The Ontario Energy Board recently approved a reliability must-run contract between OPG and the IESO for the 2,140 MW Lennox generating station near Kingston (the RMR Contract). Reliability must-run contracts allow the IESO to instruct a generator to operate a facility in specific ways in order to maintain the reliability of the electricity system. The Lennox decision was the first opportunity the Board had to review a reliability must-run contract under Chapter 7 of the IESO’s Market Rules.
The origins of the RMR Contract can be traced to the IESO’s refusal of OPG’s request to de-register the Lennox facility on the ground that its removal was likely to have an unacceptable impact on the reliability of the IESO-controlled grid. OPG and the IESO subsequently negotiated the RMR Contract, which obligates OPG to offer into the IESO-administered markets the maximum amount of energy and operating reserve from Lennox in a commercially reasonable manner and in accordance with stated performance standards. Payments to OPG are to be comprised of 100% of the fixed and variable operating costs for Lennox, a "margin amount" of $1.283 million, and additional revenues equivalent to 5% of the gross revenues earned by or attributed to Lennox in the IESO-administered markets. The total payments to OPG over the term of the contract are estimated to be approximately $62 million.
It was agreed that the RMR Contract was to come into effect as of October 1, 2005, subject to approval by the Board "prior to its implementation" under section 5 of OPG’s License. OPG filed an application with the Board and the IESO was the sole intervenor. The matter proceeded by way of a written hearing before the Board.
In a decision issued on March 13, 2006, the Board determined that all of the requirements for reliability must-run contracts set out in Chapter 7, section 9.7 of the Market Rules had been met. OPG argued the Board’s jurisdiction under section 5 of OPG’s License was limited to a consideration of the RMR Contract’s compliance with the Market Rules, and that no further analysis was necessary. However, the panel rejected OPG’s contention and held that section 5, which provides that an agreement "shall comply with the applicable provisions of the Market Rules or such other conditions as the Board may consider reasonable," provided it with the authority to review the reasonableness of the financial provisions and to consider whether the RMR Contract provided an incentive to OPG to alter its offer behaviour in the market.
The Board then proceeded to examine the RMR Contract’s financial provisions. The Board agreed with OPG that the 100% recovery of the fixed and variable operating costs for Lennox was appropriate and that the provision of a fixed margin amount of $1.283 million was needed to cover other costs and risks (such as OPG’s head office costs and fuel contracts and supply) that would not be included in operating costs. The RMR Contract also contained a revenue sharing mechanism and performance rewards and penalties, which the Board accepted were appropriate to support the IESO’s reliability objectives by providing incentives to OPG to use Lennox in all hours and to meet or exceed the historical Lennox reliability performance.
Finally, the Board reviewed the potential for the RMR Contract to induce OPG to alter its offer behaviour in the market. In that regard, the Board accepted that certain contractual provisions in the RMR Contract would safeguard against the alteration of OPG’s offer behaviour, including those that required ongoing true-ups against actual approved costs, notification of significant events (such as new projects or significant increases in costs of projects), and audit provisions. After satisfying itself that these safeguards were adequate, the Board approved the RMR Contract as submitted.
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