Investigating Energy Market Activity in Ontario

The Ontario electricity market has been characterised as a ‘hybrid market’. Although the wholesale market operates to dispatch generators and loads on the basis of an hourly energy price, virtually all supply to the market is contracted with the Independent Electricity System Operator (IESO) (at the direction of the government) or regulated by the Ontario Energy Board, the public utility regulator and prices to most customers are regulated by the government. Market participants are largely incentivised by their contracts and both suppliers and customers are for the most part indifferent to market revenues.

Despite the marginal role for electricity markets in the Ontario energy system, there is no shortage of regimes for investigating energy market activity. There are two related but discrete regimes, each with their own mandate and purposes: one carried out by the Market Surveillance Panel (MSP) and one carried out by the IESO.

Both regimes are largely run by the agencies with little consideration for procedural entitlements of market participants. This is less a concern with the MSP system as the MSP only has the authority to issues reports and does not have the power to levy sanctions. Even here, however, the reports can have reputational impact and can also lead to investigations under the IESO regime, which does have the power to impose sanctions.

The IESO regime has not, so far, been tested in a contested proceeding. While there have been investigations, they have resulted in either settlements or orders that have not been challenged.

This minor role for the IESO regime could reflect the limited relevance of the IESO market as discussed above. As a result, investigations tended to focus on out-of-market payments. However, the IESO now proposes to increase the importance of the market through a new ‘Market Renewal’ initiative.[2] As a result, one can expect more attention to issues such as price manipulation.

In my view, both of these regimes are in serious need for review to address several concerns, including lack of fair process, lack of a statutory investigative framework, and lack of independence.

This paper first sets out a description of the two regimes and then lists concerns that should be addressed.

Reporting on inappropriate conduct: the MSP

The MSP is a panel of the Ontario Energy Board (OEB), which is the province’s public utility regulator. The MSP’s members are appointed by the OEB’s management committee and it exercises powers granted to it under the Electricity Act 1998 and pursuant to a by-law passed by the OEB’s management committee (the MSP By-Law).

The MSP has the statutory power to investigate ‘any activity related to the IESO-administered markets or the conduct of a market participant’.[3] The MSP’s investigative power is extremely broad; it includes the power to compel testimony, enter business premises, where it can remove documents and other records, and conduct searches.[4] Refusal to comply with an MSP direction is punishable as contempt by the Ontario Superior Court of Justice.[5]

Although the MSP has broad investigatory powers, it has virtually no enforcement powers. Its main powers are to investigate and report. It does not have the power to issue orders or fines.

Specifically, under the MSP By-Law, the MSP may investigate ‘the conduct of a market participant.’ An investigation leads to a report to the OEB chair and ‘any other person that the Panel considers appropriate’. The report may include findings that ‘a person has engaged in inappropriate or anomalous conduct’ and include recommendations, if any, resulting from the investigation.

The MSP’s investigations are carried out by the market assessment unit (MAU). The MAU is established by the IESO to perform the functions given to it under the Market Rules and to support the MSP, in the manner agreed to by the IESO and the OEB. The MAU also supports the IESO’s enforcement activities as described below.

The term ‘inappropriate or anomalous conduct’ is not defined in any of the MSP’s governing documents. The MSP has indicated that it considers ‘gaming’ to fall within the category of inappropriate conduct. The MSP has stated that it ‘regards gaming as the exploitation of opportunities to profit or benefit from defects in the design of the market, from poorly specified rules or procedures, or from circumstances that are not expressly covered by Market Rules or procedures’.[6]

It is unclear whether the MSP may write a report alleging that a market participant has violated the Market Rules or what the implications of such a determination may be. While the MSP’s investigative powers are drafted broadly, it is arguable that the specific power granted to the IESO to impose penalties for Market Rule violations would displace this general power.[7] However, this overlap is of concern because the MSP’s allegations do not have to be proven before an independent tribunal and a market participant has no opportunity to challenge them. Further, as discussed below, the Ontario electricity governance system is largely driven by the provincial government that has extensive supervisory powers of all energy agencies. This creates the risk that a negative MSP report may create a political context in which the IESO may feel compelled to commence an enforcement process.

Enforcing the Market Rules: the IESO’s Market Compliance and Enforcement Division

In contrast to limited enforcement and the broad investigatory powers of the MSP, the IESO has general statutory authority to ‘make orders…imposing financial penalties on market participants’ and to terminate participation in the IESO-administered markets’.[8] There are no statutory powers addressing the IESO’s power to conduct an investigation or the process by which it determines whether or not a market participant has breached the rules or makes orders imposing sanctions against market participants. All of those powers are addressed in the IESO’s Market Rules.

The Market Rules are prepared by the IESO with minimal oversight. Unlike other ISOs, regulatory approval is not required for making the Market Rules. While a person may challenge a Market Rule amendment by bringing an application to the OEB, the OEB has a very restricted power to review the rule[9] and must make an order within 120 days of an application being filed.[10] There is no other statutory time limit by which the OEB must make any other adjudicative decision in its mandate. In the 15 years that the Ontario market has been opened, there have been two reviews of the Market Rules. One was unsuccessful and one was withdrawn.

The IESO’s compliance powers are exercised by its Market Enforcement and Compliance Division (MACD) pursuant to a letter to MACD from the IESO’s president and CEO (the delegation letter).[11]

The delegation letter states that, ‘although the IESO is bound to comply with the Market Rules, MACD’s enforcement powers and procedures do not apply against the IESO’. It also states that the IESO ‘has voluntarily accepted that it should be treated as if it were a market participant’. It is not clear why the enforcement powers should not apply to the IESO. In any event, the director of MACD is responsible to the IESO’s board of directors, so it is questionable how effective such an enforcement power would be.

The Market Rules set out the process for MACD to investigate and enforce compliance with the Market Rules. As indicated, none of these investigation and enforcement processes are provided for in legislation. Further, these investigations are not subject to the Limitations Act, and there are no limitation periods in the Market Rules. As a result, market participants can and have been investigated for allegations going back several years.

The steps of an investigation include providing notice to a market participant that it may have breached the Market Rules (a notice of alleged breach (NAB)).[12]

Despite its title, a NAB does not itself contain an allegation of breach. Instead, it advises the market participant that it may have breached a rule and sets out the grounds for the potential breach and the potential sanctions. Following the receipt of a NAB, the market participant may make representations or request a meeting.

Following the initial NAB and the responses thereto, MACD typically requests information from the market participant to be used as part of MACD’s investigation.[13] The Market Rules impose an obligation to comply with a request for information.[14]

With the exception of an alleged violation of the General Conduct Rule (GCR), MACD has the authority make any determination it considers appropriate, including a determination that a market participant has breached a rule. The Market Rules do not provide any process by which MACD is required to make this decision.

If it determines a breach, MACD may direct the market participant to comply with the rules or issue a financial penalty. Financial penalties cannot be issued unless MACD is satisfied ‘that the breach could have been avoided by the exercise of due diligence by the market participant or that the market participant acted intentionally’.[15]

As indicated, the process for addressing alleged breaches of the GCR is different. The GCR was enacted in 2015.[16] It resembles anti-manipulation provisions in other jurisdictions with a few Ontario-specific additions. Specifically, it prohibits conduct that:

exploits the IESO-administered markets, including by, without limitation, exploiting any gap or defect in the Market Rules;

circumvents any of the Market Rules;

manipulates any of the IESO-administered markets, including by, without limitation, manipulating the determination of a settlement amount;

undermines through any means the ability of the IESO to carry out its powers, duties or functions under the Electricity Act 1998 or the Market Rules; or

interferes with the determination of a market price or dispatch outcome by competitive market forces.

Where MACD alleges a violation of the GCR, it must provide the market participant with the option of having the determination of breach established by the OEB. In this case, MACD must demonstrate to the OEB that a breach has occurred. If the OEB determines that there has been a breach, then the matter is returned to MACD to address sanctions.[17]

The determination of the financial penalties are remarkably complex and open-ended.

If MACD determines that a fine is appropriate, it then has to consider the quantum of the financial penalty. The quantum is a function of two factors: the non-compliance level (NCL) and the impact level (IL). Essentially, the NCL sets the range of the fine and the IL sets the location within the range.

The NCLs, and their accompanying sanctions, are set out below. Note, the sanctions are per occurrence. Each market rule breach constitutes a separate occurrence.


Market participant conduct


Level 1

Failed to comply, in part, with the requirements of a market rule, and, on its own initiative informed the IESO on a timely basis of:

  • the reasons for the non-compliance, and
  • the manner and time in which the non-compliance will be remedied.

Non-compliance letter or up to C$2,000 per occurrence.

Level 2

Failed to comply in whole with the requirements of a market rule, and on its own initiative informed the IESO on a timely basis of:

  • the reasons for the non-compliance; and
  • the manner and time in which the non-compliance will be remedied.

Non-compliance letter or up to C$4,000 per occurrence.

Level 3

Failed to comply, in whole or in part, with the requirements of a market rule, did not on its own initiative inform the IESO on a timely basis of the non-compliance; but did inform, at the IESO’s request and within the time specified in the request, the IESO of:

  • the reasons for the non-compliance; and
  • the manner and time in which the non-compliance will be remedied.

Non-compliance letter or up to C$6,000 per occurrence.

Level 4

Failed to comply, in whole or in part, with the requirements of a market rule, did not on its own initiative inform the IESO on a timely basis of the non-compliance; and did not inform, at the IESO’s request and within the time specified in the request, the IESO of:

  • the reasons for the non-compliance; and
  • the manner and time in which the non-compliance will be remedied.

C$1,000 to C$10,000 per occurrence.

As indicated, in determining the location within the range of penalties in the NCLs, the IESO takes a number of factors into account:

  • the circumstances in which the breach occurred;
  • the severity of the breach;
  • the extent to which the breach was inadvertent, negligent, deliberate or otherwise;
  • the length of time the breach remained unresolved;
  • the actions of the market participant on becoming aware of the breach;
  • whether the market participant disclosed the matter to the IESO on its own or whether it was prompted to do so;
  • any benefit that the market participant obtained or may have obtained as a result of the breach;
  • any previous breach by the market participant of the Market Rules or of the conditions of its licence;
  • the actual or potential impact of the breach on other market participants;
  • the actual or potential impact of the breach on the IESO-administered markets as a whole;
  • the actual or potential impact of the breach on the reliability of the integrated power system;
  • any sanctions that may be imposed on the IESO by a standards authority as a result of the breach;
  • the immediacy of the threat that the breach poses to the reliability of the integrated power system or the IESO-administered market;
  • presence and quality of the market participant’s compliance programme;
  • whether on its own initiative, a market participant has undertaken to reasonably compensate the IESO-administered market for the value of any benefit it obtained as a result of the breach; and
  • such other matters as the IESO considers appropriate.

There is overlap between the list of impact levels, non-compliance levels, due diligence and intentionality. In addition, the considerations are sufficiently broad that, in practice, it is virtually impossible to predict what a fine might be in any situation. MACD has also not provided any guidance on what types of fines it would impose in different situations.

If MACD determines that there has been a breach and determines the sanction as above, it can make an order against the market participant that imposes the sanction. As indicated, apart from an alleged violation of the GCR, the Market Rules do not impose any obligation on the IESO to make its case to a third party before making an order.

A market participant may then challenge that order through the IESO’s dispute resolution process.[18]

The dispute resolution process includes filing a notice of dispute (NOD) and a response by the IESO,[19] mediation[20] and arbitration.[21] The arbitration is conducted by members of an IESO arbitration panel that largely follows the procedure in the Ontario Arbitration Act 1991.

The arbitration process resembles a contractual arbitration more than a regulatory proceeding.

A market participant may appeal an arbitrator’s decision to the OEB if the order imposes a financial penalty above C$10,000, or denies or terminates access to participate in the market.[22]

As there have been no contested orders, the procedural issues for either an arbitration or an appeal have not been determined. Presumably ,MACD would have the onus of proving its case.

Concerns with the regulatory regimes

The Ontario investigation regime raises several concerns, including lack of fair process, lack of a statutory investigative framework, and lack of independence.

Fair process

The most important concern with the Ontario regime is with respect to the fairness of the process in the determination of whether a market rule has occurred. With the exception of the GCR, In carrying out its powers under the Market Rules, MACD acts as the investigator, the prosecutor and the judge of whether a market rule violation has occurred. MACD makes the initial determination of whether to prosecute a breach; if it determines that a breach may have occurred, it pursues its powers to collect information in support of that position; it then applies that information to make a finding that a breach has occurred.

This combination of powers within the same division of an organisation is inconsistent with principles of fairness in administrative law or the practice of electricity system operators in North America. In both cases, the IESO is an outlier.

The principles of fairness in administrative law require structural separation of investigation and decision making. As the Supreme Court of Canada put it in Brosseau v Alberta Securities Commission:[23]

The maxim nemo judex in causa sua debet esse underlies the doctrine of ‘reasonable apprehension of bias’. It translates into the principle that no one ought to be a judge in his own cause . . . As a general principle, this is not permitted in law because the taint of bias would destroy the integrity of proceedings conducted in such a manner.

Although these principles are subordinated to parliamentary sovereignty in the sense that legislation may override these principles,[24] that does not apply here because the Electricity Act 1998 does not prescribe how the IESO’s investigation process should work. In the absence of overriding legislation, the current IESO process appears to be designed by the IESO for the benefit of the IESO.

As the Fairness Commission expressed it in the context of the Ontario Securities Commission, ‘it is axiomatic that enforcement and adjudicative functions should be performed by different bodies.’ While MACD does not perform a strictly adjudicative role, it carries out the same function: it determines whether there has been a breach of rules and then fixes a sanction. In the absence of explicit statutory authority to authorise such a conflict of interest, according to the Fairness Commission, ‘it will be presumed that the legislature intended that the chosen process be one that comports with the basic common law principles.’[25]

It is also common practice in electricity and regulatory regimes to have a separation between market rule enforcement and determination of non-compliance. The table set out below identifies the enforcement structure of selected jurisdictions.[26]


Public Utility Commission


System operator or other administrator

US Energy Regulation

(FERC – contested cases heard by independent administrative law judge) through Commission hearings).



US Commodity Trading

(CFTC through Commission hearings)



US Securities Regulation

SEC Commission hearing (contested cases heard by independent administrative law judge)



Alberta Energy Regulation

Alberta Utilities Commission (through Commission hearing)



Texas Energy Regulation

PUCT Commission hearing



Ontario Securities Regulation

OSC Commission hearing

OSC may bring action to Ontario Superior Court of Justice


Canadian Tax Law

Avoidance: Tax Court of Canada

Evasion: Ontario Superior Court of Justice


Canadian Competition Law

Competition Tribunal Hearing



Proposed IESO Framework




Another fair process issue relates to disclosure of the case that a market participant has to meet. The Market Rules do not require MACD to disclose any information that it has collected in an investigation and MACD’s practice is to refuse to provide it upon request. In criminal prosecutions there is an obligation of disclosure. Even in energy regulatory compliance proceedings overseen by the OEB there are disclosure requirements.[27] However, the Market Rules drafted by the IESO do not impose any disclosure obligations on the IESO.

Lack of statutory investigative framework

As indicated, the process for investigation and determinations of compliance are addressed in the IESO Market Rules, not in legislation. The IESO has drafted Market Rules to give itself broad investigatory powers.

Notably, as indicated, the Market Rules provide that market participants are required to provide information to MACD when it conducts an investigation. MACD has also taken the position that this includes an obligation to attend and provide information under oath. However, unlike the MSP, MACD does not have statutory authority to compel information.

The Supreme Court of Canada has held that an administrative agency must have explicit statutory authority to compel information.[28] The lack of such authority here brings the legality of that requirement into doubt.

Lack of independence

There are two discrete but related concerns about independence: the first is, whether MACD can effectively investigate compliance with the Market Rules by the IESO; and second, the role of the government in supervising the IESO, and ultimately MACD.

On the issue of IESO compliance, system operators generally have a major impact on how competitively markets operate. As Joskow has noted, administrative intervention by system operators, such as reducing voltage control, have had a larger impact on dampening electricity prices than have price caps.[29]

However, the GCR, which was sponsored by MACD, effectively precludes enforcement against the IESO. This is not surprising. MACD is a division of the IESO and answerable to the IESO board. It is not realistic to expect MACD to neutrally enforce rules against its own employer.

A more fundamental independence challenge relates to the nature of the IESO itself. Other North American ISOs are subject to the regulatory oversight of either FERC or state or provincial regulators. The IESO is not.

The IESO’s accountability is to the government, which appoints its board members and approves its budgets and business plans. The government also has considerable directive powers over the IESO. For all intents and purposes, the IESO is more a branch of government than an independent market operator.[30]

Given this relationship, there is, at the very least, the perception that the IESO’s enforcement activity could be influenced by the political priorities of the government. Market participants could reasonably have the perception that enforcement discretion is, in part, exercised to satisfy the expectations of IESO leadership, and ultimately, the government of Ontario.


[1] George Vegh is a counsel at McCarthy Tétrault LLP and adjunct professor of energy regulation at the University of Toronto Law School as well as the School of Public Policy and Governance.

[2] See:

[3] Electricity Act 1998, Sections 37(1).

[4] Electricity Act 1998, Sections 37(3),(5), (6), (9), (11)

[5] Electricity Act,1998, Sections 37(4).

[6] MSP By-Law, Section 7.2.5

[7] Market Surveillance Panel, Monitoring Document:  Monitoring of Offers and Bids in the IESO-Administered Markets, March, 2010, p. 48.

[8] See ATCO Gas Pipelines v. Alberta, [2006] 1 S.C.R. 180 at para. 73; see also: Re Broadcasting Regulatory Policy, [2012] 3 S.C.R. 489 at para. 39 and also, para. 44.

[9] The OEB may only revoke a rule amendment if it determines that the amendment ‘is inconsistent with the purposes of this [Electrity Act, 1998] or unjustly discriminates against or in favour of a market participant or class of market participants.’ Electricity Act 1998, Sections 33(9).

[10] Electricity Act 1998, Sections 33(6).

[11] Letter from IESO CEO to MACD dated 1 August 2013 re: Delegation of Compliance Enforcement (the delegation letter).

[12] Market Rules, Chapter 3, Section 6.2.3

[13] Market Rules, Chapter 3, Section

[14] Market Rules, Chapter 3, Section 6.2.6.

[15] Market Rules, Chapter 3, Section

[16] Market Rules, Chapter 1, Section 10A.

[17] See IESO Licence, Section 7.3. (EB-2015-0045).

[18] Market Rules, Chapter 3, Section 2.

[19] Market Rules, Chapter 3, Section 2.5

[20] Market Rules, Chapter 3, Section 2.6

[21] Market Rules, Chapter 3, Section 6.7.

[22] Electricity Act, 1998, Sections 36(1) and Ontario Regulation 12/01.

[23] [1989] 1 S.C.R. 301 (Brosseau), at p. 310.

[24] Brosseau, at 310-311.

[25] Report of the Fairness Commission to the Chair of the Ontario Securities Commission, 5 March 2004, p. 44.

[26] These jurisdictions were selected by the IESO in its proposal to have the GCR violations determined by the IESO before it ultimately agreed to have the determination made by the OEB.

[27] See: EB-2009-0308.

[28] Canadian Pacific Air Lines Ltd. v. Canadian Air Line Pilots Assn., [1993] S.C.J. No. 114.

[29] Paul Joskow, ‘Competitive Electricity Markets and Investment in New Generating Capacity’, MIT, June, 2006.

[30] A recent example of the closeness of the relationship between the IESO and the government is the finding of the Ontario Auditor General that the IESO restated five years of financial statements to make it appear that a government policy decision could be presented as having no impact on the government’s debt. The Auditor General concluded that the government-IESO activities were ‘designed to remove transparency and accountability…’ Auditor General of Ontario, ‘The Fair Hydro Plan: Concerns about Fiscal Transparency, Accountability and Value for Money’, Special Report, October 2017, at p. 5.

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