may also participate in the hearings before the adjudicative branch.
The OEB is the most customer-facing part of the government oversight. Their website has valuable information for customers, they try to support customers with their outreach and there is an ombudsman that tries to deal with customer issues.
Over time the role of the OEB has evolved. Initially, the focus was on the core regulatory requirement which is approving rates. As the OEB gained more experience they gravitated to also reviewing the strategic direction of the transmitters and local distribution companies (LDCs).
There has been some good in this. By requiring long-term asset plans, by ensuring cybersecurity awareness and by publishing reliability statistics they have helped focus LDCs on customer needs beyond rates. Other initiatives, such as benchmarks that are statistically irrelevant due to the sample size, and some customer surveys, have missed the mark and not been as effective.
Lately, the OEB has been trying to more directly dictate how LDCs manage their business. Examples include bill presentation (this is not so recent), disconnection procedures, customer communication requirements and, most recently, capacity management. This is problematic for four reasons. First, as a regulator, the OEB does not have the knowledge base to be making some of these decisions. Second, by dictating certain processes the flexibility to respond to some situations is lost which can be to the detriment of some customers. Third, in a related manner the benefits of potential innovation is lost. For instance, I am sure LDCs could come up with a better bill presentation if allowed. Finally, and most importantly, all these mandates add costs which are ultimately borne by the customer.
These changes have not been entirely of the OEBs own volition. There has been a parallel trend with regards to the independence of the OEB from the Ministry of Energy. Initially, the OEB operated largely independently. This is how it should be. Over time, the Ministry of Energy exerted more and more control through letters of direction. These letters were initially sporadic and each focused on a specific new or change in responsibility for the OEB. Now, the letters are issued annually, are many pages long and provide detailed direction to the OEB for the upcoming year. The OEB has naturally responded by shifting their focus to meeting the directions set out in the letter and not necessarily acting in a manner that may be best for the overall long-term performance of the electricity industry. The increased involvement of the OEB and the lack of independence has had another consequence. This can be seen in the chart below. The cost of the OEB has taken off. They are forecasting another big jump in 2025. This is concerning and not just because it is another expanding government entity. As our Chair puts it “regulators exist to create regulations”. The biggest cost of the growth of the OEB will be with all the organizations they regulate who will have to respond to the increasing demands of the OEB. These costs will inevitably end up with the customer.
Independent Electricity System Operator (IESO)
The IESO has a number of responsibilities but the primary ones are operating the electricity market in Ontario, ensuring that supply meets the demand for electricity at all moments and overseeing the safety and capacity of the transmission grid. There are two other responsibilities which are funded separately and are discussed further below.
Most of the electricity sector revenues flow through the IESO. This includes all revenues for transmitters, most generation and any other government programs. The LDCs collect all their billings from customers and then remit over 80% of it each month to the IESO.
The IESO is not customer-facing unless you are a participant in the electricity market or a generator. The closest they get to regular customers would be in dealing with those with MicroFIT contracts. Even then, the month-to-month payments are handled by the LDCs and customers only deal with the IESO if they are moving or selling their contracts.
The problem with the electricity market in Ontario is that it has become largely irrelevant. Some years the market covers less than 20% of the cost of electricity. The rest is Global Adjustment (GA). Given this it becomes difficult to assess if the IESO is doing a good job or not. Unfortunately, this is out of the IESOs control as the Global Adjustment is the responsibility of the MOE.
The IESO gets a similarly detailed letter of direction as the OEB. This is less a concern as the IESO is clearly a government agency with no expectation of independence. The IESO is not showing the same level of increase in costs.
MOE
The MOE is currently called the Ministry of Energy and Electrification but the name seems to change every time there is a new Minister so I will stick to MOE for simplicity.
If there is a theme running through the comments above, it is clearly one of control of the industry by the MOE. To some degree this is inevitable. Electricity is a key industry for business development and for the standard of living Canadians expect. If something goes wrong with electricity in Ontario it is the government that gets the blame. It is also one largely owned by government players including most LDCs, OPG and a chunk of Hydro One. This is not an American state where the majority of the assets are investor owned.
It is harder to get a handle of the costs of the MOE though someone with a better understanding than me of financial reporting by the Government of Ontario may be able to. First, the ministry changes over time. Under Minister Rickford it was the Ministry of Energy, Northern Development and Mines. The costs thus included the Northern Development and Mines bureaucracy. Second, the costs include the various subsidies and these are not always separated from the administrative costs. Unfortunately, I suspect an analysis would reveal a growing government agency.
The Government of Ontario has been very transparent in its energy policies with its vision paper, its policy announcements and the opportunities for input on proposed regulations and legislation.
The concern is not with these big picture decisions. Those are policy decisions that rightfully belong with the government. The concern is at the next layer which is the actual management of the industry. With the top-down approach that is currently being displayed, the government is losing the benefits from independent decision-making by the agencies under their control. Agencies which, for all their faults, are closer to the action.
More importantly, the MOE is straying into trying to manage various aspects of the industry. This never works well. What sounds good in an office often does not work well in the field. This is particularly the case when the decisions are about “guiding” the industry based on an often unrelated government objective (more housing, faster broadband) rather than just finding the most efficient course of action.
Just like with the OEB, this level of micro-managing can be problematic with the same issues applying. In addition is the concern with the “law of unintended consequences”. Regulations intended to guide behavior in one direction can result in unforeseen behaviors. For instance, the recent regulations intended to assist in housing developments will also allow those LDCs that are so driven to more quickly grow their rate-base and thus charge higher rates.
Conclusion
There is a need for all three of these government organizations and the roles that they play. However, just like every other organization in the industry, it would be best if they were kept as lean as possible, worked with rather than through the other industry participants over which they have authority, and kept the focus on the long-term best interests of the customer.