SUBMISSION OF THE
INDEPENDENT POWER PRODUCERS SOCIETY OF ONTARIO
("IPPSO")
TO THE STANDING COMMITTEE ON RESOURCES DEVELOPMENT
OF THE ONTARIO LEGISLATURE
ON THE ENERGY COMPETITION ACT, 1998
1. Introduction
IPPSO supports the goals of the new legislation, and commends the government for this very
important initiative. Many of the structural changes that it incorporates, such as the
commercialization and separation of Ontario Hydro's generation and transmission businesses,
increased customer choice, open and non-discriminatory access to both transmission and
distribution, oversight of the operation of the market by an Independent Market Operator,
and the creation of an independent electricity regulator in the form of an empowered Ontario
Energy Board, are changes that IPPSO has recommended to the government over the past
several years. IPPSO also supports the effort of government to adhere to the Year 2000
deadline for open markets set out in the White Paper. If the legislation is adopted, with the
improvements we will suggest in this presentation, it should provide a framework for a more
competitive electricity industry in Ontario. The prospect of real competition and a level
playing field will allow our members to invest in new generation facilities in Ontario, to
create jobs and, over time, produce lower electricity costs for Ontario consumers.
IPPSO has a number of specific comments which it believes, if adopted, would further
improve the legislation. The major improvements IPPSO will recommend will include:
- the need for stakeholder consultation on regulations which will be issued pursuant
to the legislation, since many of the important decisions and rules will be contained
in the regulations;
- the legislation should permit the creation of several publicly owned generation
companies; the proposed Generation Company ("Genco"), with over 85% of
installed electricity generation capacity in Ontario, will have too much market power
and will stifle competition;
_ in determining the level of stranded debt, if any, the government needs to ensure that
the Genco bears a fair share of the debt so as not to be endowed with an unfair
advantage relative to other generators;
_ the need for the legislation to provide market mechanisms to encourage the
development of energy efficiency and the use of cleaner, more environmentally
benign energy sources, including the development of a renewable energy portfolio
standard;
_ the need to have full corporate separation between transmission/distribution
companies and competitive businesses and restrictions on cross-ownership of
companies in the monopoly and competitive spheres;
_ the need to ensure through legislation that Ontario Hydro's existing power purchase
contracts with Independent Power Producers ("IPPs") will be honoured.
2. Market Power
(a) Structural Issues
IPPSO is concerned with the market power of the Genco, given its very large
percentage of installed generation capacity in Ontario and the government's stake in
the success of this company while stranded debt exists. In particular, IPPSO is
concerned with predatory pricing behaviour which would make it impossible for
other generators to compete.
(i) IPPSO is of the view that chapter II of the Electricity Act ("the Act") be
restructured to permit the government to create at least four publicly owned
Gencos. The provisions in the proposed legislation, which rely heavily on
regulatory intervention, will not, even if strengthened as proposed by IPPSO,
be strong enough to adequately deal with the market power of a single
Genco, particularly over the next few years, and the suggestions of the MDC
with respect to vesting (with respect to which IPPSO has some concerns) and
the like, are helpful but not sufficient. IPPSO should be clear that we are not
recommending privatization of the generators. We are, rather, proposing that
several Gencos will provide a more competitive market that one, even if the
ultimate owner of all four is the government of Ontario. There are precedents
for multiple publicly owned companies, in particular New Zealand and the
state of New South Wales. Much of the remaining structure of the legislation
would not be affected by having more than one Genco. The stranded debt
exercise would be carried out in much the same manner, and the new Ontario
Energy Board Act ("the OEB Act") would not need to be changed in any
substantive manner. The government could establish the division of assets
and liabilities of Ontario Hydro into four separate units by regulation; the
legislation would stipulate that the four units be of approximately equal size.
The MDC has also expressed concern about the dominance of a single
Genco in its June 30th report.
(ii) With respect to other structural remedies for market power, section 69(4) of
the OEB Act authorizes the Board to include in a generator's licence
conditions to address the abuse or possible abuse of market power, including
the requirement to adhere to prescribed codes of conduct, minimum or
maximum prices at which electricity can be sold through the IMO markets
or otherwise, duration of contracts between the licensees and any other
person, and restrictions on significant investment by the licensee in, or
acquisition of, generation facilities in Ontario.
IPPSO agrees with these potential licensee conditions, but suggests that two
others be added. A new Section 69(4)(e) should allow the Board to order
temporary transfers of control of generation facilities through leases, bidding
rights contracts, asset swaps, and other like arrangements. Section 69(4)(f)
would be a more general clause which would allow the Board to condition a
licence in any manner it deems to be in the public interest, short of outright
forced divestiture, to minimize the opportunity for abuse of market power and
enhance competition.
(iii) Finally, since Genco will be, in the early years at least, the prime supplier of
stand-by power, it must agree to do so on a fair and non-discriminatory basis.
(b) Regulatory Oversight
As drafted, the Act does not allow the Board to take action on its own initiative with
respect to abuse of market power issue, a step which it can take with respect to any
matter under section 19(4) of the OEB Act. IPPSO is of the view that the Board
should have the power, on the grounds that the Genco's market power issue is
sufficiently serious that all available tools should be used to deal with it, particularly
since the government appears to have ruled out the outright divestiture of some of the
Genco assets. Section 35 of the Act permits the Market Surveillance Panel of the
IMO to investigate, inter alia, an alleged abuse of market power and report its
findings to both the IMO and the Board. The IMO must inform the Board
within 30 days of its intended course of action. The Board may at that point conduct
a review and could decide to amend a party's licence or direct the IMO to amend the
market rules to mitigate the effect of an abuse of market power [section 36(4)(a)
and (b) of the Act].
In the alternative, the Minister, under section 27(1), may issue a policy directive, once
approved by the Lieutenant-Governor-in-Council, to the Board concerning market rules
made pursuant to section 30 of the Act to deal with the abuse or possible abuse of market
power. The Board may convene a proceeding if it considers it necessary to implement such
a directive. The Board may amend a licence to deal with market power, after a section 27
proceeding.
The Board, however, is precluded by section 73(e) of the OEB Act from conducting a
proceeding to amend a licence in order to deal with an abuse or possible abuse of market
power unless it does so pursuant to a report from the IMO or a Ministerial request under
section 27. As noted earlier, IPPSO believes the Board should be free to initiate a licence
amendment proceeding on the application of a party, or on its own initiative, and to
subsequently amend a licence, if it determines that to do so would be in the public interest,
taking into account the objectives of the Board and the purposes of the Act.
In a similar vein, the Board is charged, under section 86 of the OEB Act, with monitoring
the competitiveness, fairness, transparency and efficiency of electricity markets and reporting
to the Minister thereon, and, pursuant to section 86(2), the Minister may ask the Board for
advice with respect to abuse or potential abuse of market power of or other circumstances
that would lead to diminished competition. IPPSO is of the view that the Board should be
able to initiate a study into market power matters on its own, and provide the results to the
Minister, for the reasons noted above. The MDC took the same position on this issue (and
on the need for the Ontario Energy Board to act on its own initiative to amend a licence, if
necessary) in its Second Interim Report (p. 28).
3. The Pervasive Use of Regulations
The Act and the OEB Act are a legal skeleton for the new electricity marketplace. Most
details of the new market will be contained in regulations which will be promulgated in the
future by the government.
A large number of critical aspects of the new market will be established by regulation,
including the parties to whom open access requirements will apply under section 25(2)
[see 106(1)(d)], the contracts or classes of contracts which will not be included in the
provisions of section 25(3) and (4), which indicate which contracts will no longer be valid
when the new Acts come into force [see 106(1)(e)], the determination of stranded debt and
residual stranded debt [see 79(2)], and the incidence, amount, timing, etc. of the transition
charge (s. 80), the special payments to be made by the Genco, the Services Corporation
("Servco"), and certain municipal utilities to the Financial Corporation to help pay down
the stranded debt (s. 90). There is, last but not least, a provision which allows the
government to "except any person from any provision of the Act, subject to such conditions
or restrictions as may be prescribed by the regulations" [s. 106(1)(l)].
The regulation-making powers are found both in a general section, entitled Part IX,
Regulations, and throughout virtually every chapter of the Act.
IPPSO is of the view that, given that so many important decisions and rules will be contained
in regulations, it is essential that a formal consultation process be in place under which
stakeholders can review regulations in draft form before they are finalized. The regulations
should be referred both to the Market Design Committee and directly to the stakeholder
groups for comment.
4. Stranded Debt
IPPSO is supportive of the six-step approach to the determination of stranded debt outlined
in the government's White Paper, A Direction for Change. IPPSO's primary concern in this
area is that too little equity and debt will be assigned to the Genco, which would then allow
it to use unfair pricing to prevent the entry of new competitors into the marketplace. IPPSO
understands that pursuant to section V of the Act, and as described in some detail in the
Ministry of Finance publication of July 2nd, entitled Electricity Competition, A Financial
Update, prior to making a determination of the initial amounts of stranded debt or residual
stranded debt pursuant to section 79 of the Act, the Minister of Finance will establish
valuations and debt levels for each of the Genco and the Servco, which, after taking into
account the projected values of certain payments by those two companies and the municipal
electric commissions would determine the basis for any residual stranded debt. IPPSO
would like to have the opportunity along with other stakeholders to review these proposed
valuations, debt loads and proposed payment streams, in order to determine whether the basis
for selecting them is reasonable and does not unfairly tilt the playing field. One way to
organize this consultation would be for the government to refer the matter to the Ontario
Energy Board, which would then hold a hearing on the matter, receive submissions from
interested parties and provide an independent advisory report to the government. The current
Ontario Energy Board Act provides for such a reference. Such an independent assessment
of these matters is important since, as both a shareholder of Genco and guarantor of Hydro's
existing debt, the government has, to a degree, a conflict of interest in dealing with this issue.
IPPSO cautions the government that assigning too little debt to Genco would leave it open
to challenges in the United States in respect of export sales on the grounds that it has been
subsidized.
Aside from the need for stakeholder input in the determination of stranded debt and the
recovery thereof, IPPSO has concerns with three specific aspects of the legislation.
First, IPPSO is concerned that the competition transition charge, once established, can not
be changed in a manner that provides Genco an unfair competitive advantage, is arbitrary
or lacks predictability, or impairs the financing of IPP projects. The regulations should
reflect this approach, and require that any proposed change be referred to the OEB.
Second, section 59 of the Act, which deals with dividends payable to the government from
the Genco and the Servco, on the shares held by the government in those companies,
provides that the dividends be payable into a "special purpose account" in the Consolidated
Revenue Fund ("CRF") rather than to the Financial Corporation. Section 59(2)(b) provides
that such monies should be payable to the Financial Corporation at such time as the Minister
of Finance may direct. Section 59(3) provides that any funds remaining in the special
purpose account when the stranded debt has been paid off, should be returned to the CRF.
This scheme would allow the government not to allow some or all of the dividends to go
towards paying down the stranded debt. IPPSO believes that if all consumers and generators
are going to have to incur a charge to pay down the stranded debt, the government should
contribute any and all dividends it might receive to the same end. The government is
currently responsible for all of Hydro's debt, and if the lower debt of "commercial"
generation and services companies permits them to pay dividends to their shareholders, it is
inappropriate to direct those funds to other uses prior to the stranded debt being fully
recovered.
Third, in part VI of the Act, in sections 82 through 88, the Genco, the Servco and the
municipal electric utilities are required to make various payments, equivalent to the federal
and provincial income taxes and property taxes that they would pay if taxable (or other
analogous amounts as set out in the regulations) to the Financial Corporation to help defray
the stranded debt. An estimate of the present value of such amounts will be made, which
amount will then be deducted from the total stranded debt to arrive at an amount of residual
stranded debt which will be amortized by the levy of a transition charge. All of these
sections contain a provision which allows the government by regulation to prescribe a date
after which these payments would be made not to the Financial Corporation, but to the
Minister of Finance [see for example section 84(2)]. IPPSO presumes that this date is meant
to be the date at which the residual stranded debt is stated to be retired under section 79(6)
of the Act, but that is not clear. Otherwise these monies could be diverted from their alleged
purpose, which is to help pay down the residual stranded debt, while the competition
transition charges were still being paid by Ontario consumers and generators in respect of
such debt. Such a result would be unacceptable from IPPSO's point of view. Sections 84(2),
85(2), 86(3), 87(2) and 88(5) should be amended accordingly.
5. Green Power and Environmental Matters
The Act and OEB Act have, as one of their objectives the promotion and encouragement of
energy efficiency and renewable energy. For example, section 1(g) of the Act provides that
the purposes of the Act include,
". . . to facilitate energy efficiency and the use of cleaner, more environmentally
benign energy sources in a manner consistent with the policies of the Government
of Ontario."
In addition, the Act, in Schedule D, amended the Environmental Protection Act to permit
market based approaches, including emissions trading, to achieve environmental quality
goals; section 87(1) of the OEB Act permits the Government to issue regulations requiring
sellers of electricity to disclose to their customers the nature of the fuel for, the process of
generation of, and the environmental contaminants in, the electricity they are selling; and
section 69(2)(i) of the OEB Act permits the Board to include compliance with these
information requirements as a condition of the retailer's licence. IPPSO supports these
initiatives, and suggests that generators and marketers be required to disclose the
environmental characteristics of their entire portfolio, not just part of it, and that, in general,
the Canadian disclosure requirements match those currently being developed in the United
States. IPPSO believes the legislation must go further to encourage more efficient forms of
energy generation, including renewable energy. First, the statutory provisions relating to the
market rules to be developed by the IMO should make it clear that the renewable energy
producers cannot be prejudiced in bidding to supply power because of the intermittent nature
of their production.
Second, the present legislation does not require any minimum amounts of renewable energy,
however defined, be provided as part of the province's electricity mix, nor does it require that
each licensed seller of electricity to include a minimum amount of renewable energy in its
annual sales.
The legislation should direct the IMO, working with various stakeholders, to develop a
renewable energy portfolio standard (a minimum percentage of renewable energy in each
retailer's "portfolio") which will be ready for implementation when the new market opens
in the year 2000. IPPSO is hopeful that the MDC will be able to make recommendations for
implementing such a standard and an associated renewable energy credit trading program,
which will establish the percentage level of renewable based electricity to be sold in Ontario.
These recommendations would serve as the basis for regulation on the matter. Section IX
of the Act and/or section 87(1) of the OEB Act should authorize the government to make
regulations prescribing the percentage amounts of renewable energy that must be included
in the portfolio of any licensed retailer of electricity, and/or to exempt renewable generation
from the transmission tariffs, which would create a more level playing field between
renewables and other energy sources.
6. Transmission and Distribution Companies
Separation of Non-Competitive (Wires) and Competitive Businesses
and Investment in Generation Facilities
(a) The provisions of the Act and the OEB Act do not require that the municipal electric
utilities create two separate companies, one for their wires business and one for their
electricity sales and other competitive business. Section 69(2)(f) of the OEB Act
provides that the distributor's licence may contain provisions requiring separate
accounts and records for each of its businesses "in order to prohibit subsidies
between separate businesses". Section 71 requires that distributors maintain separate
accounts for distribution and other activities. Section 69(8) provides that a
distributor's licence may stipulate that the distributor may sell electricity directly or
establish an affiliate, or some other contractual arrangement to sell electricity, and
section 69(9) states that it must not sell electricity directly after a date prescribed in
the regulations. Section 69(13) provides that the licence may direct the distributor
to establish a subsidiary to sell electricity.
IPPSO believes separate accounts would be inadequate for purposes of maintaining
separation between the distributors' wires business and its other businesses, and
would increase the need for regulatory oversight. It believes that corporate
separation is required; this position is consistent with the commitment made in the
White Paper (p. 18) that "They (local distribution utilities) would be required to
establish separate subsidiaries for their competitive business."
(b) Sections 79 and 81 of the OEB Act permit a transmitter to acquire an interest in a
generation facility, provided it obtains the approval of the Ontario Energy Board,
which should give the approval only if it satisfies itself that,
". . .the impact of the acquisition of the interest would not adversely affect the development and maintenance of a competitive market."
Section 81(3)(a)
or that the acquisition is necessary to maintain the reliability of the transmission
system.
IPPSO is of the view that the transmission companies should not be permitted to
invest in generation facilities under any circumstances. Given the size and strategic
position of the Servco, it would be particularly inappropriate for it to have
ownership of generation facilities, and would run directly counter to the logic of
dividing Ontario Hydro into a Genco and a Servco. Reliability of transmission can
be maintained by other methods, including, if necessary, contracting for the required
generation. The provision of must-run contracts as recommended by the MDC
would ensure initial system reliability and the addition of new competitive generation
will help sustain long run system reliability.
(c) Sections 79 and 81 of the OEB Act also require Ontario Energy Board approval for
the acquisition of interests in generation by a distributor or an affiliate thereof (and
for the acquisition by a generator or an affiliate thereof of an interest in a distributor,
or transmitter). Section 79 provides that the Board may automatically approve such
transactions, or hold a formal review of them, utilizing the same criteria as for a
transmittor's acquisition of generation. IPPSO is of the view that, in general,
distributors or their affiliates should not acquire controlling interest in generation
systems, in particular within their franchise areas. Generation already owned by
distributors should be grandfathered. IPPSO recommends that the government issue
regulations which will set out the criteria which the Ontario Energy Board should use
to determine when a distributor should be allowed to acquire non-controlling
interests in generation companies.
7. Existing Contracts between Ontario Hydro and IPPs
The new legislation makes no mention of existing IPP contracts with Ontario Hydro. IPPSO
is of the view that the Act should specifically deal with these contracts, given their
importance to its members and the fact that they are existing, long term legally binding
obligations of Ontario Hydro, analogous to a debt instrument.
More specifically, the administration of the contracts and payment of amounts due for
electricity purchased under them should be a specifically enumerated responsibility of the
Financial Corporation in section 52(c) of the Act. The legislation should not permit the IPP
contracts to be transferred to the Genco, the Servco, or any third party. The contracts were
signed with a Crown corporation bearing a government guarantee, and that credit should not
be diminished. The Financial Corporation's obligation under the contracts would continue
to be guaranteed by the government as a result of section 53 of the Act. Genco in particular
would have an incentive to try to renegotiate or otherwise disrupt these contracts, since it
would be a competitor of the generators in question. The plants under contract would have
must-run status under IMO rules. IPPs should be free to sell additional or surplus electricity
from the facilities in question into the market. The IPPs' ability to sell their surplus power
would in itself make a small contribution to curbing the market power of Genco. A new
indexing provision for power sales under these contracts needs to be developed to replace
the Hydro DCR, and probably reflected in a regulation.
In addition, the definition of stranded debt in section 79(2) should be broadened to
specifically identify the existing NUG contracts as a Financial Corporation liability to be
included in the calculation of what is ultimately determined to be stranded debt.
Finally, section 25(3) of the Act provides that,
"Any contract entered into between Ontario Hydro and a municipal corporation or
any other person before a regulation is made under section 45 for the supply of
electricity to the municipal corporation or other person ceases to have effect on the
day subsection (1) comes into force."
This section should be amended to state that it does not apply to contracts between Hydro
and independent power producers entered into prior to the date the new regime comes into
effect, as several of these contracts provide, in part, that Hydro shall sell general power to
the IPP as required, and the section, read literally, would result in a unintended breach of
these contracts.
8. Bilateral Contracts
Part III of the Act should contain a provision that explicitly permits the use of bilateral
physical and financial contracts. In IPPSO's view, these contracts are necessary to help
control Genco's market power, ensure that the market rules evolve fairly, encourage
competition, and facilitate new investment when needed. The market rules, established by
the IMO pursuant to section 30, should facilitate bilateral contracts. Both the White Paper
(p. 16) and the MDC in its March 31st report to the Minister (Principles of Market Design,
section 2.3, p. 7) support the use of bilateral contracts.
9. Powers of Market Surveillance Panel
IPPSO is concerned with the broad search and seizure of documents powers which section 35
gives the IMO in connection with its investigation of market practices. While IPPSO
supports the principle behind section 35, it believes there should be some safeguards against
abuse of the process. It recommends that the Board be required to give notice to the affected
parties if the IMO makes application to it to require disclosure, that it be required to hold a
hearing, if requested by the affected party, and that it issue the required order if it believes
that such action is reasonably required given the circumstances of the investigation and the
alleged abuse.
10. Transferability of Licences
Section 56 of the OEB Act provides that, in order to generate electricity or provide ancillary
service either through the IMO-administered markets or directly to any person, a party must
obtain a licence from the Ontario Energy Board. Section 18(2) provides that a licence is not
transferrable or assignable without leave of the Board. IPPSO is of the view that in order to
facilitate the financing of generation facilities, Board approval should not be required where
the licence is being pledged or assigned to a lender or comparable party as security for that
party providing financing to the generator.
11. Appeal from Market Rules
IPPSO believes that the three-year limit imposed as a challenge to the "original" market rules
by section 33(3) should be removed, as even good rules can be obsolete as the market
evolves.
12. Incidence of the Transition Charge
(a) Section 79(4) should be amended to read, "every generator including Genco
described in the regulations", so as to avoid double collection of the charges. The
charge should not apply to exports, nor to existing IPP contracts.
(b) Genco and Servco should not be able to avoid payment of their share of the
transition charges on businesses in which they hold controlling interests under
section 85(1) by putting them into subsidiaries, which are taxable.
13. Transitional Regime: 1999
Section 25 appears to contemplate a mini-market experiment in 1999, prior to the full
operation of the market, to test system and market rules with a limited number of
participants. IPPSO believes that these arrangements should not provide an undue advantage
to any particular generator, or disadvantage existing IPPs in any fashion.
14. Consolidated Licences
Some entities will require multiple licences, for example, generator and retailer. Licensing
requirements should be a simple as possible and sections 56 and 69 of the OEB Act should
be amended to provide for consolidated licenses.
15. Level Playing Field
Section 88(2)(b) of the Act should be deleted as it provides Genco and Servco or their
subsidiaries an advantage relative to other purchasers of municipal utility assets, since it does
not require a transfer fee for transfers of shares or assets to these entities.
For further information:
Al Barnstaple, President 416-224-9569
Jake Brooks, Executive Director 416-322-6549
Tom Brett, Director 613-236-3882
John Brace, Director 416-962-6262
Bruce Ander, Director 416-667-5724
Rob McLeese, Director 416-366-4820
Linda Bertoldi, Director 416-367-6700
Independent Power Producers' Society of Ontario (IPPSO)
websites: http://www.newenergy.org/newenergy and
http://www.marketdesign.org
PO Box 1084, Stn. F, Toronto, Ont. M4Y 2T7
tel.: 416-322-6549
fax: 416-481-5785
Internet e-mail:
ippso@web.net