ENERGY MARKETS B U L L E T I N

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1 p ENERGY MARKETS B U L L E T I N May 13, 2004 Recent Developments in Ontario's Electricity Sector: Ministry of Energy releases Draft Renewable Energy Supply Contract p.2 OEB initiates proceedings for prudency review of electricity distributors regulatory asset applications p.2 OEB releases Report on Demand-Side Management and Demand Response p.3 OEB Sets New Rules for Customer Deposits p.8 Hydro One issues 10-Year Plan for Ontario's Transmission System p.10 Canadian Electricity Association Report on the Integrated North American Electricity Market p.11 Update on Recent Regulations p.13 OEB Consultation on Increased Efficiency in the Electricity Distribution Sector p.15 IMO posts information on connections to the IMOcontrolled grid or distribution systems, and on how to become a participant in the IMO-administered markets, in support of the Renewables RFP p.15 BORDEN LADNER GERVAIS LLP

2 Introduction Recent editions of the Borden Ladner Gervais LLP Energy Markets Bulletin have addressed Energy Minister Dwight Duncan s announcement of the Ontario Government s new vision for the province s electricity sector (April 15, 2004), and the release, by the Ministry of Energy, of a Request for Qualifications ( RFQ ) in advance of issuing a Request for Proposals to seek up to 300 MW of renewable energy capacity (the Renewables RFP ) to be in service no later than the end of 2007 (April 28, 2004). These bulletins are available in the Publications area of the Borden Ladner Gervais web site or by contacting any of the members of the Energy Markets and Infrastructure Group at the numbers and addresses shown at the end of this bulletin. In this edition, we have highlighted other recent developments of note in Ontario s electricity sector. Ministry of Energy Releases Draft Renewable Energy Supply Contract On May 11, 2004, the Ministry of Energy released a draft of the Renewable Energy Supply Contract (the RES Contract ) in respect of the 300 MW renewable energy capacity RFP, currently expected to be issued on May 31, This draft will form the basis for the actual RES Contract to be signed by those proponents selected and accepted by the Ministry, in accordance with the selection criteria outlined in the Renewables RFP. While the Ontario Electricity Financial Corporation (the OEFC ) is currently shown as the counterparty to the RES Contract, the RES Contract contemplates that OEFC may unilaterally assign it to the Ontario Power Authority (the OPA ), following the OPA s establishment pursuant to applicable legislation. Among other things, the OPA will have the authority to recover all costs under the RES Contract from electricity consumers through appropriate settlement mechanisms. The RES Contract is in draft form and is subject to further revision by the Ministry of Energy. The Ministry is currently soliciting comments and questions on the RES Contract from interested parties. The tentative schedule in the RFQ provides for the submission of questions and comments on the RFQ and draft RES Contract until May 20, 2004, with the Renewables RFP and the RES Contract being issued on May 31, The Ministry has also advised that due to the Victoria Day holiday on May 24, 2004, the deadline for submission of Statements of Qualifications under the RFQ has been extended to 3:00 p.m. (EDT), May 25, OEB initiates proceedings for prudency review of electricity distributors regulatory asset applications In December 2003, the Minister of Energy authorized Ontario electricity distributors to apply for the recovery of the first 25% of the balances of their Regulatory Asset accounts. The Regulatory Asset accounts include those accounts related to transition costs incurred in preparing for the opening of the wholesale and retail electricity markets in May 2002 and extraordinary BORDEN LADNER GERVAIS LLP Page 2

3 expenses ( Z factors ). They also include numerous variance accounts that distributors have been using to track the differences between the costs they have incurred in purchasing electricity and other services through the wholesale market, and the amounts recovered from their customers in respect of those items. The rate adjustment applications were made to the Ontario Energy Board in January 2004, and most distributors were issued new rate schedules in March, for implementation April 1, 2004, at the same time as the new two-tiered electricity pricing (4.7 /kwh for the first 750 kwh and 5.5 /kwh for the balance) for residential and low volume consumers replaced the fixed price of 4.3 /kwh set for these customers by the previous government. In these Phase I applications, the OEB focused on four primary Retail Settlement Variance Accounts, tracking the distributors costs and revenues in respect of power, wholesale market service charges and transmission charges. The intention was to make these adjustments final, and to conduct prudence testing on the remainder of the distributors Regulatory Asset accounts. This is particularly relevant to the transition cost and Z factor accounts, in that the recovery of those costs is subject to a number of tests in the OEB s Distribution Rate Handbook, including prudence, materiality, and inability of management to control the acquisition. Several intervenors responded to the applications, and have insisted on the importance of being able to test the distributors submissions through cross-examination. As a result, the rate adjustments are being considered interim by the OEB. On May 5, 2004, the OEB issued its first Procedural Order on Phase II of these applications. The OEB has selected 5 of the largest distributors in the province, and has directed them to file material in support of their Regulatory Asset balances by May 21, The Procedural Order provides for an Issues Conference, an Issues Day before the OEB (if necessary), intervenor interrogatories, intervenor evidence and applicant interrogatories, with the process culminating in five days of oral hearings during the week of July 12, The OEB has set aside one day of hearing time for each distributor, although this may be extended. The Procedural Order notes that The Board shall hear evidence in each of these five proceedings at the same time in one oral hearing. Evidence heard in one proceeding shall be admitted as evidence in the other four proceedings. In addition to determining the recoverable Regulatory Assets for each of the five named distributors, the OEB will be able to assess, among other things, what would constitute the best evidence, forum and process to determine the reasonableness of Regulatory Assets amounts claimed or to be claimed for the remaining distributors. The OEB s decision on these applications will therefore have impacts on all licensed and rate-regulated distributors in the province. Ontario Energy Board Issues DSM/DR Report The Minster of Energy has recently highlighted the need for Ontario to create a culture of conservation to help ensure a reliable and affordable electricity supply in the future. The province s demand for electricity is growing, and supply conditions are tight, particularly with the Ontario Government s plan to phase out the province s coal fired generation facilities in Demand Side Management ( DSM ) and Demand Response ( DR ) strategies are becoming critical to meeting the Province s need for power. BORDEN LADNER GERVAIS LLP Page 3

4 On June 18, 2003, the Minister of Energy directed the OEB to consult with stakeholders on options for the delivery of DSM and DR activities within the electricity sector. In March 2004, following a consultation process, the OEB released its Report on Demand-Side Management and Demand Response in the Ontario Electricity Sector (the Report ). The Report s recommendations address: the establishment of a conservation agency; the role distributors should play in DSM/DR initiatives; implementing DR in the IMO-administered markets; and consumer education. Conservation Agency After reviewing current practices in other jurisdictions, the OEB recommended that a central conservation agency should take the lead for overseeing DSM and DR activities in Ontario s electricity sector. The OEB believes that a central coordinating agency would ensure consistency, universal access to programs, and compatibility with broader public policy goals. The conservation agency would be funded through a charge on electricity consumption, so that individuals or organizations that use the most electricity should contribute the most towards conserving it. The new agency would be responsible for: developing the province-wide DSM and DR plan (including conservation fund administration, market plans, budget allocations, and market transformation initiatives); identifying broad areas of opportunity in DSM and DR; setting rules for selecting and prioritizing DSM and DR activities; ensuring a comprehensive portfolio of programs, including hard to reach sectors; contracting with and funding market players and distributors for the design and delivery of programs; setting monitoring and evaluation programs; contracting for an independent audit of results; and providing an annual report to the Minister. The conservation agency would contract for specific DSM/DR activities and invite proposals from individuals and entities, including distributors, energy service companies, retailers, wholesalers, and individual consumers. In selecting counterparties to contracts, the agency would use screening criteria such as the total resource cost test. This test evaluates the costs and/or benefits accruing to society as a whole, due to an activity, excluding externalities. The conservation agency would be licensed by the OEB, which would also oversee the provincewide DSM and DR plan; approve the consumption charge; and approve the conservation agency s budget. The Report proposes that the Ministry of Energy be involved in the oversight of the conservation agency to the extent that it is responsible for setting overarching objectives for DSM and DR (such as peak demand and consumption reduction charges). BORDEN LADNER GERVAIS LLP Page 4

5 Role of Distributors While the OEB favours a central coordinating agency to encourage market transformation, program consistency, and service of hard-to-reach market segments, it also envisions LDC participation in DSM/DR activities. Distributors would work toward increasing distribution system efficiency. The OEB would oversee distributor DSM/DR activities for least-cost planning and/or distribution system optimization, which might include investments in new metering technology, controllers, communications or new gateway services. The OEB would also be responsible for developing principles and guidelines on the regulatory treatment of these activities for ratemaking purposes as well as reviewing the regulatory treatment of distribution system losses in order to encourage system efficiency gains. The OEB has also suggested that distributors should be eligible to develop and deliver DSM/DR activities for the conservation agency beyond least-cost planning and distribution system optimization. Distributors could approach the conservation agency for additional or full funding of DSM/DR activities or bid on projects identified by the conservation agency. Contracts entered into with the conservation agency would fall outside the distributor s regulated rate of return and distributors would be entitled to build in room for profit. The OEB has noted however, that it will closely monitor such situations to ensure that cross-subsidization does not result from granting distributors the right to engage in competitive activities. A major concern of some stakeholders is the economic disincentive which exists for distributors in relation to the promotion of conservation and efficiency activities. Under the current system, profits for distributors are linked to electricity sales. A distributor that encourages DSM/DR activities and programs, or is subject to such programs as proposed by the conservation agency, would suffer reduced sales and corresponding decreased profits. The OEB recognized this issue in the Report, but did not propose a solution. It states that there are various methods for dealing with the depletion in revenue such as: annual updates to volumetric forecasts to adjust rates to recover approved revenue requirements [in other words, adjusting rates to ensure that LDC revenues enable them to earn their permitted returns despite reduced consumption]; modification to distribution rate structure (more fixed, less variable); modification of type of PBR framework (revenue cap rather than price cap); and variance accounting (ie. lost revenue adjustment mechanisms). The Board intends to review the issue and determine an appropriate method for revenue protection as part of its future review of electricity distribution Performance Based Regulation. Finally, the OEB has commented on the Minister s announcement that the government will allow distributors to apply to the OEB for the next instalment of their allowable return on equity beginning March 1, 2005, provided that distributors commit to reinvest one year s incremental returns in conservation and demand initiatives. The OEB indicated that guidelines for the review and approval of such investments are still to be developed. However, it expects investments to BORDEN LADNER GERVAIS LLP Page 5

6 focus on activities that promise immediate conservation benefits, including equipment, business practices and information systems that will enable DSM/DR activities and on DSM research. Demand Response in the IMO Administered Markets The third set of recommendations involves the markets themselves. In order to encourage DR activities in the short term the OEB recommends that the Independent Electricity Market Operator (the IMO ) design and develop economic DR to be put in place as a transitional measure. Economic DR, as described by the OEB, would entail paying buyers of electricity to curtail their usage. Economic DR should only be available in periods when the price for electricity is above a certain threshold, and would only be available on a transitional basis. The OEB anticipates that it will take three to five years for the market to develop a more realistic demand curve where the deciding factor to curtail load is price. The OEB also commented on the current Transitional Demand Response Program being developed by the IMO. The OEB feels that one of the eligibility criteria as currently proposed by the IMO would be too limiting. Specifically, the IMO has proposed that a verifiable barrier to DR participation exist. The OEB has noted that large industrial consumers who are not active in the market because they lack experience in responding without a payment stream; they have fixed price contracts; or prices are too low to make it economic for them, could potentially be excluded from participation in economic DR under the IMO s proposed program. The OEB recommends that such consumers be eligible for economic DR as they represent a large opportunity for immediate DR resources. The OEB would play a part in enhancing DR in the retail markets by: developing interim and long-term Standard Supply Service ( SSS ) pricing strategies that include peak and off-peak time-differentiated SSS prices altered seasonally; amending the Distribution System Code to require installation of advanced metering technologies on any new installation that is forecast by the distributor to have a monthly average peak demand during a calendar year of over 200kW; and reviewing the use of metering technologies by low-volume consumers and implementing its findings through guidelines and amendments to codes. The proposed conservation agency would consider pilot and demonstration projects for emerging and innovative technologies that enable retail load management. Coordination with the IMO is included in this recommendation, as the OEB has indicated that the IMO should have oversight of DR in the markets that it administers. The OEB s last recommendation for bringing DR to the IMO-administered markets involves aggregation of retail load. It is the OEB s view that no one player should be mandated to play the role of load aggregator. In furtherance of this view, the OEB is recommending that the IMO revise the Market Rules to facilitate load aggregation including statistical measurement, metering, and settlement requirements. It is the OEB s opinion that relaxed Market Rules could allow load aggregation to develop naturally and thus eliminate the need to mandate the role of load aggregation in the market. BORDEN LADNER GERVAIS LLP Page 6

7 Consumer Education The OEB recommends that the conservation agency be a conservation champion for educating consumers. The conservation agency would coordinate efforts with the Ministry of Energy, which sets policy direction and general energy matters; the OEB, which is responsible for communicating to consumers how the markets work and what choices are available; and the IMO, which is responsible for interacting with market participants in respect to market function. The goal of consumer education would be to promote knowledge of how, when and whether to use electricity and gas. The OEB also envisions a role for itself in designing, developing and/or delivering information to consumers related to energy conservation, energy efficiency, load management and cleaner sources of energy to help consumers understand their energy choices and the consequences of such choices. Funding of Conservation Efforts and Programs The OEB recommends that conservation efforts and programs would be funded by a charge on electricity consumption, in line with the approach that those who use the most electricity should contribute the most towards conserving it, and will also have the greatest opportunity to save from investment in conservation. This charge would be levied on all consumers, but would not apply to self-generated electricity. Going Forward DSM activities in the gas sector, and the role of distributed generation in DSM, were discussed during the consultation process, but the OEB indicates in its Report that it will not be making any recommendations with respect to such issues at this time. The OEB has noted throughout its Report that many of its proposals will require legislative action and amendments to codes and Market Rules. The timeline and likelihood of implementing the OEB s proposals remains unclear. However, the OEB has noted in relation to some of its recommendations that further consultation with stakeholders should be undertaken before definitive action is taken. In particular, the OEB has specified that the IMO should consult with stakeholders in relation to the development of economic DR and that the OEB itself will issue a notice for comments with respect to amendments to the Distribution System Code relating to the installation of advanced metering technology. Other opportunities for consultation may arise with respect to issues that the OEB has stated it will review. The OEB s DSM/DR Report and the Ontario Power Authority and Conservation Secretariat In his speech to the Canadian Club on April 15, 2004, Energy Minister Duncan announced that within a year, the government would establish the Ontario Power Authority (the OPA ). Among its responsibilities will be the achievement of the targets set by the government for conservation, the use of renewable energy, and the overall supply mix of electricity in the province of Ontario, as part of a broader system planning role. A Conservation Secretariat will be established within the OPA, which will spearhead conservation efforts among consumers BORDEN LADNER GERVAIS LLP Page 7

8 across the Province, and develop programs to assist consumers in those efforts. The Conservation Secretariat will monitor progress in reducing overall demand. According to the Minister, the OEB would maintain a role in conservation by establishing a framework to help local distribution companies deliver energy conservation programs as appropriate. It remains to be seen how the OEB s role in conservation and DSM will be defined and coordinated with that of the OPA and Conservation Secretariat. However, the Minister s comments suggest that while there is acceptance of the idea of a central agency to coordinate conservation efforts, the OEB s role with respect to that agency may not be as broad as that envisioned in the DSM/DR Report. Additionally, in a speech on April 19, 2004, Premier McGuinty announced the government s plans to have smart meters installed in every home by 2010, with the first 800,000 to be installed by It is not yet clear whether, or how, this initiative would be coordinated with the OEB s review of the use of metering technologies by low-volume consumers and the implementation of its findings through guidelines and amendments to codes, as proposed in the DSM/DR Report. OEB Sets New Rules for Customer Security Deposits The OEB recently approved amendments to its Distribution System Code ( DSC ) pertaining to consumer security deposit policies of local electricity distribution companies ( LDCs ). The DSC amendments apply to residential, commercial and industrial rate classes, and they set out the conditions under which security deposits can be collected and retained. These amendments are intended to ensure that consumers receive fair and equitable treatment, but they place further limitations on LDCs authority to require and retain security deposits. Under previous legislation, municipal electrical utilities had to the power to require reasonable security from consumers. In the event of account default and inadequate security, arrears could be added to the municipal tax roll (i.e., account would be settled when the property was sold by the municipality for tax arrears). With the passage of the Energy Competition Act, 1998 and the subsequent incorporation of LDCs as commercial entities, distributors retained the right to require deposits but lost access to the tax rolls. While, distributors had wide discretion to establish their own security deposit policies across the province the OEB determined that this had resulted in dissimilar treatment of consumers in different areas of Ontario. The suggested amendments standardize the policies. Key features of the amendments include the following: Circumstances in which LDCs may require a security deposit An LDC may require a security deposit if the consumer does not have a good payment history. A consumer does not have a good payment history if, during the relevant time period, it has received (i) more than one disconnection notice from the distributor; (ii) more than one cheque given to the distributor by the consumer has been returned for insufficient funds; (iii) more than one pre-authorized payment to the distributor has been returned for insufficient funds; or (iv) an employee of the LDC visits the customer s premises to demand payment of an outstanding amount or to disconnect the premises for failing to make a payment. BORDEN LADNER GERVAIS LLP Page 8

9 The relevant time periods are: 1 year for a residential customer; 5 years for a non-residential customer in a <50 kw demand rate class; or 7 years for a non-residential customer in any other rate class. Maximum dollar amounts, and calculation of deposits If the LDC bills its customers on a monthly basis, the maximum amount of a security deposit is to be calculated based on 2.5 times the customer s average bill (over the most recent 12 consecutive months within the past 2 years). If the LDC bills its customers bi-monthly or quarterly, the average bill is multiplied by 1.75 or 1.5, respectively. This calculation represents the maximum amount; the distributor has the discretion to require any amount up to the maximum including no deposit at all. Length of time a deposit can be held and refund provisions Distributors must review all deposits annually to determine if any should be refunded. Consumers that have maintained a good payment history during the time periods described above should receive a full refund. However, for non-residential customers over 5,000 kw that represent the greatest exposure risk to LDCs, only 50% of the deposit must be refunded based solely on good payment history. To obtain a greater refund, the consumer must obtain a credit rating from a recognized bond rating service. The refund amount will depend on the rating. These amendments will require LDCs to return many consumer security deposits. To address the resulting LDC cash flow issues, a 1-year transition period has been provided for LDCs to return these deposits. The transition period ends on February 1, LDCs may refund deposits at any time prior to February 1, 2005 at their discretion. After February 1, 2005, if a consumer s anniversary date of providing the deposit is earlier than the LDC s annual review, and the consumer has maintained a good payment history, the consumer may request a refund, in writing, any day after its anniversary date. If a consumer is moving or closing its account with the LDC for any other reason, the LDC may return the deposit at any time within 6 weeks. However, if the consumer failed to pay its final bill, the distributor may retain the deposit to apply against the balance owing. Forms of security permitted and types of payment The form of payment for a residential customer can be either cash or cheque. A non-residential customer can provide cash, a cheque or an automatically renewing, irrevocable letter of credit. The LDC may also accept other forms of security at its discretion. The deposit may be paid in equal instalments over a 4-month period. Instalments may be provided over a period exceeding 4 months at the LDC s discretion or less than 4 months at the consumer s discretion. BORDEN LADNER GERVAIS LLP Page 9

10 Exemption requirements A new customer, with no payment history with the LDC, may still be eligible for an exemption from the deposit requirement, by providing a reference letter that confirms its good payment history from another electricity or natural gas utility in Canada; or (other than customers in a >5,000 kw demand class) by providing a positive credit check. Interest Calculations If cash or a cheque is provided, interest must be paid commencing on receipt of the total deposit. The interest rate is the Bank of Canada s Prime Business Rate less 2%. Accrued interest must be paid out by the LDC (i) at least once every 12 months; or (ii) on return or application of the security deposit or closure of the account, whichever comes first. Distributors have been provided with a 6-month implementation period to make the necessary changes to their current security deposit policies and customer information systems. The implementation period ends in July Even before the OEB moved to standardize deposit policies, distributors have faced significant impacts as a result of customer defaults, particularly since approximately 85% of the customer s bill reflects commodity, transmission and wholesale market service charges that the distributor must pay to the IMO whether or not the distributor is paid by the customer. Reducing the distributor s ability to protect itself from defaults, through new rules that limit its ability to take and hold deposits, may increase its exposure in the future. Hydro One Issues 10-Year Transmission Plan On March 2, 2004, Hydro One released its 10-year plan for the transmission system in Ontario, entitled Transmission Solutions, (the Plan ), outlining the transmission changes and updates required to ensure the secure and reliable delivery of electricity in Ontario in the future. In devising the Plan, Hydro One was guided by the following transmission goals: the integration of new customers by providing such customers with efficient and timely connections, ensuring that transmission facilities are adequate to reliably supply Ontario s load, and ensuring Ontario has full use of available generation sources throughout the Province and in neighbouring jurisdictions. The Plan discusses the current and planned transmission system projects for the next 10 years, including upgrades, new facilities and reinforcements. The more significant transmission development activities outlined in the Plan include: Load Connections Hydro One s assessment of its 273 transmission connection stations indicates that 74 of these connections will reach or exceed their capacity by Hydro One is currently working with customers to develop and reach agreements on the preferred solutions to address this issue. New or modified load connection projects BORDEN LADNER GERVAIS LLP Page 10

11 proceeding in 2004 include new connection station facilities in the Barrie and Mississauga areas. Area Supply Reliability Hydro One has major regional initiatives underway to address supply reliability in the Greater Toronto Area (Toronto, and York Region), Ottawa, the Kitchener/Waterloo Region, and Windsor. Generation Connections Hydro One reports that it is currently meeting with more than 70 new generation project proponents considering connection to the transmission system, although only four are currently under construction. Major initiatives are underway near London and in northern Ontario to facilitate additional capacity. Retirement of Coal-fired Generation The Plan discusses the system reinforcements required to ensure continued reliable transmission of electricity after the planned retirement of coal-fired generating stations. Interconnections Hydro One reports that potential interconnection projects are being discussed with Quebec, Manitoba and Michigan to increase the transmission capability between those jurisdictions and Ontario. Transmission Bottlenecks Hydro One s most active projects to address transmission bottlenecks are in the Niagara region (to increase import capacity at the New York intertie and allow for generation developments in the area, including Beck III), and in northwest Ontario (to reduce constraints limiting transfers of northwest Ontario resources and imports from Manitoba and Minnesota). Hydro One states that the Plan is a living plan that will continue to evolve as Ontario s electricity sector changes and in response to input from key stakeholders. Canadian Electric Association ( CEA ) Report: Canadian Electricity and the Economy: The Integrated North American Electricity Market A Bi-National Model for Securing a Reliable Supply of Electricity This report, released by the CEA on March 3, 2004, highlights the lessons coming out of the August 14, 2003 electrical power blackout and focuses on the interdependency and resiliency of the North American electricity market. It notes that increasingly open markets have brought opportunities for new efficiencies, new technologies and better customer service and price. However, the same systems also face pressures that affect reliability, including aging infrastructure, a lack of new generation and improved transmission to meet demand, and growing regulatory pressures. With those concerns in mind, the CEA proposes several measures that all stakeholders should consider. These include the following: 1. Support an open debate on all of the supply options available to meet the growing demand for electricity. BORDEN LADNER GERVAIS LLP Page 11

12 The CEA believes it is reasonable to project demand growth between 1 to 1.5 percent per year for the foreseeable future, meaning that significant investment is needed in order to meet that demand. The report warns that the right signals need to be in place to stimulate new investment in generation, transmission and distribution infrastructure, while at the same time improvements in efficiency must be made. 2. Encourage bi-national cooperation on the construction of new transmission capacity to ensure a reliable continental electricity system. The report refers to the U.S. Department of Energy s determination that the transmission system in the United States had become congested because investment in new transmission facilities has not matched growth in electricity demand and investment in new generation. The report highlights several examples where supply has not been available due to transmission congestion. One example is the Pacific Northwest with the lack of direct interties between Alberta and the United States. This limits opportunities for cross-border trade between the two jurisdictions. The CEA suggests streamlining the process for siting transmission lines which would in turn aid in speeding construction. Increasing the rates of return on capital invested in transmission facilities would also help to encourage investment. 3. Explore opportunities for bi-national cooperation for both investment in advanced transmission technologies and transmission R&D. The report encourages taking advantage of opportunities for bi-national cooperation for investment in advanced transmission technologies and transmission R&D. Focusing on supply alone is not the solution to the problem. Distributed generation and demand side measures are also necessary to relieve existing transmission constraints. 4. Promote new generation technology and demand-side measures to relieve existing transmission constraints and reduce the need the need for new transmission facilities. The report states that distributed generation in Canada accounts for 11% of total generation, while distributed generation accounts for 8% of total generation in the United States. Emphasis is placed on the importance of adding more distributed generation to the system and that bi-national co-ordination of demand-side initiatives could work to address transmission constraints on the international grid. 5. Endorse a self-governing international organization for developing and enforcing mandatory reliability standards for the evolving electricity industry. In its preliminary conclusions, the joint Canada/U.S. task force on the August 14, 2003 blackout pointed to the failure of some parties to follow NERC s voluntary reliability standards. (The final report, issued last month, carried this conclusion forward, and identified several institutional issues with respect to those standards, in light of NERC s lack of structural independence from the industry it represents and [its lack of] authority to develop strong reliability standards and to enforce compliance with those standards. ) The CEA agrees that voluntary reliability standards should change, especially as markets continue to evolve. Furthermore the CEA supports the enactment of the reliability BORDEN LADNER GERVAIS LLP Page 12

13 standard language contained in the U.S. Energy Bill. The Bill allows for the creation of an Electric Reliability Organization ( ERO ), which could provide solutions that are applicable and acceptable to all parties across the continent. The report stresses the importance of Canada s participation in the process. 6. Coordinate measures to promote critical infrastructure protection. The report notes that the integrated market helps Canada and U.S. participants effectively work in concert to safeguard the North American Electricity Grid against both physical and electronic cyber threats. 7. Harmonize U.S. and Canadian efforts to streamline or clarify regulation of electricity markets. The report highlights that significant effort is underway by the government of Canada to review the federal regulatory framework. The object of the Smart Regulation project is to ensure that regulation is operating in the most efficient and effective way possible. An argument is made that the Smart initiative should be harmonized with efforts in the United States currently being undertaken in order to harmonize approaches in regulating electricity markets. The advantages of doing so would appear to be clear. The report stresses the need for cooperation between both Canada and the U.S. in order to further cross-border trade and encourage reliability in the system, recognizing that steps should be taken in a manner that respects the sovereignty of both the U.S. and Canada and their specific states and provinces. As energy demands continue to increase, co-operation between the two nations will become increasingly necessary in order to ensure reliability. Recent Regulations under the Electricity Act, 1998 and the Ontario Energy Board Act, 1998 (i) Electrical Distribution Safety O.Reg. 22/04 Ontario Regulation 22/04 ( O.Reg 22/04 ) made under the Electricity Act, 1998 (the Electricity Act ) establishes among other things safety standards to be met by all distribution systems and the electrical installations and electrical equipment forming part of such systems. The standards apply in particular to: (i) all electrical installations operating at 750 volts or below that are not a direct part of a distribution system; (ii) all overhead distribution lines, including secondary distribution lines; (iii) all underground distribution lines, including secondary distribution lines; and (iv) distribution stations. Distributors shall also ensure that installation work is based upon plans prepared by either a professional engineer or on the distributors standard design drawings or standard design specifications that have been assembled by a professional engineer, and certified by an engineering technologist. Before a distribution system is put into place, an inspection must be performed by a professional engineer on behalf of the distributor, or by qualified persons BORDEN LADNER GERVAIS LLP Page 13

14 identified in a construction verification program developed by a distributor and approved by the Electrical Safety Authority. The provisions of O. Reg 22/04 will come into force at various times over the course of the next year. Certain provisions apply to distribution systems regardless of when they came into existence; others apply only to distribution systems that are designed or come into existence on or after February 11, (ii) Designated Consumers and New Exemptions from Licensing, Rate Regulation and Other Provisions of the OEB Act O.Reg. 41/04 Ontario Regulation 41/04 ( O.Reg 41/04 ) made under the Ontario Energy Board Act, 1998 (the OEB Act ) amends Ontario Regulation 161/99 ( O.Reg 161/99 ) by setting out a lengthy list of consumers that are prescribed for the purposes of Section 56(f) of the OEB Act as designated consumers, entitling them to the fixed commodity price of 4.3 /kilowatt-hour prior to April 1, 2004, and the tiered commodity price of 4.7 and 5.5 from April 1st. O. Reg. 161/99 exempts certain distributors and transmitters from licensing, rate regulation and other requirements of the OEB Act. O.Reg. 41/04 adds mines to the list. It also amends other exemptions for transmitters to make it clear that the transmission system need not have been in continuous use since January 1, 2002 in order to qualify for the exemption, provide that other conditions have been met. Finally, O.Reg. 41/04 provides that certain transmitters that are also generators will continue to qualify for certain exemptions even if the transmitter incidentally transmits electricity to a consumer that was connected on March 1, 2004 to the transmission system that the transmitter owns or operates. (iii) Tiered Commodity Pricing for Low-volume and Designated Consumers O.Reg. 42/04 Made under the OEB Act, O.Reg 42/04 came into force on April 1, O.Reg 42/04 confirms the conservation threshold for low-volume and designated consumers as 750kWh per month. However, the conservation threshold for a low-volume consumer or a designated consumer who has an account with a distributor as it relates to property defined in the Condominium Act, 1998, a residential complex as defined in the Tenant Protection Act, 1997 or a property that includes one or more dwellings and that is owned or leased by a co-operative as defined in the Cooperative Corporations Act and that relates to more than one property in the property or complex, is 750kWh per month multiplied by the number of units to which the account relates in the property or complex. O.Reg 42/04 fixes the commodity price for electricity payable by a low-volume consumer or a designated consumer pursuant to Section 79.4(1) of the OEB Act at 4.7 /kwh for the electricity consumed during a billing period, up to and including 750kWh, and 5.5 /kwh for the electricity consumed during a billing period in excess of 750kWh. The invoice from a distributor or in the case of retailer-consolidated billing, a retailer to the low-volume consumer or designated consumer for each billing period must show as separate items the amount billed at 4.7 /kwh and the amount billed at 5.5 /kwh. BORDEN LADNER GERVAIS LLP Page 14

15 (iv) Payments re: Section 79.4 of the OEB Act Amendments to O.Reg. 435/02 O.Reg 435/02 sets out the payment mechanism that ensures that parties such as distributors that must pay the market price for electricity but are only paid the statutory price of 4.3 /kwh by low-volume and designated consumers are made whole by the Ontario Electricity Financial Corporation. O.Reg. 43/04, made under the OEB Act, amends O.Reg. 435/02 by providing for more than one statutory price. The amendments came into force on April 1, 2004, when tiered pricing of 4.7 /kwh and 5.5 /kwh for low-volume and designated consumers comes into effect. OEB Consultation on Increased Efficiency in the Electricity Distribution Sector In January, 2004, the OEB announced that it would hold consultations during which it would review alternate ways of driving further efficiencies in the delivery of electricity services and to better understand the impact of implementing these alternatives on distributors and the broader electricity industry. Among the key issues in the discussion paper that preceded the consultation sessions in February, and in the sessions themselves, were whether there are economic service and other benefits to be gained from further consolidation of the electricity distribution sector ; and whether consolidation may also provide additional benefits by allowing distributors to be more involved in commodity procurement and load aggregation, including acting as load serving entities, [that would contract with generators and others to provide default supply service to Ontario electricity consumers], and in demand side management and system planning. Over a 2½ day period in February, the OEB heard from a broad spectrum of distributors and other electricity sector participants. Distributors and others were divided on the question of whether further industry consolidation would create more efficiencies in the distribution sector. Similarly, participants (distributors included) were divided on the merits of allowing distributors to act as load serving entities, thereby potentially taking on risks related to electricity trading that they do not currently have, as distributors currently are required to purchase all of their commodity requirements in the spot market. The OEB recently issued a report, available on the OEB s web site ( that summarizes the positions of the participants on key issues, but the OEB has not yet adopted its own position on the issues, nor is it clear whether the OEB will do so. Attendees at the consultation were advised by OEB representatives that Board staff would be discussing the issues with the OEB, but that a further report may not be produced. IMO posts information on connections to the IMO-controlled grid or distribution systems, and on how to become a participant in the IMOadministered markets, in support of Renewables RFP With the release on April 28 th of the Request for Qualifications in respect of the upcoming Request for Proposals for 300 MW of renewable energy capacity, the IMO has posted information on its web site information on making new or modified connections to the IMO-controlled grid and distribution systems in Ontario. The IMO s flow chart and accompanying material provide a useful resource in navigating the connection process for those interested in the Renewables RFP. BORDEN LADNER GERVAIS LLP Page 15

16 To discuss any of the matters raised in this Bulletin, please contact Linda Bertoldi at (416) , or Mark Rodger at (416) This publication has been prepared as a service to clients and friends of Borden Ladner Gervais LLP and other persons involved in energy markets. It is not intended to be an exhaustive statement of law or an opinion on any subject. If you have specific areas of concern or require further details we would be pleased to elaborate on any of the matters set out above. Linda L. Bertoldi Tel: (416) lbertoldi@blgcanada.com Co-Chair, Energy Markets Law Group Rick F. Coburn Tel: (416) rcoburn@blgcanada.com Bruce Fowler Tel: (416) bfowler@blgcanada.com W. Paul McCarten Tel: (416) pmccarten@blgcanada.com Michael Shadbolt Tel: (416) mshadbolt@blgcanada.com Christine E. Long Tel: (416) clong@blgcanada.com Elizabeth A. Jordan Tel: (416) ejordan@blgcanada.com Meaghan Bethune Tel: (416) mbethune@blgcanada.com J. Mark Rodger Tel: (416) mrodger@blgcanada.com Co-Chair, Energy Markets Law Group Stephen J. Fyfe Tel: (416) sfyfe@blgcanada.com Shane Freitag Tel: (416) sfreitag@blgcanada.com James C. Sidlofsky Tel: (416) jsidlofsky@blgcanada.com Richard J. Morelli Tel: (416) rmorelli@blgcanada.com William R. McLean Tel: (416) wmclean@blgcanada.com Vinay Mehta Tel: (416) vmehta@blgcanada.com Tyler J. Moore Tel: (416) tjmoore@blgcanada.com BORDEN LADNER GERVAIS LLP Page 16

17 Ottawa Office Contacts: Peter C.P. Thompson Tel: (613) Kent D. Howie Tel: (613) BORDEN LADNER GERVAIS LLP IS AN ONTARIO LIMITED LIABILITY PARTNERSHIP. FOR MORE INFORMATION ON THE FIRM S CANADIAN ENERGY MARKETS ISSUES AND OTHER LEGAL SERVICES, CONTACT ONE OF OUR OFFICES BELOW: Vancouver Office: 1200 Waterfront Centre 200 Burrard Street P.O. Box Vancouver, British Columbia V7X 112 Tel: (604) Fax: (604) Toronto Office: Scotia Plaza 40 King Street West Street Toronto, Ontario M5H 3Y4 Tel: (416) Fax: (416) Ottawa Office: World Exchange Plaza 100 Queen Street, Suite 1100 Ottawa, Ontario K1P 1J9 Tel.: (613) Fax: (613) Montreal Office: 1000 de La Gauchetiere Street West Suite 900 Montreal, Quebec H3B 5H4 Tel: (514) Fax: (514) Calgary Office: 1000 Canterra Tower 400 Third Avenue S.W. Calgary, Alberta T2P 4H2 Tel: (403) Fax: (403) ::ODMA\PCDOCS\CCT\506677\4 BORDEN LADNER GERVAIS LLP Page 17