1 Intelligent Well Technology: Status and Opportunities for Developing Marginal Reserves SPE
Incentive Regulation for a Generation-Only Company
Mitchell Rothman, Power Advisory LLC, 416 534-4152,
Overview
Ontario Power Generation (OPG) is the generation successor to the former Ontario Hydro. It is the largest generation company in the province and is wholly owned by the Ontario government. OPG has a mix of generation assets, including nuclear, hydroelectric, coal-fired and gas-fired thermal plants. Under Ontario law, the price for the output of OPG’s nuclear and run of the river hydraulic generation assets is regulated by the Ontario Energy Board (OEB), the electricity and gas regulator in Ontario.
The OEB has had responsibility for regulation of OPG’s prices for XX years. It has now moved towards instituting an incentive regulation mechanism (IRM) for OPG’s regulated assets. This is a unique situation. In competitive wholesale markets, the price of electricity is set by the market; in regulated markets, the generation entity is vertically integrated to include transmission and usually distribution as well. This paper will report on the development of proposed IRMs for these OPG assets and on the process of choosing one.
Methods
IRM is a widely used approach to regulation in North America and elsewhere. It is preferred to cost of service (COS) methods because COS guarantees the regulated entity that it will earn its allowed rate of return on equity as long as it behaves prudently. Incentive regulation, on the other hand, lets the regulated entity earn more if it reduces cost and less if it fails to reduce cost. incentives to reduce cost. A price cap IRM unlinks the entity’s price from its cost performance by setting price increases according to a formula containing a target for productivity growth and a price inflator.
This paper will discuss the issues and the process for devising an IRM for OPG, a generation-only entity. Issues to be addressed included how an IRM could be applied to only a portion of a firm’s operations (prices for OPG’s thermal and peaking hydroelectric assets are not regulated), how it could be applied to such disparate activities as hydroelectric and nuclear generation, and what form of regulation is appropriate for these activities.
A report has been prepared for the OEB to serve as a basis for stakeholder consultation. This report[1] has been circulated and will be discussed at stakeholder consultation sessions in the summer of 2012. This paper will focus on issues which arose in the preparation of the report and on issues discussed in the subsequent stakeholder sessions.
The paper will therfore survey the existing literature on IRMs and their applications in North America and discuss how a standard IRM approach could be applied to OPG. One consideration in this case are that only some businesses of OPG are regulated, so it would be difficult to apply a standard IRM approach that relates to the entire business of the regulated entity. Another is the relative performance of OPG’s regulated assets. The effectiveness of an IRM will also depend on how relative performance will affect OPG’s executives, given that the firm has a sole shareholder, the government.
The report includes a recommendation for a unique approach to IRM to meet the unique situation.
Results
The results will discuss the stakeholder reaction to the proposed IRM for OPG’s regulated assets and will also analyse whether the IRM is likely to have the desired impact on OPG’s performance.
Conclusions
The paper will conclude with an analysis of the prospects for and potential benefits of and IRM for the regulated assets of OPG..
References
The paper will reference material describing IRM approaches as they have been applied in North America and other jurisdictions, the stakeholder consultation report cited earlier, and material from the stakeholder consultations.
Existing literature on RPS programs includes
Center of Energy Economics, Bureau of Economic Geology, University of Texas at Austin, Harmonization of Renewable Energy Credit (REC) Markets across the U.S
Ryan Wiser, State of the States: Update on RPS Policies and Progress, Lawrence Berkeley National Laboratory
Renewable Energy Markets 2010
[1] Power Advisory LLC, “Incentive Regulation Options for Ontario Power Generation’s Prescribed Generation Assets”, report prepared for the Ontario Energy Board, Feb. 27, 2012.