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Ontario's Failed Experiment (Part 1)
Reliability declines after 10 years of incentive regulation.
North American jurisdiction—Ontario—whose network is tied into U.S. grids, which measures reliability performance similarly to U.S. LDCs, and for which we have extensive reliability data for many LDCs over a long period of time ( e.g., from mid-1990s to 2007). Furthermore, in 2000 the Province of Ontario started IR.
In 1998, the government of Ontario and regulator, the Ontario Energy Board (OEB), began what arguably was the most complex electric restructuring in North America. Prior to restructuring, these distributors were acknowledged to be technically efficient and providing highly reliable power. The OEB’s implementation task force concluded that these distributors would face notably increased profit motives under IR. The task force noted further that it would be reasonable to expect the Ontario utilities to react to these increased incentives. The task force and other stakeholders maintained that robust standards would be necessary to ensure the continued supply of reliable power.
The OEB opted to require LDCs to continue supplying power within the levels of reliability observed over the preceding three years. However, despite stated intentions to review these standards by 2003 and set financial penalties for noncompliance, the OEB didn’t review LDCs’ reliability until 2008, and then it did so only for the 2004 to 2006 period based on sector averages. The OEB hasn’t conducted a public review of LDC reliability performance from 2000 to 2003, nor has it ever conducted a review of any post-IR performance over the 2000 to 2007 period and examined whether LDCs are compliant with the standards imposed in 2000.
Were the OEB’s IR standards, monitoring, and reporting requirements sufficiently robust to mitigate the utilities’ potentially imprudent cost reductions, and the likely consequences for lowered reliability?
Incentive Regulation in Ontario
Prior to 1998, when the government of the Province of Ontario introduced comprehensive restructuring of the electricity sector, more than 300 municipal electric distribution utilities (MEUs) varying in size from several hundred customers to hundreds of thousands of customers operated in the province. These MEUs operated alongside a vertically integrated, provincially owned utility, Ontario Hydro, which controlled most of the generation and transmission capacity in the province and also distributed electricity in rural areas of the province where there was no municipality. Ontario Hydro sold power at cost to the MEUs, which also distributed electricity essentially as ratepayer cooperatives, earning very low rates of return and operating with little or no debt. Due to their essentially non-profit, public status, the MEUs weren’t subject to stringent regulation by the provincial energy regulator, the OEB, but had rates set by Ontario Hydro in a light-handed, cost pass-through approach.
Some critics maintained that mergers among the publicly owned MEUs would create efficiencies due to privatization and increased scale. In 1998, Bill 35, the Energy Competition Act, 1998 , was enacted. While the Energy Competition Act affected the electric sector broadly, restructuring Ontario Hydro and enabling the IESO (the Ontario ISO and power pool), transferring regulatory authority to the Ontario Energy Board and charging the board to examine performance based regulation (PBR), it also undertook a fundamental restructuring of the MEUs.