On December 19, 2024, Ontario’s Minister of Energy and Electrification delivered the Ontario Energy Board (OEB) a renewed Letter of Direction (LoD), setting out his expectations for the OEB and the energy sector for the 2025-2028 business planning period.
This is the first LoD to be issued following many significant energy policy decisions made by the province in 2024, including:
The new letter also follows the IESO’s October 2024 revised Demand Forecast that anticipates Ontario’s electricity demand will grow by approximately 75% by 2050. The IESO had previously forecast a 60% increase in demand by 2050.
The LoD lays out over 20 expectations across seven areas under three major themes:
The letter stresses the need for the regulator to align with government policy, specifically asking the OEB to “carefully consider” Ontario’s Affordable Energy Future as well as the government’s upcoming integrated energy plan and natural gas policy statement when implementing the Minster’s expectations.
Commentary
In recent commentaries, we have noted that the energy transition is being driven by decisive government policy choices. The government has made clear for some time that a key policy focus is broad economic and industrial competitiveness in the future low carbon economy through targeted investments in critical technologies, manufacturing capabilities, and resource extraction. These decisions are creating a tension between government’s desire to build-out energy infrastructure quickly and the regulator’s role of providing oversight to ensure cost-effectiveness. This emerging tension requires regulators, like the OEB, to adjust to the new policy context by proactively taking a leadership role in investigating and advancing regulatory change or risk falling behind and having solutions imposed upon them by government.
It is apparent that the government has decided that the latter approach is necessary for the next business planning cycle (if not longer). The LoD shows the Minister assuming firm control of the OEB’s non-adjudicative regulatory policy agenda. Overall, the LoD is focussed largely on the OEB’s role with the electricity distribution system and local distribution companies (LDCs). However, the letter features an extremely wide set of expectations that range from a high level desire for improved regulatory efficiency to specific policy outcomes and/or parameters.
The direction includes modifying the “beneficiary pays” principle for new “first-mover” connections (e.g., “LDCs, transmitters, and their shareholders should be kept whole”), increasing the use of shared services by LDCs, developing transmission system capacity maps, updating the Non-Wires Solutions Guidelines, streamlining leave to construct approvals for certain pipeline projects, improving customer access to electricity and natural gas energy efficiency programs, strengthening LDC corporate governance, all the way down to an expectation that OEB management and staff should “provide assistance” to Commissioners on matters involving intervenor participation.
This substantial amount of direction leaves little discretion for the OEB as it prepares its upcoming business plan.
The OEB-Government Relationship: Increasing Integration
The renewed direction is the most explicit statement to date of the rapidly changing expectations the government has regarding the role of the OEB. This is a role that is increasingly focussed on quickly advancing (i.e., approving) significant energy infrastructure expansion as a foundational input for the government’s economic development policy aspirations.
It is clear the current perception is that the existing regulatory framework is more of a barrier than an enabler of Ontario’s energy infrastructure and economic expansion aspirations. That is, the government’s is of the view that the main risk of the current regulatory framework is under-building energy infrastructure, which would frustrate achieving housing and economic growth goals. For example, with respect to regulatory efficiency the Minister writes “the OEB needs to consider how it can be accelerated to ensure planning and approvals can best serve high-growth areas and to support Ontario’s journey to a clean energy economy and its ability to attract future investment.” (emphasis added)
The evolution of the OEB’s role of an infrastructure enabler to advance economic growth is echoed throughout the LoD:
Overall, the framing of the relationship between the OEB and Ministry in the 2024 letter, reveals the evolution of the OEB away from its traditional role as an independent economic regulator and active policy development institution to a more passive administrator of government policy. The LoD also appears to signal that the OEB is expected to make increasing use of non-adjudicative methods of regulation through OEB management and staff to implement government policy rather than the more formal adjudicative processes led by a panel of Commissioners.
Housing Connections: A Sign of Things to Come?
On housing connections, the Minister asked the OEB to “Implement its recommendations expeditiously to amend the Distribution System Code (DSC) to extend the connection horizon for new electricity distribution lines for multi-phased housing development projects to a maximum of 15 years...”
The impact of this expectation appears to have to been immediate.
On November 18, 2024, the OEB proposed amendments extending the connection and revenue horizons for housing developments to the DSC. Stakeholder feedback was due by December 9, 2024. Following the December 19th LoD, the OEB issued final DSC amendments on December 23, 2024. The Notice of Final Amendments stated “The OEB acknowledges the financial and other risks identified by stakeholders, as well as the desire for greater precision or additional consultation. The OEB believes that moving forward with final amendments at this time is needed to support the government’s housing priorities, and that it is appropriate to leave some flexibility to address connection scenarios as they arise.” (emphasis added)
This accelerated completion (35 days from posting the proposed amendments) of the housing connection DSC amendments will likely influence other aspects of the housing development initiative. For example, the LoD set an expectation that the OEB will “establish” a Capacity Allocation Model (CAM) for multi-phased housing development projects by March 2025. This expectation is in contrast to the OEB’s announcement on November 21, 2024, launching a consultation to develop a CAM. The OEB subsequently established a stakeholder advisory committee to assist OEB staff in developing the CAM and expected to meet from December 2024 to April 2025, which would be followed by an additional “consultation process when proposed amendments to the DSC to implement the CAM are issued for comment.”
It remains to be seen how the OEB will alter its approach to developing a CAM to meet the Minister’s expectations. Moreover, whether the acceleration and truncation of consultation observed with respect to housing connections becomes a more widespread practice by the OEB will be monitored closely (e.g., will other initiatives, such as the consultation to review and consider changes to its performance-based approach to rate regulation (PBR; Advancing Performance-based Regulation (EB-2024-0129) be accelerated?).
Of particular interest will be how the OEB balances regulatory uncertainty (e.g., not addressing certain risks, such as financial, and a general lack of precision) and dealing with the resulting subsequent challenges on an ad hoc basis with achieving faster resolution of initiatives. Further, it is an open question on how key stakeholders, such as utilities and consumer groups, will react to this more expeditious approach and any resulting regulatory uncertainty and unpredictably.
Corporate Governance Rebooted
The Minister expects the OEB to “[d]evelop a prioritized plan to review the Distribution System Code and OEB policies to identify opportunities to strengthen the governance, transparency, and accountability of LDCs and their corporate governance and risk management structures, and to improve reliability, and support investments in serving future customer needs.” The LoD does not explain why LDC corporate governance needs to be strengthened, nor does it explain why other rate-regulated utilities are not included.
This expectation is of interest because of the previous “Governance Guidance for OEB Rate-Regulated Utilities” consultation that concluded with a 2018 report from the OEB setting out “best practices for utility corporate governance and sets out the OEB’s mandatory reporting and record keeping requirements on utility governance.”
The initiative and resulting report applied to all rate-regulated utilities (i.e., Ontario Power Generation, electricity distributors and transmitters, and natural gas utilities). The initiative was subsequently paused in 2019, pending the government’s decision to undertake a governance restructuring of the OEB. However, in 2020, the newly restructured OEB decided not to proceed with the changes, stating in a letter from the CEO that “While the OEB continues to see a linkage between good governance, excellence in utility performance and customer value, we have decided to close the Corporate Governance Guidance for OEB Rate-Regulated Utilities initiative. Further, we will not proceed with the associated reporting and record keeping requirements originally proposed. Regulated utilities may refer to the best practices laid out in the Final Report should they choose to do so.”
How the OEB intends to approach this expectation, such as potentially revisiting and/or re-adopting the 2018 “best practices” as well as reporting and record keeping requirements on utility governance, but applying the changes exclusively to LDCs (rather than all rate-regulated entities), will be of interest and likely contentious.
OEB management and staff, Commissioners, and Intervenors
On September 27, 2024 the OEB delivered a Report on Intervenors and Regulatory Efficiency to the Minister. In response to the report and its recommendations, the LoD states: “I also expect that OEB management and staff will provide assistance, as appropriate, to Commissioners by being proactive and diligent in ensuring that such report recommendations – and other good practices for ensuring intervenors are cost effective, efficient and in the public interest – are followed, and that Commissioners are transparently advised, as appropriate given the independence of their adjudicative role, where staff believe improvements are required, or intervenors need to be limited or directed.”
The OEB’s report to the Minister has not been published publicly. Further, the Minister’s letter does not elaborate on why Commissioners need to be assisted or advised by OEB management and staff on either the recommendations or other matters, such as the need to limit or direct intervenors.
In the absence of further clarity from the government and/or OEB on how this will be implemented and operationalized to ensure transparency and Commission independence, this expectation will be viewed critically by customer and environmental intervenors. In particular, the expectation on potentially limiting or directing intervenors is likely to be interpreted as the government seeking to intervene indirectly in adjudicative proceedings, through OEB management and staff, to limit intervenor scrutiny of and participation in certain utility rate and leave-to-construct applications.
Whither the Wholesale Electricity Market?
The Minister’s letter makes no mention of the IESO’s Market Renewal Program (MRP), which is scheduled to launch on May 1, 2025. The absence of any reference to the OEB’s role in the MRP is a conspicuous omission given that the design changes will introduce the most “fundamental reforms” to the Ontario electricity market since market opening.
The MRP requires guidance and support from the OEB in a number of areas because of the resulting Market Rule Amendments. In April 2024, the OEB indicated that it expected that the MRP would require amendments to the settlement provisions in the Standard Supply Service Code and the Retail Settlement Code. Further, in June 2024, the OEB issued draft Accounting Guidance related to the MRP Market Rule Amendments to assist electricity distributors in preparing for the MRP.
However, the OEB has yet to indicate the precise timing of finalizing of MRP-related Code amendments and Accounting Guidance. Given the foundational changes of the MRP it is curious that the Minister did not set out any expectations for the OEB to (1) ensure any required Code and Guidance changes are put in place in a timely fashion to facilitate a smooth transition to the new market design, or (2) work with the IESO to ensure market participants and relevant stakeholders are aware and ready for the launch of the MRP.
Conclusion
Ontario is seeking to significantly and quickly expand the size of the province’s energy system to meet numerous objectives, including housing growth, economic growth, industrial expansion, energy transition and emission reductions. These are all legitimate issues for government to pursue.
Meeting this challenge requires a change in mindset and a change in regulatory and planning tools at the OEB and the IESO. Neither institution has had to address the need for rapid system expansion and demand growth previously and do not appear to be evolving at the pace expected by the province. As a result, the government is exerting increasing control over regulatory (and planning) policy that is challenging the traditional focus on economic efficiency and cost-effectiveness, including the role of OEB management, staff, Commissioners and adjudicative proceedings.
Whether these changes can be accommodated effectively within Ontario’s existing energy institutional arrangements (i.e., between the Ministry, OEB, and IESO), such as the OEB’s current statutory mandate is not clear. Indeed, updating the OEB’s mandate and objectives (i.e., OEB Act, 1998) as well as associated regulations to reflect the government’s position on how the energy sector should be regulated going forward is likely necessary. It may also be appropriate to revisit the responsibilities and authorities of the Minister (i.e., Ministry of Energy Act, 2011).
Power Advisory strongly advises clients and interested parties to read the letter of direction in detail given the breadth of issues it touches upon and how it displays the willingness of the government to set the OEB’s regulatory policy agenda in detail. The evolving approach to energy regulation (and the role of the energy sector more broadly) is increasing the importance, value, and need for sector stakeholders to proactively develop policy positions to ensure effective and active participation in government, OEB, and IESO consultations.
Please contact Power Advisory if you have any questions or would like any additional information.