SETTING PAYMENT AMOUNTS FOR OPG’S PRESCRIBED ASSETS EB Michael Lyle, General Counsel ; fax Adelaide St. W., Suite 1600 Toronto, Ontario, M5H 1T1

2 POLICY NEUTRALITY OPA agrees that this is not the forum to decide on future evolution of electricity sector in Ontario OPA believes regulatory contracts option is more policy neutral than other options Current OPA procurement contracts designed to be able to operate in hybrid, competitive or fully regulated system

3 BENEFITS OF REGULATORY CONTRACTS Regulatory contracts best approach when consider: –Efficient operation of existing wholesale market –Private sector investment in new generation Provides OPG with appropriate incentives to behave in wholesale market Allows for level playing field between OPG refurbishment/expansion and private investment

4 WHAT IS IT? Option not well understood Does not “fit well into a soundbite” (London Economics) Criticized on grounds of: –Transparency –Complexity –Cost to consumers –Risk to OPG –Inconsistency with OEB mandate

5 TRANSPARENCY OPA believes that cost inputs to a regulatory contract should be determined in a transparent, quasi-judicial process based on a cost of service like filing OPA advocates as much transparency as possible in negotiation process and ultimately transparent OEB review of outcome of negotiations

6 COMPLEXITY OPA acknowledges that regulatory contracts option involves complexity None of the options are simple Others have acknowledged that all options need to address incentives for OPG conduct in wholesale market This approach more likely to optimize public interest

7 COST TO CONSUMERS Key cost inputs based on cost of service like proceeding Average cost to consumers under regulatory contracts model not significantly different from cost of service outcome

8 RISK TO OPG Concern expressed about risk related to IESO proposal Regulatory contract flexible way to address appropriate allocation of risk between OPG and consumers

9 MANDATE OEB given mandate to set payments based on strengths of quasi-judicial process: –Transparency –Testing of evidence Contractual negotiations have other benefits: –Able to address complexity –Flexibility Proposal would combine best of each process without diminishing OEB powers

10 CONCLUSION Regulatory contracts option has the following attributes: –It is policy neutral –It provides incentives for OPG to behave efficiently –It does not discourage private investment –It is transparent –It is flexible –It combines best aspects of quasi-judicial and contract processes