The Electric Utilities Act is the result of this work. It reflects a broad consensus among utilities, customers, independent power producers and regulators on how best to meet the Government's objectives. When the Act came into effect on January 1, 1996 it represented a turning point in the evolution of Alberta's electric industry. Over the coming months and years, Alberta will make the transition to a fully competitive market for power, and to more streamlined regulation in parts of business where customers are best protected by regulating costs.
The New Structure
The new structure does not affect the physical nature of electricity delivery, nor does it require integrated utilities to divest themselves of assets. However, the functions of generation, transmission and distribution will be treated separately for accounting, regulatory and functional purposes.
Open competition for generation: The new structure increases the number of players in the generation sector. Under the old arrangements, independent generators had to negotiate with the existing utility generators to sell power. Independent power producers and importers will now compete on an equal basis with existing utility generation, in both the current market to supply power and in the market to supply new generating capacity.
Open access power pool: A new provincial power pool is the market for all electricity bought and sold in the province. The pool is operated as a cooperative venture and is overseen by a council made up of representatives from all Alberta participants in the pool. All generators in Alberta and importers sell energy through the pool to distributors and exporters. The pool establishes an hourly market price for exchanges of power.
System access to the pool: All generators and importers are able to supply power on a non-discriminatory basis to the pool, regardless of who owns any given portion of the power lines. The grid that delivers electricity throughout Alberta is coordinated by a Transmission Administrator, who contracts with the owners of facilities to provide transmission services. The Transmission Administrator also ensures that necessary levels of system support services are in place. The Grid Company of Alberta Inc. (GridCo) has been appointed to fill this role in 1996. Tariffs to recover system access costs from distributors and generators are established by the Transmission Administrator, subject to regulatory approval.
Regulated distribution: Utilities will continue to have the basic right and obligation to meet the power supply requirements for all customers in their service areas. Service area boundaries are unchanged. To serve their customers, distribution companies will purchase energy through the pool and obtain transmission services from the Transmission Administrator. Distributors pay 'postage-stamp' rates for transmission: that is, all distributors pay the same price for transmission, regardless of how far they are from sources of generation.
Import and export: The new structure removes restrictions on who may import or export power in Alberta. Importers and exporters must become members of the Pool. They must also demonstrate that they have appropriate contractual arrangements with the Transmission Administrator and any external transmission systems involved in their transaction. Both importers and exporters will pay location-based tariffs for system access.
Impact on Customer Rates Implementing the Electric Utilities Act has almost no immediate impact on customer rates, since the costs of transmission and existing generation continue to be shared among all customers in the province. A great deal of work went into the regulation on how the costs of existing units are shared, to make sure that each distribution utility's costs are not significantly different in the near-term than they would have been under the former system
The effect of new pricing arrangements made by distribution utilities on behalf of their customers will be averaged across the province, as has been the case in the past. Since new generation is expected to be more expensive than existing generation, this means that rate differences could appear if distributors' loads grow at different rates.
However, future differences in rates are forecast to be minimal. This is because load growth rates are not expected to differ significantly and system access rates will be the same for all distributors.
Depending on the outcome of the study of customer price choice, it is also possible that consumers will be able to make their own pricing arrangements for new generation.
In the long term, increased competition and incentive regulation are expected to result in lower costs than the old structure would have provided.
The Power Pool
The power pool is an open-access, competitive market for electric energy. The Electric Utilities Act stipulates that all electricity traded in the province will be bought and sold through the pool.
Key concepts underlying the pool include:
- Anyone wishing to participate in the pool must become a member of the pool.
- The pool accepts energy offers from all generators and importers belonging to the pool. This includes existing generators as well as plants that are built in the future.
- The pool also accepts bids for energy from distributors for price-sensitive load; i.e., load that would prefer to be curtailed rather than pay more than a given price for power.
- The pool acts as an hourly spot market for energy. A single price is declared for each hour based on a weighted average of the prices of the most expensive units dispatched (or demand bids curtailed) to meet load in that hour.
- All energy is traded at the declared pool price for the hour. There is no spread between the price paid by buyers and that received by sellers.
- The pool does not take part in arranging, settling or managing bilateral contractual agreements between buyers and sellers of power. This does not preclude such contacts. It is expected that buyers and sellers will find it advantageous to have bilateral pricing agreements, and that they will use the pool price to settle imbalances.
Management of the Pool
Three entities play a role in managing the power pool: the Power Pool Council, the Power Pool Administrator and the system controller.
Power Pool Council: The council is responsible for making sure the pool operates as an open, fair and efficient market for power. The Power Pool Council is an independent corporation make up of representatives from consumer groups, independent power producers, utilities, and other organizations with a stake in the pool. The council is responsible for establishing the rules by which the pool operates, and for appointing the Pool Administrator and system controller.
Power Pool Administrator: The Power Pool Administrator is responsible for carrying out the financial transactions and general operations of the pool. This includes:
- Managing the bid-offer process, in which participants submit their prices for supplying to and receiving power from the pool.
- Determining the "merit order" (the ranking of units according to the price they offer into the pool) and working out the overall schedule for which units should run when.
- Scheduling units to provide system services, such as operating reserve.
- Carrying out all the financial settlements, so that distributors pay for the power they purchase and generators receive their payment.
- Determining the costs of running the pool and recovering these costs through membership fees charged to pool participants.
System Controller: The system controller is responsible for the task of keeping a large, dynamic electric system physically stable. This is a minute-by-minute, hour-by-hour job as load rises and falls, as generating units come onto the system. as emergencies arise with transmission facilities or generators. Specific tasks include:
- Dispatching units and price-responsive demand bids according to the schedule set by the Power Pool Administrator.
- Coordinating with owners of transmission facilities.
- Communicating system services requirements to the Power Pool Administrator and making sure the system has adequate levels in place at all times.
Importing and exporting power: All power imported into and exported from Alberta is also traded through the power pool. Importers submit offers to sell to the pool, are placed in the merit order with other suppliers of energy and receive the pool price for energy sold to the pool. Exporters submit bids to buy from the pool and pay the hourly pool price for energy taken. The Power Pool Administrator must ensure that scheduled flows across the transmission lines linking Alberta to other systems are feasible. Importers and exporters must belong to the Power Pool and must demonstrate that they have in place the necessary arrangements with any external transmission systems they use.
Generation
All generators must sell their energy through the power pool.
In the early years of the new structure, most of the energy sold through the pool will come from Alberta's existing generating units, which continue to be owned by the utilities. However, as electric load grows and existing units are retired, future generation will be built through competition among suppliers.
Existing units offer energy to the pool in the same way as any supplier does, and receive the pool price for the energy they sell. However, the Electric Utilities Act treats existing generation differently from other supply in one important way: by ensuring that the costs of these units continue to be shared by all customers in the province.
This was an important objective in shaping the new structure since Alberta, unlike many other jurisdictions, has a low average cost for existing generation. The new structure ensures that Albertans continue to share this advantage, regardless of where they are located in the province.
The mechanism for achieving this objective is a set of legislated financial "hedges" between distributors and owners of existing generating units. The specifics of the hedges are determined through a combination of regulations and EUB decisions. Essentially, they ensure that the price distributors pay for power from existing units is close to the variable cost of generating that power. In return, distributors are required by the EUB to contribute fixed monthly payments to cover the fixed costs of existing generation.
This mechanism ensures that:
- Distributors (and therefore their customers) are hedged against pool prices which are greater than the cost of power from existing sources for their current load requirements.
- Utilities are not faced with the risk of stranded investment for generating facilities they have built.
The legislated financial hedges are shared equitably among distributors on the basis of their shares of total provincial load.
New Generation
Any generator can build new generating capacity in Alberta. Two kinds of companies will compete to build generation in the future:
- Independent power producers, such as industrial customers with their own generation, cogenerators (who simultaneously produce power and heat for some other purpose) and owners of renewable energy sources.
- The generating arm of existing utilities. Any contract between a generator and its affiliated distribution company will be reviewed by the Alberta Energy and Utilities Board. The regulator is responsible for making sure any such contract is negotiated fairly and independently, and is in the best interest of customers.
In Alberta's new industry structure, there is no longer a requirement for the regulator to approve new generating units on the basis of province-wide need for capacity. Instead, market forces will come into play as distributors forecast the pool price and make appropriate financial arrangements with new generators in order to hedge the hourly pool price. Alternatively, a generator may build a new unit on the basis of forecast revenue at the pool price.
Transmission
The province-wide transmission will be managed as a single entity, although transmission facilities will continue to be owned by the respective utilities. This recognizes that transmission must be operated as an integrated system to maintain reliability and cost efficiencies. Two bodies play key roles in managing the transmission system: the Transmission Administrator and the Electric Transmission Council.
Transmission Administrator: The Transmission Administrator is responsible under the Act for the overall coordination of the transmission system.
The role of the Transmission Administrator will is currently filled by the Grid Company of Alberta Inc. GridCo was established through a shareholders' agreement among the four utilities in the province that own transmission facilities.
Distributors purchase system access, and pay for it according to the province-wide tariff established by the Transmission Administrator. In this way, all consumers pay a common, postage-stamp cost for transmission no matter where they are located in the province.
Rates for existing generators reflect their contribution to the cost of system services, as well as costs that are common to all suppliers of power into the pool. Contribution to power system services could be either a credit or a charge. Rates for new generators to connect into the system will cover site-specific connection costs plus location sensitive costs that reflect the transmission benefits or burdens associated with their location. Location-based rates should encourage the efficient location of new plants on the grid.
Electric Transmission Council: The Electric Transmission Council is made up of distributors, generators, independent power producers, consumer groups and rural electrification associations, as well as representatives from the transmission owners. It is responsible for reviewing the activities of the Transmission Administrator and advising on issues related to the grid.
System Access and Tariffs
Transmission costs continue to be regulated. The Transmission Admin-istrator submits a tariff schedule to the Alberta Energy and Utilities Board for approval. Several key principles underlie system access rates:
Postage-stamp rates to distributors: This ensures all customers face a system access tariff that is independent of where they are located in the province.
Location-based rates for generators: The structure of the rate paid by generators for access to the system encourages them to locate where they will minimize transmission costs for the system as a whole.
Costs include system support services: A transmission system depends not only on power lines and transformers to deliver power. It must deliver power at stable voltages, and requires such support services as "spinning reserve" and automatic generation control to maintain the system within narrow tolerances as load rises and falls. A transmission system also loses a certain amount of power in delivery across long distances. The costs of such items are included in the costs recovered through system access rates.
Import and export rates: Importers and exporters pay a fixed system access fee for all contracts to offset the costs of administering them. A "transmission transfer charge" ($/MWh) is posted daily by the Transmission Administrator for service on the following day. The minimum transfer charge is $2/MWh, but is otherwise based on available market indices and should vary to reflect demand for transmission capacity.
Distribution
In Alberta's new industry structure, distributors continue to have essentially the same relationship with their customers as before. Service area boundaries are unaffected by the Act.
However, behind the scenes, distributors play a different role than in the former, vertically integrated system. They put the components of delivering power together in a different way.
The six largest distribution systems in the province are each obligated to pay a share of the fixed costs of Alberta's existing generating units. In return, they are entitled to a legislated financial hedge of the energy produced by those units. The hedge is related to the regulated operating costs of the units (if pool price is higher than the regulated cost, distributors pay the lower, regulated cost for energy).
These distribution utilities have a number of responsibilities (and risks) that stem from their legislated
hedges:
- They must arrange with the Transmission Administrator for system access services.
- They must settle with the pool for all energy taken.
- As load grows and the legislated hedges come to cover less of their needs, they must be prepared either to remain unhedged, purchasing the difference at the pool price, or to enter into new price hedging arrangements with suppliers.
Other Distribution Agents
Besides the six "entitled" distribution utilities, there are a number of other distributors in the province. These include smaller municipalities that own their own distribution systems and rural electrification associations (REAs). All the municipalities buy their energy and system access services from TransAlta. The REAs have contracts either with TransAlta or Alberta Power.
These distributors buy energy from entitled utilities, and the costs they pay reflect their share of overall load in the province. Essentially, their share of the hedges is built into TransAlta's or Alberta Power's entitlement.
These distributors have the option of participating directly in the power pool and making their own arrangements for future capacity if they wish to do so. In this case, the costs (both fixed and variable) related to their share of existing generation would be transferred from Alberta Power or TransAlta to the smaller system, which would then take on all the risks and responsibilities associated with the entitlement.
Cost regulation
While competition will control the cost of new generation, regulation is still needed in
many areas of the electric industry. Existing generating units continue to be regulated to ensure that customers retain the benefits of their low cost. The operation of the transmission system will be monitored to ensure that no conflict of interest occurs among generators, distributors and transmission owners who are linked corporately. Distribution costs and the allocation of those costs across customer classes will be reviewed. Regulation continues to protect consumers in all areas of the industry.
The Alberta Energy and Utilities Board is responsible for examining and approving the following:
- The cost of existing generation owned by Alberta Power, TransAlta Utilities and Edmonton Power, until such time as a negotiated agreement is reached to replace a unit's legislated financial hedge or a unit is removed from regulation under terms to be set by regulators under the Act.
- Replacement of the legislated financial hedges with negotiated hedges.
- System access tariffs submitted by the Transmission Administrator, based on the costs submitted to the administrator by transmission owners.
- The costs incurred by investor-owned distribution companies, along with the retail rates they charge to customers. The distribution costs and rates for municipally owned utilities are regulated by their respective municipalities rather than the Board.
- Any new, long-term financial arrangements that distributors enter into with generators to hedge the pool price.
The EUB will continue to review applications to build generating plants for compliance with environmental and siting requirements.
Incentive regulation
Regulation of Alberta's electric utilities, as in most other jurisdictions, has been based on the traditional "cost of service" approach. With this approach, regulators review all areas of a utility's expenditures and determine whether the costs have been prudently incurred and can be charged back to customers. As part of the exercise, the regulator determines a reasonable rate of return on the investment in facilities; this is what constitutes a utility's earnings.
Incentive regulation (also known as "performance-based' regulation) aims to reduce costs by giving utilities stronger incentives to pursue efficiencies. Traditional cost of service regulation does not reward exploration of new or different ways to increase efficiency. The key to incentive regulation is to allow utilities to keep part of any profits gained from innovative cost reductions. This increases their incentive to search for ways to cut costs.
There are several ways to implement incentive regulation. Approaches that are being tried in other parts of North America include:
- Setting measures that reward generating units for meeting certain performance targets.
- Increasing the period over which rates are approved, which gives utilities a stronger incentive to forecast their costs accurately, and to meet or exceed performance forecasts.
- Setting price caps that keep consumers rates below certain targets.
Looking ahead
The implementation of the Electric Utilities Act this year represented a milestone in the development of Alberta's electric industry - but certainly not an end point. In the months and years ahead, Alberta's electric industry will continue to evolve towards a fully competitive generation market.
For more information contact the Alberta Department of Energy, Tel: (403) 427-8177 and ask for a copy of "Moving to Competition: A Guide to Alberta's new electric industry structure.