In the first case of its kind, the Ontario Energy Board (the Board) has denied an application from the Association of Major Power Consumers of Ontario (AMPCO) to review a market rule amendment by the Independent Electricity Operator (IESO) adjusting the ramp rate multiplier. The decision will be of interest to participants in the Ontario market because it establishes a framework for the scope of the Board's jurisdiction in a rule amendment review, the breadth of documentary production required by the IESO, the allocation of the burden of proof in such applications, and the applicable test under the legislation. AMPCO's application related to an assumption made by the IESO with respect to how quickly the output of a generation facility can be increased or decreased (referred to as "ramp rate") to meet demand. At the heart of Ontario's wholesale market are two parallel algorithms - a pricing algorithm that calculates the wholesale price in five-minute intervals and operates without regard for transmission constraints on the system, and a physical dispatch algorithm that recognizes transmissions constraints and is used to dispatch facilities to meet market demand.
In testing prior to market opening, the IESO observed price volatility in intervals where the facility with the lowest marginal price could not ramp fast enough to meet a significant shift in demand and more expensive generation had to be dispatched. To address this volatility, the parameters of the pricing algorithm were set to assume that generation facilities were able to ramp twelve times faster than is actually the case (commonly denoted as "12x"). As a result, in these intervals higher-priced generation that can ramp quickly is dispatched, but the pricing algorithm assumes that lower-priced, but slower ramping, facilities are being used for the purposes of calculating the wholesale price.
The discrepancy between the pricing algorithm and the physical dispatch algorithm reduces sudden price increases, but also dampens the wholesale market price by moving it further away from the true cost of production. This disconnect creates inefficiencies in the market that have been noted by the Market Surveillance Panel in a number of its reports. In particular, the Panel in its June 2006 report identified the dampening of the wholesale price in Ontario due to the ramp rate multiplier as a factor that was causing exports to flow to New York even in cases where the underlying cost of generation was actually higher in Ontario than New York.
The IESO viewed the 12x ramp rate multiplier as a temporary measure when it was introduced and began a stakeholder consultation process to re-examine it in January 2006. This process culminated in early January 2007 when the IESO approved a market rule amendment reducing the ramp rate multiplier from 12x to 3x. The accompanying decision document stated that the IESO approved the amendment because:
- it will better align price with operational drivers and will have the immediate effect of reducing uneconomic exports of energy that cause both an economic burden on Ontario as well as increased emissions from the additional operation of fossil generation in Ontario to supply these exports;
- it requires no development costs to implement; and
- it results in a very modest change to the financial distribution between consumers and suppliers when market responses and the mechanisms of the hybrid market are taken into account.
AMPCO, which was an ardent opponent of the proposed change during the stakeholder consultation process, applied to the Board for a review of the amendment under section 33 of the Electricity Act, 1998. Subsection 33(9) of the Act states that the Board shall revoke an amendment and refer it back to the IESO for reconsideration if the Board finds the amendment is inconsistent with the purposes of the Act or unjustly discriminates against or in favour of a market participant or class of market participants.
AMPCO's principal allegation was that the consultation process was flawed and the issue had been pre-determined to receive the support of generators on other initiatives. In the course of the proceeding, the Board ordered the IESO to produce all documents connected with the stakeholder consultation process on the ramp rate and other initiatives that AMPCO alleged were tied to it. The IESO objected that such issues were beyond the scope of the application and in any event, it was not practicable to produce all of the required documents within the sixty-day time frame for the proceeding set by the Act. Instead, the IESO countered with a plan to limit the scope of production that was accepted by the Board. The Board also agreed to deal with the relevance of the materials produced by the IESO at the outset of the hearing.
The application was heard by the Board over a two-day period on March 29 and 30, 2007. After hearing submissions on the "relevance issue", the Board determined that subsection 33(9) was a "jurisdiction-limiting provision" that restricted its mandate to an examination of the impact of the market rule amendment against the two criteria in that subsection. The Board noted that the legislature's intent for a limited review was also reflected in the Act's tight time frame for a rule review application. In its view, assessing whether the stakeholder consultation process was adequate is a matter for a judicial review application before the courts. Accordingly, the Board ordered that any evidence related to the consultation process be struck.
When the hearing reconvened, AMPCO, the IESO and other intervenors presented evidence related to the merits of the rule amendment and its impact on consumer's bills. After allowing for the exchange of final submissions, the Board released its decision denying the application on April 10, 2007, the last day of the sixty-day time period provided for in the Act. The notable findings in the Board's decision include the following:
- The burden of proof in a rule amendment review application is on the applicant to satisfy the Board that the requested relief should be granted.
- There is merit in pursuing amendments to the market rules that can be expected to result in efficiency improvements even in the context of Ontario's hybrid market.
- "Unjust discrimination" in section 33 of the Act means unjust economic discrimination and there must be more than an economic advantage accruing to one party rather than the other to meet this test.
- The change to a 3x ramp rate will result in greater efficiency in the IESO's real-time market and the expected impact on consumers' bills is relatively modest. While estimating the impact is a complex exercise and cannot be done with precision, the IESO's calculation of 0.004 cents/kWh is an indicator of the order of magnitude of the net effect of the Amendment.
Despite the Board's ruling on the merits of the amendment, market participants will not see an immediate impact on the operation of the Ontario market. While the Board refused AMPCO's request to stay the amendment while it sought to appeal the decision, the panel did state its expectation that the IESO would not move forward with the change until AMPCO had "a reasonable opportunity to request judicial recourse." On April 27, 2007, AMPCO filed an appeal of the Board's decision in the Divisional Court.