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Energy - Electricity Act, 1998 (EA). National Steel Car Limited v. Independent Electricity System Operator
In National Steel Car Limited v. Independent Electricity System Operator (Ont CA, 2024) the Ontario Court of Appeal considered a division-of-powers constitutional challenge to the 'FIT Program', a renewable electricity program under the Green Energy and Green Economy Act, 2009 (a now spent omnibus amendment Act).
These quotes set out some basics of Ontario's Electricity Act, and the statutory basis and history of the FIT program:[1] This appeal involves a constitutional challenge to electricity costs. In 2009, the Government of Ontario designed a feed-in-tariff renewable electricity procurement program (the “FIT Program”) pursuant to the Green Energy and Green Economy Act, 2009, S.O. 2009, c. 12 (the “Green Energy Act”). Under the FIT Program, suppliers of renewable energy were paid to “feed in” energy into Ontario’s electricity grid.
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Background Facts
(i) Statutory Context
[6] By way of background, the Province of Ontario has jurisdiction over the regulation of electricity in the province, including the generation of renewable energy, by virtue of ss. 92(13), 92(15), and 92A(1)(c) of the Constitution Act, 1867. In 1998, the Legislature introduced a competitive electricity market through the enactment of the Electricity Act, 1998, S.O. 1998, c.15, Sched. A, and also enacted the Ontario Energy Board Act, 1998, S.O. 1998, c.15, Sched. B. These two statutes constitute the primary legislative framework for the regulation of electricity in Ontario.
[7] The purposes of the Electricity Act, 1998 are extensive. They are described in s. 1 of the Act:(a) to ensure the adequacy, safety, sustainability and reliability of electricity supply in Ontario through responsible planning and management of electricity resources, supply and demand;
(a.1) to establish a mechanism for energy planning;
(b) to encourage electricity conservation and the efficient use of electricity in a manner consistent with the policies of the Government of Ontario;
(c) to facilitate load management in a manner consistent with the policies of the Government of Ontario;
(d) to promote the use of cleaner energy sources and technologies, including alternative energy sources and renewable energy sources, in a manner consistent with the policies of the Government of Ontario;
(e) to provide generators, retailers, market participants and consumers with non-discriminatory access to transmission and distribution systems in Ontario;
(f) to protect the interests of consumers with respect to prices and the adequacy, reliability and quality of electricity service;
(g) to promote economic efficiency and sustainability in the generation, transmission, distribution and sale of electricity;
(g.1) to facilitate the alteration of ownership structures of publicly-owned corporations that transmit, distribute or retail electricity;
(g.2) to facilitate the disposition, in whole or in part, of the Crown’s interest in corporations that transmit, distribute or retail electricity, and to make the proceeds of any such disposition available to be appropriated for any Government of Ontario purpose;
(h) to ensure that Ontario Hydro’s debt is repaid in a prudent manner and that the burden of debt repayment is fairly distributed;
(i) to facilitate the maintenance of a financially viable electricity industry; and
(j) to protect corridor land so that it remains available for uses that benefit the public, while recognizing the primacy of transmission uses. [8] For the purposes of this appeal, items (a), (b), (d), (f), (g) and (i) are of note.
[9] The Ontario Power Authority (“OPA”) was established in 2004. Its mandate was to ensure a long-term, adequate supply of electricity in Ontario. It was responsible for the procurement of new electricity generation, entering into contracts with generators[1] of electricity, and planning for Ontario’s electricity system. The not-for-profit company, the Independent Electricity System Operator (“IESO”),[2] is responsible for the day-to-day operations of the electrical system and for administering the competitive wholesale electricity market. It also administers the billing and settlement of electricity transactions. In January 2015, the OPA merged with the IESO respondent, with the combined entity continuing as the IESO. The new IESO’s mandate was expanded to include the responsibilities formerly held by the OPA. IESO’s objectives include:(a) contracting for the procurement of electricity supply and operating the electrical grid to promote the purposes of the Electricity Act, 1998.
(b) engaging in activities to facilitate the diversification of sources of electricity supply by promoting the use of cleaner energy sources and technologies, including alternative energy sources and renewable energy sources.
(c) regulating Ontario’s electricity markets pursuant to Part III of the Electricity Act, 1998, which establishes the markets and empowers IESO to make rules regulating them. [10] The application judge described at para. 115 of his reasons the historical developments that led to the introduction of the FIT Program:The wholesale electricity market was originally designed with the objective that, over the long-run, HOEP [the Hourly Ontario Energy Price] would be sufficient to allow electricity producers to recover both their fixed costs and variable costs (costs which increase with the quantity of electricity produced, such as fuel costs, labour costs, etc.). However, following the opening of Ontario’s competitive wholesale electricity market in May 2002, the prices of electricity rose significantly. This, in turn, caused the government of the day to introduce legislative price controls. This price freeze meant that the market price (HOEP) would not be permitted to rise to cover the cost of private investment in new generation facilities that were needed to meet the province’s electricity demands. [11] In the early 2000s, as pollution and global warming became prominent issues, the Ontario Government introduced legislation and programs to decarbonize the energy sector. Beginning in 2005, the Ontario Government had requested that the OPA prepare a long-term (20 year) electricity plan for the Province. The Government developed an interest in procuring new renewable energy generation, which by its nature does not emit carbon, and which reduces reliance on sources of energy that emit carbon into the atmosphere. Between 2004 and 2006, the Minister of Energy and the OPA engaged in procurements for the generation of electricity from renewable sources (known as Renewable Energy Supply (RES) I, II and III and Renewable Energy Standard Offer Program (RESOP)). As I will discuss, the Global Adjustment (originally described as the Provincial Benefit) was introduced at this time.
[12] On October 8, 2008, the Minister of Energy presented a proposal to Cabinet. The proposal identified three benefits associated with investing in energy conservation and renewable energy:(a) environmental benefits – cleaner air, much lower greenhouse gas emissions, and shifting reliance from non-renewable resources;
(b) economic benefits – a “green economy” – jobs and economic development opportunities in green manufacturing through skills development and innovation; and
(c) social benefits – regional opportunities, including rural areas and the north, First Nations and Métis partnership opportunities, protection for low-income Ontarians, and community participation including municipalities and Local Distribution Companies. [13] In 2009, the Provincial Government enacted the Green Energy Act. The preamble of the Act stated:The Government of Ontario is committed to fostering the growth of renewable energy projects, which use cleaner sources of energy, and to removing barriers to and promoting opportunities for renewable energy projects and to promoting a green economy.
The Government of Ontario is committed to ensuring that the Government of Ontario and the broader public sector, including government-funded institutions, conserve energy and use energy efficiently in conducting their affairs.
The Government of Ontario is committed to promoting and expanding energy conservation by all Ontarians and to encouraging all Ontarians to use energy efficiently. [14] The Green Energy Act amended s. 25.35 of the Electricity Act, 1998. The amended section authorized the Minister to direct the development of a feed-in tariff program that was designed to procure energy from renewable energy sources. Section 25.35 stated:(1) The Minister may direct the OPA [later the IESO] to develop a feed-in tariff program that is designed to procure energy from renewable energy sources under such circumstances and conditions, in consideration of such factors and within such period as the Minister may require.
(2) Where the Minister has issued a direction under subsection (1), the Minister may issue, and the OPA [later the IESO] shall follow in preparing its feed-in tariff program, directions that set out the goals to be achieved during the period to be covered by the program, including goals relating to,
(a) the participation by aboriginal peoples in the development and establishment of renewable energy projects; and
(b) the involvement of members of the local community in the development and establishment of renewable energy projects.
(3) Where the Minister has issued a direction under subsection (1), the Minister shall issue, and the OPA [later the IESO] shall follow in preparing its feed-in tariff program, directions that set out the goals relating to domestic content to be achieved during the period to be covered by the program.
(4) In this section,
“feed-in tariff program” means a program for procurement, including a procurement process, providing standard program rules, standard contracts and standard pricing regarding classes of generation facilities differentiated by energy source or fuel type, generator capacity and the manner by which the generation facility is used, deployed, installed or located. [15] On September 24, 2009, the Minister of Energy issued a Directive to develop and administer the FIT Program. The Directive noted that the FIT Program was designed to procure energy from a wide range of renewable energy sources and was critical to Ontario’s success in becoming a leading renewable energy jurisdiction. The Minister’s Directive identified the objectives of the program as being: (a) to increase capacity of renewable energy supply to ensure adequate generation and reduce emissions; (b) to introduce a simpler method to procure and develop generating capacity from renewable sources of energy; (c) to enable new green industries through new investment and job creation; and (d) to provide incentives for investment in renewable energy technologies.
[16] The Minister’s Directive also identified the desire to encourage Indigenous communities to participate under the FIT Program through various means including: support programs and “price adders” intended (a) to incentivize Indigenous community or municipal investment and participation and to overcome barriers to entry, and (b) to reflect the fact that Indigenous and community-based projects are generally recognized as having higher cost structures than projects developed by commercial developers. These “adders” increased the rates paid for electricity generated for some FIT Program generators. Specifically, the “adders” supplemented the rates for projects with a minimum percentage of Indigenous ownership, co-operative ownership, or municipality or other public sector ownership.
[17] The IESO launched the FIT Program on October 1, 2009, and across seven years signed over 30,000 individual contracts for various renewable energy projects. These included contracts for the generation of electricity by private entities through renewable electricity generation technology such as wind turbines, solar panels, hydroelectric generation, and biogas. The electricity from these systems is fed into the electricity grid where it is distributed to consumers, thereby providing ‘green’ renewable energy.
[18] The 2011 Annual Report of the Auditor General provided an assessment of the FIT Program. In it, the Auditor General of Ontario described the FIT Program as being designed to meet three policy objectives: to reduce Ontario’s environmental footprint by bringing more renewable energy online; to better protect the health of Ontarians by eliminating harmful emissions from burning coal; and to create green energy jobs and attract scarce investment capital to Ontario in a global recession.
(ii) Pricing
[19] The FIT Program contracts had a standardized price and contract structure. The prices to be paid for the electricity procured through the FIT Program were set out in a price schedule published by the IESO [SS: 'Independent Electricity System Operator']. The generators were paid a fixed fee that varied depending on the type of electricity produced.
[20] Consistent with the September 24, 2009 Directive, the principle governing the price-setting exercise was that generators should be compensated for their costs of construction and provided with a reasonable rate of return on their investment. The FIT Program prices were calculated to provide generators with an 11 percent return on equity as a reasonable commercial rate of return. Thus, under this program, a private supplier of renewable energy was paid a fixed rate over the approximate 20-year term of the contract to “feed in” energy to Ontario’s electricity grid.
[21] An electricity generator receives two revenue streams: (i) those it receives from the wholesale market known as the Hourly Ontario Energy Price (the “HOEP”)[3] and (ii) a compensatory payment made by IESO reflecting the difference, if any, between HOEP revenues and the generator’s entitlement under the contract it has entered with IESO. Consumers pay this latter component to IESO through the Global Adjustment. At paras. 124 and 125 the application judge described the energy charges:Electricity charges are determined through a mix of market and government mechanisms including regulations. For consumers, the HOEP is combined with regulatory charges to make up the fee paid for the use of electricity. Consumers pay the HOEP, the Global Adjustment, a debt retirement charge, transmission and delivery fees, and market service charges meant to recover administrative costs.
Originally called the Provincial Benefit, the Global Adjustment was introduced January 1, 2005, and was designed so that the electricity regulator could recover from consumers the difference between the HOEP and the contractual price paid to electricity generators. [22] As the application judge explained, the Global Adjustment is described in s. 25.33 of the Electricity Act, 1998. That section states:(1) The IESO shall, through its billing and settlement systems, make adjustments in accordance with the regulations that ensure that, over time, payments by classes of market participants in Ontario that are prescribed by regulation reflect,
(a) amounts paid to generators, the Financial Corporation and distributors, whether the amounts are determined under the market rules or under section 78.1, 78.2 or 78.5 of the Ontario Energy Board Act, 1998;
(b) amounts paid to entities with whom the IESO has a procurement contract, as determined under the procurement contract; and
(c) such amounts as may be prescribed that are paid or incurred by the IESO in relation to the Ontario Fair Hydro Plan Act, 2017. [23] Accordingly, IESO has to adjust rates to recover the amounts it has contractually agreed to pay generators. Details of the adjustment formula were set out in regulations promulgated under the Electricity Act, 1998. The formula contained in the applicable regulation, O. Reg. 429/04, is attached as Schedule A to these reasons. In essence, it represents a cost recovery scheme. Only actual costs incurred by IESO are collected from consumers of electricity.
[24] Part of the Global Adjustment funded electricity procurement contracts under the FIT Program. Other procurement programs included RES I, II and III, RESOP, and Large Renewable Procurement (LRP). The objective of the pricing formula was to fully recover these costs in the electricity bills sent to commercial and residential consumers. The IESO calculated the precise Global Adjustment every month according to the detailed formula set out in O. Reg. 429/04. The appellant does not take issue with the RES, RESOP, or LRP components of the Global Adjustment.[4]
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