Independent Electricity System Operator – s. 42 of OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting; s. 49 of NI 93-101 Business Conduct
Headnote
OSC Rule 91-507 -- derivatives trade reporting obligations -- filer seeking to vary existing exemption that grants the filer and its authorized market participants relief from derivatives trade reporting obligations in respect of transmission rights contracts to also include virtual transactions -- NI 93-101 -- filer also seeking relief from the business conduct rule for the filer and its authorized market participants activity in respect of transmission rights contracts and virtual transactions -- relief granted, based on the particular facts and circumstances and subject to terms and conditions.
Applicable Legislative Provisions
National Instrument 93-101 Derivatives: Business Conduct, s. 49.
OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting, s. 42.
DIRECTOR'S EXEMPTION
IN THE MATTER OF INDEPENDENT ELECTRICITY SYSTEM OPERATOR
DECISION
(Section 42 of Ontario Securities Commission Rule 91-507 Trade Repositories and Derivatives Data Reporting; Section 49 of National Instrument 93-101 Business Conduct)
WHEREAS the Ontario Securities Commission (the OSC or the Commission) has issued an order pursuant to section 147 of the Ontario Securities Act (the Act) exempting the Independent Electricity System Operator (the IESO) from the requirement to be recognized as a clearing agency under subsection 21.2(0.1) of the Act (Clearing Order);
AND WHEREAS the Transmission Rights Contracts (as defined below) and DAM Virtual Transactions (as defined below) are derivatives (as such term is defined in Section 1 of the Act) and are therefore subject to reporting obligations under OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting (OSC Rule 91-507);
AND WHEREAS the IESO and Authorized Market Participants (as defined below) are exempt from the reporting requirements in connection with executing transactions in Transmission Rights Contracts in the TR Market (as defined below) under Part 3 of OSC Rule 91-507 by Director (as such term is defined in Section 1 of the Act) decision issued pursuant to section 42 of OSC Rule 91-507, dated October 30, 2014;
AND WHEREAS National Instrument 93-101 Derivatives: Business Conduct (NI 93-101) applies to IESO in respect of certain derivatives transacted on certain IESO-Administered Markets (as defined below);
AND UPON the application of the IESO to the Director, IESO is seeking, subject to terms and conditions, the following:
a) a decision pursuant to section 42 of OSC Rule 91-507 exempting the IESO and Authorized Market Participants executing DAM Virtual Transactions in the DAM VT Market (as defined below) from the reporting requirements under Part 3 of OSC Rule 91-507 (the Trade Reporting Relief); and
b) a decision pursuant to section 49(2) of NI 93-101 exempting the IESO and Authorized Market Participants in respect of derivatives transacted in the DAM VT Market and the TR Market (as defined below) from the requirements under NI 93-101 (the Business Conduct Relief);
(together, the foregoing relief is referred to as the Requested Relief);
AND UPON the IESO having represented to the Director that:
BACKGROUND
1. The IESO is a non-profit corporation without share capital created pursuant to Part II of the Electricity Act, 1998 (Ontario) (the Electricity Act). The IESO is regulated by the Ontario Energy Board (the OEB) and the Ontario government appoints its directors (other than the chief executive officer who is also a director).
2. The IESO has been allocated the statutory mandate (the Statutory Mandate) of meeting the objects set out in subsection 6(1) of the Electricity Act.
3. Summarized, the Statutory Mandate creates three fundamental roles for the IESO: (i) ensuring the reliability of the integrated power system (the Power System); (ii) overseeing and running the IESO-administered markets (the IESO-Administered Markets); and (iii) planning the provincial electricity system and, as necessary, procuring electricity resources.
4. The IESO-Administered Markets include both physical markets, specifically, the real time energy market (the Energy Market), and financial markets, specifically, the transmission rights market (the TR Market), that together comprise the IESO-Administered Markets.
5. In carrying out the Statutory Mandate, the IESO has developed a codified set of rules to govern the provincial electricity grid and the IESO-Administered Markets in Ontario (collectively, the Market Rules). Section 32 of the Electricity Act authorizes the IESO to make the Market Rules.
6. In addition to the Market Rules, IESO develops and administers manuals and procedures, which provide more detailed descriptions of the requirements for various activities specified in the Market Rules, including the forms and agreements required by market participants (the Market Manual).
7. To improve and modernize Ontario's electricity markets, the IESO has designed and is implementing a market renewal program, which is designed to enhance Ontario's current electricity market, including addressing certain inefficiencies in the electricity market, and facilitate Ontario's continued transition to new and diverse resources (the Market Renewal Program). The Market Rules required to implement the Market Renewal Program went into effect on November 8, 2024, and the IESO anticipates that the renewed market will begin operating May 1, 2025.
8. As part of the Market Renewal Program, the IESO is developing a day-ahead market (the DAM) which will replace its current day-ahead commitment process under the Energy Market. The DAM will provide for both physical transactions (DAM Physical Transactions) and virtual transactions (DAM Virtual Transactions).
REGULATORY OVERSIGHT AND FRAMEWORK
IESO operates under a licence from the OEB
9. The OEB is the provincial regulatory authority of the natural gas and electricity sectors under the OEB Act and the Electricity Act. The IESO operates pursuant to the license granted to it by the OEB (the OEB Licence) under the OEB Act.
10. Pursuant to the OEB Licence, the IESO is required to notify the OEB of any material change in circumstances that adversely affects or is likely to adversely affect the IESO's ability to comply with the OEB Licence, its financial integrity, or its ability to carry out its responsibilities under the Electricity Act, as soon as practicable after the occurrence of any such change, but in any event within 15 days of the date upon which such change becomes known to the IESO.
Market participants must be authorized by the IESO
11. A prospective market participant must file a completed application for authorization with the IESO to participate in IESO-Administered Markets. The submitted application will include organization and contact information that is submitted to the IESO in accordance with the Market Manual. The IESO will also conduct a business registry search on the organization to confirm its active status and registered officers.
12. Participation in the IESO-Administered Markets is limited to those participants who have, among other things, been approved in advance by the IESO, execute and file a participation agreement, satisfy the requisite prudential support requirements, meet the financial thresholds that are equivalent, where applicable, to those to be applied under NI 93-101, dealing with "eligible derivatives parties" in the context of the DAM Virtual Transactions, and have been issued a licence by the OEB pursuant to Part V of the OEB Act (other than transmission rights participants, virtual traders, capacity auction participants or capacity market participants using solely demand response resources who do not require a licence by the OEB pursuant to Part V of the OEB Act, for that class of participation), subject in all respects to the Market Rules (Authorized Market Participants).
13. The IESO and Authorized Market Participants' licences contain conditions that require them to comply with applicable provisions of the Electricity Act, regulations made thereunder, and the Market Rules, including Chapter 9 of the Market Rules which prescribes the monthly settlement process governing the IESO-Administered Markets.
IESO's governance and structure
14. The IESO's board of directors (the IESO Board) consists of the IESO chief executive officer and between 8-10 independent directors. The IESO Board oversees the IESO's business and affairs, and approves amendments to the Market Rules. The IESO Board has established three committees: (i) Audit Committee; (ii) Human Resources and Governance Committee; and (iii) Markets Committee.
Market Rules
15. The Market Rules govern the IESO and all Authorized Market Participants participating in the IESO-Administered Markets. The provisions of the Market Rules are complete codes, covering the form and content of all the transactions in the IESO-Administered Markets.
16. Pursuant to Chapter 7, Section 13 of the Market Rules, the IESO must notify the IESO Board, the OEB and the relevant government authorities of any suspension of the IESO-Administered Markets. As set forth in Chapter 7, Section 13.2.4 of the Market Rules, the IESO may suspend market operations in the event of the following: (i) market operations cannot be continued in a normal manner due to a failure in the software, hardware or communication systems that support market operations; (ii) a major blackout; (iii) the IESO-controlled grid breaks up into two or more electrical islands; (iv) an emergency situation requiring the IESO to evacuate its principal control centre and move to a backup control centre, under conditions and subject to the requirements of Chapter 5 of the Market Rules; or (v) declaration of an emergency by the Premier of Ontario or a direction from the Minister of Energy and Mines (the Minister) to the IESO or to an Authorized Market Participant to implement an emergency preparedness plan.
17. Section 32 of the Electricity Act permits the IESO to make rules establishing and governing markets related to electricity and ancillary services. Therefore, the IESO, through the IESO Board, has authority to make the Market Rules, and the IESO and Authorized Market Participants are required to comply with the Market Rules.
18. Subsection 32(6) of the Electricity Act provides that before making the Market Rules, the IESO is required to give the OEB an assessment of the impact of the proposed rule amendment on the interests of consumers with respect to prices and the reliability and quality of electricity service, and the OEB may revoke the rule amendment.
19. Sections 33 to 35 of the Electricity Act authorize applications to the OEB to review the Market Rules and gives the OEB authority to set aside the Market Rules that are inconsistent with the purposes of the Electricity Act or that are unjustly discriminatory against an Authorized Market Participant or a class of Authorized Market Participants. Specifically, subsection 33(2) of the Electricity Act requires the IESO to publish any amendment to the Market Rules at least 22 days before the amendment comes into force. The OEB may, not later than 15 days after the amendment is published and without holding a hearing, revoke the amendment on a date specified by the OEB and refer the amendment back to the IESO for further consideration in accordance with subsection 33(3) of the Electricity Act. As well, pursuant to subsection 33(4) of the Electricity Act, any person may apply to the OEB for review of an amendment to the Market Rules by filing an application with the OEB within 21 days after the amendment is published.
Market conduct
20. Under Chapter 1, section 10A of the Market Rules, Authorized Market Participants and the IESO are prohibited from either directly or indirectly engaging or attempting to engage in conduct that they know or ought reasonably to know: (i) exploits the IESO-administered markets, (ii) circumvents the market rules, (iii) manipulates any of the IESO-administered markets (including settlement amounts), (iv) undermines the ability of the IESO to carry out its powers, duties, and functions under the Electricity Act or Market Rules, or (v) interferes with the determination of market price or dispatch outcome by competitive market forces.
Records and reports
21. The IESO is bound to make certain reports to the Minister pursuant to the Electricity Act and to the OEB pursuant to the OEB Licence, and from time to time, the Minister issues directives and letters to the IESO articulating government policy.
22. Pursuant to the Electricity Reporting and Record Keeping Requirements of the OEB, the IESO is required to provide the OEB with quarterly financial statements for all market accounts showing quarter end financial position and quarterly and year to date results of operations. In addition, pursuant to subsection 25.3(1) of the Electricity Act, the IESO is required, within 90 days after the end of every fiscal year, to submit to the Minister an annual report on its affairs during that fiscal year, signed by the chair of the IESO Board. This report must also be submitted to the OEB pursuant to the OEB Licence.
23. All transactions concluded within the IESO-Administered Markets must conform to the Market Rules, and all Authorized Market Participants must receive transaction confirmations from the IESO in accordance with the provisions thereof.
24. Under Chapter 2, section 3.1.6 of the Market Rules, the IESO must publish and maintain lists of all Authorized Market Participants, including those subject to suspension or termination orders, those that will cease to be Authorized Market Participants and the time of cessation, as well as those subject to deregistration due to breaches of the Market Rules.
Compliance and enforcement
25. The OEB has the powers of oversight in connection with the business of the IESO, including its operation of the IESO-Administered Markets.
26. Specifically, the IESO and Authorized Market Participants in the IESO-Administered Markets are subject to the following oversight, among other things, of the OEB: (i) all market design changes, which are implemented through amendments to the Market Rules, and are subject to review and approval by the OEB; (ii) the IESO orders and decisions, which are subject to appeal to the OEB, including compliance and enforcement decisions by the IESO's Market Assessment and Compliance Division (MACD) and arbitration decisions pursuant to the Market Rules dispute resolution process for addressing disputes between the IESO and Authorized Market Participants; (iii) market participants, which are subject to compliance and enforcement authority by the OEB; (iv) the IESO-Administered Markets, including the TR Market, are subject to monitoring and oversight by the OEB's Market Surveillance Panel (the MSP); and (v) licensing, whereby certain market participants and the IESO must be licenced by the OEB and any failure to abide by licence conditions, the OEB Act or the Electricity Act can result in compliance and enforcement action by the OEB, including the imposition of a fine by the OEB, or the suspension or the revocation of the licence.
27. The MSP monitors, investigates and reports on activities and behaviour in the IESO-Administered Markets and Ontario's electricity sector, and is specifically enabled to carry out investigations and inspections, including by compelling the production of documents and testimony, and to report to and make recommendations to the OEB.
28. The MACD is an independent ring-fenced division of the IESO that has been delegated powers to act on behalf of the IESO and to make determinations and exercise authorities accorded to the IESO in the following provisions of the Market Rules: (i) Chapter 3, section 6.1.2 (monitoring of compliance with the Market Rules), (ii) Chapter 3, section 6.2 (procedures concerning alleged breaches of the Market Rules), and (iii) Chapter 3, section 6.6 (non-compliance letters and financial penalties). The MACD has two separate teams for monitoring compliance, one of which is the Market Assessment Unit (MAU).
29. The IESO and the OEB have entered into a protocol pursuant to which the IESO's MAU provides assistance and support to the OEB's MSP in relation to matters involving monitoring, analysing, evaluating, investigating, reviewing and reporting on the IESO-Administered Markets (the Protocol). The Protocol is currently in force.
30. Section 36 of the Electricity Act authorizes appeals to the OEB by persons who are subject to orders under the Market Rules that: (i) require them to pay a financial penalty or amount of money that exceeds $10,000; (ii) suspends or terminates their participation in the IESO-Administered Markets; or (iii) refuse their authorization to participate in the IESO-Administered Markets.
Previous Orders
31. The IESO is exempt from the requirement to be recognized as an exchange under section 21 of the OSA by the Commission order issued pursuant to Section 147 of the OSA and is exempt from the operation of National Instrument 21-101 Marketplace Operation (NI 21-101) by Director order issued under Section 15.1 of NI 21-101, each dated March 6, 2002 (the Exchange Order).
32. The IESO is exempt from the requirements to file forms and fees in connection with trades which are exempt from prospectus and registration requirements with the Commission pursuant to Part 7 of OSC Rule 45-501 Ontario Prospectus and Registration Exemptions by Commission order issued pursuant to Section 147 of the OSA, dated March 28, 2002 (the Exempt Distribution Order).
33. The IESO and market participants are exempt from the reporting requirements in connection with executing transactions in Transmission Rights Contracts and the transactions in the TR Market are exempt from the reporting requirements under Part 3 of OSC Rule 91-507 by Director order issued pursuant to section 42 of OSC Rule 91-507, dated October 30, 2014 (the Exempt Reporting Decision, and collectively with the Exchange Order and the Exempt Distribution Order, the Previous Orders).
THE IESO-ADMINISTERED MARKETS
34. The Energy Market serves as a platform for matching the supply and demand of electricity in Ontario. It facilitates the real-time scheduling and dispatch of the Power System, to ensure load and generation are balanced, flows on the transmission system are within appropriate limits and voltage and frequency are maintained.
35. Dispatchable generators (i.e., power plants that can adjust their output) and dispatchable loads (i.e., consumers of electricity that can adjust their usage) submit their offers to sell electricity and bids to buy electricity to the Energy Market. Based on these offers and bids (and forecast information for non-dispatchable generators (i.e., electricity from power sources that cannot easily adjust their output)) and loads (i.e., consumers who cannot easily adjust their usage), the IESO determines the quantity of energy and operating reserve to be transacted and the market clearing price for each interval, which determines the actual delivery, use, and market clearing price of electricity. The IESO schedules and dispatches resources accordingly.
36. The IESO settles the Energy Market monthly by invoicing and collecting payments from loads for their monthly electricity withdrawals and remitting payment to generators for their monthly injections.
37. The physical transmission circuits interconnecting, i.e., "interties", Ontario with neighbouring jurisdictions (Manitoba, Québec, New York, Michigan and Minnesota) have limited transfer capacity, which can result in congestion and price differentials between Ontario and neighbouring markets. The IESO administers auctions for transmission rights (the Transmission Rights Auction) to Authorized Market Participants, pursuant to which Authorized Market Participants may acquire financial contracts linked to price differences between jurisdictions (Transmission Rights Contracts), and thereby provides an opportunity for generators and loads to hedge against congestion on the interties. The Transmission Rights Auction allows importers and exporters of electricity to reduce the price risk associated with trading between Ontario and neighbouring jurisdictions.
38. Transmission Rights Contracts are purely financial instruments. They do not guarantee physical rights over transmission paths, nor do they impact the scheduling and dispatch of energy or operating reserve. Purchasers of Transmission Rights Contracts are entitled to payments if there is congestion over the transmission path(s) for which the purchaser holds a Transmission Rights Contracts.
39. Transmission Rights Auctions are settled in the TR Market. The TR Market involves the transfer of funds only between Authorized Market Participants; it does not involve the transfer of electricity nor does it affect the actual delivery of electricity.
Market Renewal Initiative -- The DAM
40. A day-ahead market for electricity is a standard component of many electricity markets in North America. It allows Authorized Market Participants to submit bids and offers a day in advance of operations in order to secure schedules and prices for the following day. In these markets, most of the supply is scheduled in the day-ahead market and the real-time market is used to balance any deviations that occur between day-ahead and real-time.
41. The DAM is one of the key features of the IESO's future energy market.
42. Following the introduction of the DAM, the Energy Market, together with the TR Market and the DAM, will constitute an enhanced wholesale electricity market.
43. The Market Renewal Program and the DAM will not materially impact the TR Market. The TR Market will continue to operate as it has since it opened in 2002 (continuing to rely on the above noted Previous Orders issued by the Commission).
DAM Physical Transactions
44. Authorized Market Participants will offer or bid price-quantity pairs into the DAM and, if economic, will receive a schedule in the DAM. Authorized Market Participants whose physical offers/bids are scheduled in the DAM must deliver/consume electricity in real-time, or "buy/sell-back" (i.e. pay or be paid the applicable real-time price for deviations from day ahead schedules) in the Energy Market. Authorized Market Participants are incentivized to meet their DAM schedules as long as it remains economic to do so in real-time based on real-time prices.
DAM Virtual Transactions
45. DAM Virtual Transactions will be energy offers and bids in the DAM that are not backed by physical supply or demand. They will be evaluated just like physical offers and bids in that they can receive a DAM schedule and are subject to the two-settlement process; however, because they do not represent a physical resource, their actual real-time quantity is zero, which means their balancing settlement will always be for the full megawatt quantity of the DAM schedule. DAM Virtual Transactions, which will have no delivery or consumption obligations in real-time, are scheduled based on their DAM schedule and prices.
46. Including virtual transactions in the DAM increases the pool of DAM participants, which increases price convergence between day-ahead and real-time. Price convergence encourages day-ahead participation by physical generators and loads. DAM Virtual Transactions will also provide physical generators and loads with an ability to hedge their exposure to real-time prices.
47. A virtual supply transaction participant profits when the price it is obligated to pay in the real-time market (for megawatts that are not physically supplied) is less than the DAM price it has paid for its DAM schedule. Conversely, a virtual demand transaction participant profits when the DAM price it pays is less than the real-time market price it is paid (for megawatts that are not physically consumed).
48. The DAM rules will provide (and the dispatch algorithm will be programed to provide) for the IESO to schedule DAM Physical Transactions out of economic merit order and thereby displace otherwise economic DAM Virtual Transactions, if necessary, to ensure that sufficient physical resources clear in the DAM (i.e. "reliability pass").
49. While any entity that meets the registration and prudential security requirements may register to participate in DAM Virtual Transactions and become an Authorized Market Participant, the IESO anticipates existing participants in the Energy Market, energy traders that currently trade with neighbouring jurisdictions, and financial institutions to participate in DAM Virtual Transactions as an Authorized Market Participant (the DAM VT Market).
50. Authorized Market Participants who are residents in Ontario may participate in DAM Virtual Transactions by satisfying eligibility requirements and signing a participant agreement. While any entity that meets the registration and prudential security requirements may register to participate in DAM Virtual Transactions and become an Authorized Market Participant, the IESO anticipates virtual trader participation from existing participants in the Energy Market, energy traders that currently trade with neighbouring jurisdictions, and financial institutions. In the event that a defaulting Authorized Market Participant's prudential support is insufficient to satisfy its outstanding payment obligations, the IESO will continue to be authorized to socialize any payment deficiency by issuing a default levy to other Authorized Market Participants.
AND UPON the Director being satisfied that granting the Requested Relief would not be prejudicial to the public interest;
IT IS THE DECISION of the Director that the (i) the Requested Relief is granted; and (ii) the Exempt Reporting Decision is varied to include the additional relief contemplated in this decision;
PROVIDED THAT:
(a) the Previous Orders and the Clearing Order remain in force and effect;
(b) in respect of the TR Market, the IESO promptly complies with requests from the Commission, on an as-needed basis, to share (i) positional data, (ii) transactional data, (iii) valuation data, and (iv) transmission rights clearing account data, within IESO's possession in respect of the TR Market, including any information or documentation concerning such data, in a form acceptable to the Commission;
(c) in respect of the DAM VT Market, the IESO delivers to the Commission on a quarterly basis (within 30 days of the end of each calendar quarter), and at any time promptly upon the request of staff of the Commission, a report in respect of DAM Virtual Transactions, the total trading volume and total trading value originating from Authorized Market Participants, presented on a per Authorized Market Participant basis; and
(d) the IESO shall not disclose to any person or company, including its Authorized Market Participants, any request by the Commission for data, information or documentation and shall maintain the confidentiality of the request and any response to it. Where disclosure may be required by law, the IESO will, to the extent permitted by law, inform the Commission of the disclosure requirement.
DATED April 30th effective on May 1, 2025
OSC File #: 2024/0457