Ontario Launches New Competitive Procurement for Electricity Transmission

The Independent Electricity System Operator (IESO) has announced its latest design decisions for a formal competitive procurement for new electricity transmission build in Ontario, also known as its “Transmitter Selection Framework” (TSF). The TSF follows from a July 10, 2023 letter of direction from the (then) Ontario Ministry of Energy.

Successful proponents of an RFQ will be included in a registry of qualified electricity transmitters eligible to bid on subsequent RFPs for new identified transmission projects. Eligible proposals must meet the following minimum criteria:

• Benefit all electricity ratepayers
• Estimated cost of C$100M or greater
• Nominal voltage of 200 kV or greater
• Sufficient lead time (at least 6 years)

It is expected that successful proposals will also be required to demonstrate Indigenous participation.

Notably, identified transmission projects that do not meet all of the above-listed criteria will automatically be designated to incumbent transmitters such as Hydro One.

Successful TSF proponents will be awarded partial contracts for a yet-to-be-determined number of years following commercial operation, after which time the existing utility rate regulation mechanism administered by the Ontario Energy Board (OEB) will apply.

The partial contract is intended to control costs pertaining to project design and construction, including the creation of a maximum initial rate base for OEB rate regulation based on a fixed lifetime operations and maintenance (O&M) plan. The transmitter will be required to submit prescribed amounts for review by way of a cost-of-service application to the OEB. The transmitter’s revenue requirement, including some or all post-COD revenue, would be fixed via IESO contract and incorporated into the Uniform Transmission Rates (UTRs). Following IESO contract expiration, typical OEB rate regulation would apply subjecting all cost components for review and incorporation into the UTRs.

This blended revenue structure (contract + rate regulation) appears to aim to strike a balance between fostering competitive economic growth on the one hand and relative long-term stability on the other hand. Competition can help maintain downward pressure on price while rate regulation can attract requisite large scale capital investment.

It will be interesting to see if the competitive procurement element (together with the ratepayer benefit requirement) of the TSF will bring Ontario one step closer toward an integrated regional approach to east-west transmission development, or if the rate-regulated element will otherwise continue to foster more north-south transmission development to the U.S., which developers typically view to be more economically attractive than building anew for only domestic customer use.