Ontario Energy Board provides direction on competition to the IESO

A recent article by lawyers at another major law firm, reporting on a recent Ontario Energy Board (OEB or Board) decision was titled The Ontario Energy Board has denied AMPCO's Application to Revoke the "Transitional Capacity Auction" Market Rule Amendments[1]. While not inaccurate, we take a different view of the essence of the OEB's recent decision.

Full disclosure; the author acted as counsel to the applicant in that case; the Association of Major Power Consumers in Ontario (AMPCO). Given that involvement, and having observed, from the inside as it were, the development of the record and the full articulation of the issues and perspectives of the parties in that case, we come away with a somewhat different impression of the decision.

From our perspective, what is important about the OEB's January 23^rd decision in the case[2] is the finding that "there at least appears to be discrimination". True that AMPCO's application requesting that the Board revoke the market rule in issue and remit it to the Ontario Independent Electricity System Operator (IESO) which made the rule for further consideration was dismissed, and we don't disagree with most of what our colleagues wrote in their article. We suggest, however, that the unusual step taken by the Board in nonetheless providing observations on the matter, to be helpful to the IESO in its further market evolution work, bears mores emphasis.

Before considering these observations let's take a more careful look at the Board's findings. As already noted, the Board found that "there at least appears to be discrimination" resulting from the impugned market rule amendments. Those amendments essentially expanded eligibility to participate in the fledgling Ontario electricity capacity market to generators whose power purchase agreements with the Ontario government have expired. Until now the IESO's capacity market has been limited to demand response resources; entities who are able to reduce their electricity consumption and thus assist in balancing electricity supply and demand in the real time market. AMPCO, on behalf of its members providing demand response, took the position that because generators are paid in the real time energy market when they provide supply, and demand response resources don't get paid when they reduce demand, the respective positions of demand response resources and generators in the expanded capacity market would be unjustifiably unequal and thus unjustly discriminatory. Our read of the OEB's decision (and the reader should bear in mind the perspective which we bring to the matter, as disclosed at the outset of this article), is that the Board agreed. Consider the following passage from the Board's reasoning;

In theory, these differences in treatment could result in unjust economic discrimination as the DR Resources, being ineligible for those payments, may have to substantially lower their offers to uneconomic levels if they wish to successfully compete in the [expanded capacity auction]. For DR Resources, the costs associated with activation will not be recoverable in the current market.

One of the reasons that this finding is important is that it reflects a "market view" of the situation. By that we mean that the Board took the view that "[G]eneration resources and DR Resources are functionally equivalent in balancing supply and demand in the energy market. Theoretically, there are no relevant differences in their circumstances." This is the view that the U.S. Federal Energy Regulatory Commission (FERC) has taken of the role of both demand response resources and generation resources in the electricity markets under its jurisdiction. The other potential view would go "behind the meter" and assess entitlement to compensation based on the cost structure of individual market participants. Our aforementioned colleagues, for example, in their review of this OEB decision suggest that "the introduction of energy or other forms of out-of-market make-whole payments for non-generator capacity market participants could dampen economic efficiency and reduce intended cost savings to ratepayers". From a market view, we respectfully disagree. (We also note, "for the record", that the OEB made no such observation.) If services being provided are functionally equivalent, as the OEB, and the FERC before it, have found, then the opportunity to provide those services, and get paid for doing so, should go the lowest bidder. That is the essence of competition, and true competition (absent market failure) ultimately provides ratepayers with the lowest prices for the services received.

As our colleagues have explained, "the OEB did not find that there was unjust discrimination between DR Resources and generators under the [expanded capacity auction]". Here, too, the Board's careful wording is important:

The OEB finds that there is insufficient evidence to make a finding that the Amendments will result in unjust discrimination.

As our colleagues have noted, one of the critical findings by the OEB, in articulating the test that it would apply pursuant to the legislation, is that "the claim of discrimination cannot be purely qualitative". The Board determined:

The OEB appreciates that as the Amendments are prospective, quantification will be based on estimates and assumptions about the operation of the market, but within that context the OEB requires adequate information on the nature and extent of the economic impacts in order to make a finding of unjust discrimination.

It is in keeping with this articulation of the test to be applied that the Board found that they lacked sufficient evidence on the point to make a positive finding of a likelihood of unjust discrimination, in the result. That is, the deficiency of AMPCO's case, in the view of the Board, was an evidentiary one, and not one of principle. We read this in the following additional passage from the Board's findings (our emphasis);

The absence of quantitative evidence on costs that different parties incur does not permit the OEB to conclude with certainty whether the circumstances between generators and DR Resources are in fact similar or different, and whether, as a consequence, different treatment could constitute unjust discrimination.

…

Given the insufficiency of evidence… the OEB has no basis on which to make a positive finding of unjust discrimination and return the Amendments to the IESO for reconsideration.

This is important, and, again with respect, should inform the IESO's consideration of the decision, and in particular the helpful guidance that the Board went on to provide:

When considering market changes, the IESO should examine the total costs and compensation available to capacity market participants, whether that compensation is in the capacity market or the energy market, and whether that compensation is an out-of-market payment or some form of energy payment. The priority is to ensure that there is no unjust discrimination for or against any class of market participants. This is particularly relevant as the capacity market continues to expand by adding other types of resources.

One more thing. The Board noted, in particular, its understanding that in the course of the IESO's announced investigation of the appropriateness of energy market activation payments for demand response resources;

The IESO agreed that the scope of the stakeholder engagement would be broadened to assess activation payments, as well as energy payments, given the amount of discussion related to out-of-market GCG payments to generators.

So while it is absolutely true that, as noted by our colleagues in the title of their article, "The Ontario Energy Board has denied AMPCO's Application to Revoke the 'Transitional Capacity Auction' Market Rule Amendments", from our perspective, and we hope that of the IESO and other stakeholders working towards broadened competition and a more effective and efficient wholesale electricity market in Ontario, what is more important are the findings of the Board that; i. demand response resources and generation resources "are functionally equivalent in balancing supply and demand in the energy market"; ii. "there at least appears to be discrimination" in the differences in treatment of demand response resources and generation resources in the wholesale markets; and iii. "when considering market changes, the IESO should examine the total costs and compensation available to capacity market participants, whether that compensation is in the capacity market or the energy market, and whether that compensation is an out-of-market payment or some form of energy payment".

And most importantly;

The priority is to ensure that there is no unjust discrimination for or against any class of market participants. This is particularly relevant as the capacity market continues to expand by adding other types of resources.

This is what AMPCO's application was really about, and this, we suggest, is what the OEB's considered decision really stands for.

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