The Ontario Energy Board has denied AMPCO’s Application to Revoke the “Transitional Capacity Auction” Market Rule Amendments

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On January 23, 2020, the Ontario Energy Board (the “OEB”) denied an application by the Association of Major Power Consumers in Ontario (“AMPCO”) for an order under section 33 of the Electricity Act, 1998 (the “Act”) to revoke the market rule amendments identified as MR-00439-R00 to –R05: “Transitional Capacity Auction” (the “Amendments”) and refer such amendments back to the Independent Electricity System Operator (“IESO”) for further consideration and lifted a stay of the operation of the Amendment as ordered by the Decision and Order of the OEB dated November 25, 2019.

The Amendments at issue relate to the IESO’s new capacity market. The Amendments allowed for the IESO’s Demand Response Auction (“DRA”) which was launched in 2015 and only procured capacity from DR Resources to evolve into a Transitional Capacity Auction (“TCA”) which would also allow participation by generators that are neither under contract nor rate-regulated to compete for capacity commitments. The main issue raised by AMPCO in its application for the OEB to revoke the Amendments was that the Amendments were unjustly discriminatory to DR Resources. AMPCO claimed that their capacity offers in the TCA would not be able to compete with those of generation resources due to the out-of-market energy payments available to generation resources but not DR Resources.

The Statutory Test

This is only the OEB’s second hearing of a market rule review application since market opening in 2002. The OEB’s elucidation of the statutory test is therefore particularly valuable.

The statutory test that applies when reviewing market rule amendments is set out in Section 33(9) of the Act. The statutory test must determine whether the amendments (i) are inconsistent with the purposes of the Act; or (ii) unjustly discriminate against or in favour of a market participant or class of market participants. The central issue in this case was whether the Amendments, by enabling generation resources to compete in an expanded capacity auction, had the effect of being unjustly discriminatory to DR Resources. In order to determine whether the Amendments are unjustly discriminatory, the OEB found that three elements are required:

  1. There must be economic discrimination. The OEB recognized that in the context of electricity markets, discrimination could arise from differences in treatment, including differences in treatment for different classes of market participants.
  2. The applicant must show that the difference in treatment is not justified by a difference in circumstances. The OEB noted that “[i]t is only different treatment in the absence of material and relevant differences in the situation or characteristics among the affected market participants that raises the prospect of unjust discrimination.”
  3. The claim of discrimination and the economic impact of the difference in treatment must have some quantitative aspect to it and cannot be solely qualitative.

The OEB’s Findings

On the question of economic discrimination, the OEB found that generators and DR Resources were treated differently in the forms of differences in eligibility for payments. For example, some generators are eligible for out-of-market activation payments and start-up costs under the real-time generation cost guarantee (GCG) program. These payments are not made available to DR Resources.

On the question of differential treatment and differences in circumstances, the OEB notably found that both generators and DR Resources incurred activations costs and both are functionally equivalent in balancing supply and demand in the energy market. As such, the OEB found that there was no relevant differences in circumstances. This finding reflects the considerable strides load-side resources have made into the IESO-administered markets in recent years.

On the question of whether AMPCO had demonstrated the quantification of the economic impact, the OEB found that there was no evidence presented by any party on the range of costs by any of these market participants and that the absence of quantitative evidence of costs that different parties incur did not allow the OEB to determine whether the different treatment of generators and DR Resources constituted unjust discrimination. The OEB stated that the experience under the DRA thus far demonstrated limited activation of DR Resources which would suggest that there would have been limited economic impact on DR Resources.

Considerations for the IESO

The OEB provided certain observations relating to market changes. As the capacity market continues to expand by adding additional capacity resources and retaining additional resource commitments, the OEB noted that 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”. Though the OEB did not find that there was unjust discrimination between DR Resources and generators under the TCA, as the capacity market continues to evolve, ensuring that there is no unjust discrimination as between different classes of market participants should be considered a priority.

In so doing, the IESO will need to pay heed to the OEB’s finding that both supply and demand-side resources are “functionally equivalent”. The OEB made this finding despite evidence tendered to suggest that the absence of consumption or ‘negawatt’ of electricity does not necessarily provide the same societal and economic value as the supply or ‘megawatt’ of electricity. If both supply and load are indeed to be treated as functionally equivalent resources for the purposes of participation in the IESO-administered markets, then this would appear to support the case for providing some form of make whole payments for non-generator capacity market participants.

Possible energy payments for economic activation of DR resources is the subject of a current IESO stakeholder engagement. It will be interesting to see if and how that stakeholder engagement will inform the IESO’s pending resource adequacy stakeholder engagement. On the one hand, the OEB’s decision permits the IESO to proceed with broadening competition in the June 2020 capacity auction consistent with its efforts to meet the projected capacity need starting in 2023 as described in the recently released IESO Annual Planning Outlook. On the other hand, the introduction of energy or other form of out-of-market make-whole payments for non-generator capacity market participants could dampen economic efficiency and reduce intended cost savings to ratepayers.

Our team at McCarthy Tétrault continues to closely follow the development of the IESO’s capacity auction, as well as the market renewal program generally. If you would like more information about this decision or more information about the market renewal program generally, we are here to help. Please contact Reena Goyal or Zachary Masoud or any other member of the Power Group at McCarthy Tétrault with any questions or for assistance.

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