Consolidation of OPA and IESO Raises Issues

July 2012

• In the spring, the Ontario government introduced Bill 75, which aims to merge the Independent Electricity System Operator and the Ontario Power Authority into one entity.
• The merger of the two agencies may produce some costs savings, but Bill 75 also introduces two contentious issues: the incompatibility of certain functions of the IESO and the OPA and moving the responsibility for electricity system planning to the Ministry of Energy.

The Ontario government's Bill 75 aims to consolidate the Independent Electricity System Operator and the Ontario Power Authority. The goal is to achieve cost reductions in administering the electricity system. But the legislation carries important risks.

Rising electricity costs in the past couple of years prompted calls, heard particularly during the last election, for consolidation among the many government agencies involved in the energy sector. The electricity sector is administered by the Independent Electricity System Operator (IESO), the Ontario Power Authority (OPA), the Ontario Energy Board (OEB), and lesser-known agencies such as the Ontario Electricity Financial Corporation (OEFC) and the Electrical Safety Authority (ESA). The view was held by some that rationalizing the so-called "alphabet soup" of agencies would reduce overlap and inefficiencies and lower costs.

This spring the provincial government introduced Bill 75, which aims to merge the IESO and the OPA, the two largest of the agencies, into one entity called the Ontario Electricity System Operator.

In the original design for Ontario's electricity market, the Independent Electricity Market Operator (commonly called the IMO) was given the mandate to operate the electricity system to maintain reliable and efficient dispatch of resources. The IMO developed and administered a set of market rules for this purpose. In 2004, the government created the Ontario Power Authority to take on the role of longer term power supply planning and procurement. The IMO was re-named the IESO, to emphasize its role in operating the system.

Both agencies necessarily have planning and analytical functions and some argue these are duplicative, although they are not identical, and probably involve looking at similar issues from a different perspective to fulfil different mandates. It has been suggested by proponents that merging the agencies could save $25 million a year.

The operating costs of the IESO and the OPA are recovered in the Wholesale Market Service Charge, which is visible to large consumers directly connected to the IESO-administered market, and embedded in the Regulatory Charges line item for retail customers. It must be noted that the biggest financial impact of the OPA is not in the operating cost of the agency itself, but in the cost of the programs it administers, such as the Feed-in-Tariff Program, conservation programs, and the cost of electricity procurement programs and contracts with various generators.

The actual operating costs of the two agencies combined represents about $200 million a year or about $1.40 per MWh for consumers. A $25 million annual operating cost savings for the combined agencies, if achieved, would represent a cost reduction of $0.18/MWh for consumers, or 0.14% savings on a projected all-in electricity cost of about $130/MWh (13 cents per kWh).

A hackneyed phrase in the electricity sector is that the "devil is in the details". So it is with Bill 75. The merger of the two agencies may produce some cost savings, although clearly they will be relatively small in the overall scheme of things. However, Bill 75 introduces two contentious issues.

The first is the concern that certain functions of the IESO and the OPA are not compatible in a single agency, as they represent a conflict of interest. The procurement function of the OPA is charged with entering into contracts for new power supply. The dispatch and system operation function of the IESO is charged with independent and objective dispatch of all resources (whether procured by the OPA or not). There is considerable discussion about how to structure the management and governance of these two functions so they can exist in one agency, and how that agency can function effectively.

Perhaps even more significantly, Bill 75 removes from the combined agency the responsibility for electricity system planning, and moves that to the Ministry of Energy. This alarms many industry participants and observers who see this as further politicization of what should be a rational and objective technical process. Others observe that the move merely makes explicit what has been the implicit approach of the government for some time.

Although the OPA was charged with developing an Integrated Power System Plan (IPSP) and updating it on 3-year cycles, the agency was never successful in completing this task. The initial IPSP had been filed with the Ontario Energy Board for review when it was superseded by the government's introduction of the Green Energy and Green Economy Act in 2009, legislation that took a completely different approach not contemplated in the IPSP.

In recent years, the Minister of Energy has frequently used his authority to issue ministerial directives to cause the OPA to do or not to do something. In at least a couple of high profile cases, the minister stopped generation projects that the OPA had procured (in Oakville and in Mississauga) for what many perceived as political reasons.

Electricity system planning calls for a stable vision and a long-term horizon, as projects involve billions of dollars and involve long lead times. Many concerns have been expressed about moving this function into government and away from an independent technical agency, as contemplated by Bill 75. It is viewed as a step in the wrong direction at a crucial time for Ontario's electricity system.

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