Will merging the OPA and IESO reduce electricity bills?

December 2014

• On January 1, 2015 the OPA will be merged into the IESO. The goal is to achieve cost reductions in administering the electricity system.
• 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.
• The administrative cost savings that may be achieved by the merger are very small in the overall scheme of things, resulting in negligible cost relief for Ontario energy consumers. And the merger carries risks.

On January 1, 2015 the Ontario Power Authority will be merged into the Independent Electricity System Operator. The goal is to achieve cost reductions in administering the electricity system. But the merger carries important risks and will do little, if anything, to reduce electricity costs.

Rising electricity costs in the past few years prompted calls, heard particularly during the last two provincial elections, 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 summer the provincial government passed their budget after winning a majority in the Legislative Assembly. The budget contains changes to the Electricity Act that will effectively transfer the OPA’s responsibilities to the IESO.

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 OPA 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 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 up to $25 million per 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 represent 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 0.1% savings on a projected all-in electricity cost of about $145/MWh (14.5 cents per kWh). In the government’s most optimistic scenario, the merger might save consumers up to 0.1% on their electricity bill.

There is a 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.

Unfortunately, the changes to the Electricity Act do little to mitigate rising electricity costs. The administrative cost savings that may be achieved are very small in the overall scheme of things, even in the most optimistic scenarios.

The largest cost impact for consumers comes from how capacity additions and conservation programs are conceived, developed and implemented, not from who does it. The merger of the two agencies does not address the root cause of these problems. It is largely window-dressing that will bring negligible cost relief for Ontario energy users.

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