Alberta's electricity market plans for "deregulation" have spawned two high-priced auctions and now a mess of government intervention that is unprecedented in Alberta history and hardly a "hands off" experience that one would expect from a new market regime that promised greater competition and lower electricity prices.
Following sharply increasing electricity prices over the past year, the government has been forced to step into the market. Albertans' electricity bills will remain virtually unchanged next year, following the unprecedented move last month by the Provincial government to freeze planned increases across the province.
With one eye on a possible provincial election next year and another on the public outcry of soaring electricity prices, the government caved into that public outcry and unprecedented fear of future dramatic rate increases....a result of the government's deregulation of the province's electricity industry, which was to bring increased competition and lower prices.
The freeze is expected to save the average Edmonton homeowner between $10 and $15 a month. That's because EPCOR has been forced to shelve for at least one year its previously approved 17 per cent surcharge, called a "rate rider", scheduled to take effect January 1, 2001. The surcharge was to cover unexpected costs this past year.
The government has ordered the Alberta Energy and Utilities Board to suspend all expected rate riders for one year so the riders can be subjected to a "fairness review" to ensure they are justified.
"We want to make sure that, if there are to be rate increases relative to electricity, that they are indeed valid and justified," Premier Klein said.
"We have a responsibility on the part of the people of this province to protect them to the best of our ability from rising electricity rates," he said.
Intervening means the government will send representatives to Alberta Energy and Utilities Board hearings when rate increase applications are dealt with. The representatives will observe the proceedings to ensure the board is "justified in granting" rate increases, adding, and if they're not, we will be very vigorous in our opposition," he vowed.
He defended his government's electricity industry deregulation plans and said this does not conflict with intervening on behalf of consumers over price concerns.
"We don't want Alberta consumers to take the hit," said Klein, suggesting that's why the government has announced electricity bill rebates and will intervene in rate hearings.
What is the outcome of all this political backtracking? Criticism from political opposition and confusion for power consumers and producers alike.
Opposition critics say it is market uncertainty caused by the deregulation process which is helping to drive rates up, even though the government denies it. Power producers are bound to be upset at what they see as government meddling and electricity consumers, residential, commercial and industrial alike, are paying the price for all the changes that have taken place over the past two years in Alberta.
Rebate Scheduled
Alberta's non-residential electricity consumers will receive an electricity auction rebate in 2001 worth $760 million, Alberta's Resource Development Min-ister Mike Cardinal has announced.
Qualified recipients for this portion of the province's electricity auction rebate include everything from senior's lodges, apartment buildings, and farms, to municipalities, industry, and commercial and small businesses. Just as with the rebate announced earlier for residential consumers, the rebate will be applied automatically to every customer.
"Our consultations with Albertans from various stakeholder groups overwhelmingly told us that the electricity auction rebate should be given back over one year," said Cardinal. "We have responded to that recommendation. The money will be returned quickly and simply over a twelve-month period as a credit on customers' electricity bills."
The amount of each consumer's rebate will be based on their monthly consumption of electric energy as measured in kilowatt-hours, and retailers will be required to show the credit on consumers' bills.
"Alberta's non-residential consumers account for roughly 75 per cent of the power billed in Alberta, and their share of the total auction proceeds reflects this," said Cardinal. "But there are huge differences among them in terms of their usage -- basing the rebate on each consumer's usage is a practical way to ensure they each receive their fair share."
The commercial and industrial electricity auction rebate follows the residential consumer rebate announced on September 6th. Starting January 1, 2001, all residential electricity customers in Alberta will receive a $20 a month rebate on their power bill for one year. The residential rebate covers residential power consumers and farm homes and will return about $240 million to Albertans.
The rebates add up to about $1 billion of the $1.15 billion raised through the power auction which the government held in August, as part of its move to restructure the province's electric industry. The remaining auction proceeds will be placed in the Balancing Pool, which will be shared by all Alberta power consumers through 2020.
ENMAX regulator sets Regulated Rate Option effective January 1, 2001
Meanwhile, ENMAX Corporation has announced The City of Calgary has approved ENMAX's Regulated Rate Option (RRO) for residential and small/medium commercial customers in Calgary, effective January 1, 2001.
ENMAX's residential RRO rate is up 3.9 per cent to about $58 per month on the average bill, small-commercial RRO rates decline by 6.1 per cent to about $240 per month and medium-commercial RRO rates increase by 6.75 per cent to about $960 per month. The rates are in effect for the first six months of 2001.
"Despite major increases in energy costs, which we expect to continue in 2001, average monthly residential electricity bills will be about the same as in 2000, after including the Alberta government's recently announced residential rebate," said Bob Nicolay, ENMAX president and chief executive officer.
ENMAX's residential RRO rate equates to 10.5 cents per kilowatt/hour and reflects the Alberta government's recent decision to freeze energy costs. The remaining 2.5 cents per kilowatt/hour is for billing charges, delivery charges and The City of Calgary's Municipal Consent and Access Fee. Also, the federal government charges its seven per cent goods and services tax on each customer's bill.
In addition to the price cap on 2001 energy charges, the Alberta government delayed electricity companies' ability to collect the extra money they spent in 2000 to acquire energy for resale to customers.
For ENMAX, the shortfall is about $138.5 million. ENMAX has asked Calgary City Council for permission to collect this amount through a deregulation adjustment rider over a three-year period beginning in 2002. If approved, the rider is expected to add about $3 per month to average residential bills. Interest charges for 2001 on the $138.5 million will be paid by the Alberta government through its electricity balancing pool.
"We've followed the government's directive to cap energy-related fees in 2001 and delay collection of additional energy costs from 2000 but, eventually, we need to raise rates to collect the difference between what we're paying for electricity and what we're charging customers," Nicolay said.
Second Auction Sees Dramatic Price Increase
A second Alberta electricity auction last month generated a whopping $2.3 billion in proceeds as buyers rushed back to the marketplace to lock in energy supplies ahead of the province's controversial deregulation of the market next month.
The auction sold off 2,000 MW of electricity in small chunks for about $2.3 billion. Most of the 45 buyers included manufacturers, oil and gas companies, department stores, municipalities and the Calgary airport.
The results were in stark contrast to the August auction which sold 4,249 MW for about $1.15 billion...more than twice the electricity and half the price as this month's auction. This demonstrates how the price has increased for wholesale power and this alarms Alberta's major power consumers.
According to Dan Macnamara of the Industrial Power Consumers' Association of Alberta, whose 30 members use half the province's power, the auction results are "catastrophic" for electricity consumers.
He said the higher prices being paid by the bidders, more than $120 per MWh as compared to traditional prices of $40 per MWh, reflects a buying panic as the market prepares to deregulate.
"We now have set a very high level of wholesale prices in Alberta. The result is going to be a doubling of everyone's bills," he remarked.
Despite the government's insistence that the auction proceeds will go to offset higher consumer charges for electricity, Dan Macnamara is not convinced.
He insisted that while government has tried to cushion the blow through rebates to consumers and a residential rate freeze for 2001, it only means that the pain will be twice as bad in 2002 when power marketers, who had their rates frozen, will go before the Energy and Utilities Board to recoup their losses.
"They are not going to be eating the difference," he warned.
Electricity Export Policy Criticized
With Alberta electricity supply barely exceeding demand, and power prices sky-high, it makes no sense to export to the United States, according to a spokesperson for industrial users.
But Alberta power is, in fact, exported, via transmission ties in British Columbia, raising the possibility of even higher consumer prices.
TransAlta Energy Marketing Corp., a division of the utility that produces about 60 per cent of provincial power, was granted permission in October to export up to 1,000 MW of electricity.
Enmax Energy, the Calgary-owned utility, has applied to the National Energy Board to export 400 megawatts and is waiting for a decision.
"We've opposed them all," Dale Hildebrand said of the applications. "And the NEB has approved them all."
Hildebrand is a vice-president of Optimum Energy Management and spokesperson for the 18-member Senior Petroleum Producers Association. Formed in 1996, it includes companies like Anderson Exploration, Suncor Energy and Talisman Energy.
The danger, he said, is that a corporate division that sells electricity may drive up prices and enrich the same firm's generating division.
"That is a concern -- the potential for Ôgaming,' " he cautioned.
Enmax spokesperson Tony McCallum defended his utility, saying the export licence it is seeking will be used solely to sell surplus power during off-peak times. One section of Enmax's application says "the proposed export of electricity will be in excess of the current customer requirements in Alberta."
In off-peak hours, you have to sell the power you're producing or lose potential revenue, McCallum said. You can't store electricity. "You use it or lose it."
Dale Hildebrand is wary, however: "We see the words, but it's still a concern."
For TransAlta, the international export licence was nothing new, according to Lonnie Enns, director of trading.
TransAlta has already had two two-year licences. The original licence was set up at a time when Alberta prices were low and supply outstripped demand.
"The new application calls for a renewal of that licence," Enns said. It is important to have an export licence in order to be able to import, he added. "If we don't have reciprocity, we can't get access to cheap power."
Enns also said TransAlta would not be allowed to export during times that the Alberta Power Pool declared a local shortage. And, in practice, TransAlta has been exporting only about five per cent of the amount it is importing.
The broad issue of cross-border shipment of electricity -- even from one province to another -- has been a sore point for weeks. Alberta Natural Resource Development statistics show that in 1999 Alberta exported 273,779 MWh of electricity to B.C. or Saskatchewan for $4.3 million.
But during the same 12 months, Alberta imported 2.2 million MWh at a cost of $135.5 million.
In a scathing Oct. 15 letter on the topic, president John Davies of Lethbridge Iron Works Co. wrote: "the only benefit I see from Alberta's current electricity mess is that we are lending a helping hand to the provinces on either side of us."
Davies calculated in November that electricity exports in the first nine months of 2000 averaged $54 per MWh. But imports averaged $179 per MWh.
There has been some concern in the Alberta government that companies from outside the province that provide imported electricity during peak demand periods are subjecting the power pool system to some unusual market forces, according to provincial Treasurer Steve West. "We're ensuring there is no artificial manipulation of the market."
In the end, the provincial government is frustrated with the notion that its deregulation policy is the cause of the price increases being sought by power companies and being approved by regulators. In the meantime, not enough power companies are stepping up to the plate as the government had hoped and regulators aren't moving fast enough to ensure adequate supply in a tight, deregulated market.
While opposition critics are quick to call the whole deregulation effort a fiasco, Alberta's electricity consumers should find comfortin the fact that the provincial government has proceeds from the auctions and general revenue surpluses to afford rebates and freezes and other cushions to soften the blow of rate instability in an unpredictable marketplace. The question is: What kind of "deregulation" is this? The rationale in the beginning was that deregulation would mean more competition and LOWER electricity prices. So long as supply is tight, the existing players will compete through higher prices which is ultimately bad news for electricity consumers.
It is pure political smoke and mirrors for the Alberta government to use rate freezes and rebates to protect electricity consumers from a flawed and misguided policy.
Without the rebates and rate freezes, electricity consumers would see the true cost of electricity. For years, proponents of deregulation and privatization of electricity production have complained that Canada had artificially low prices because the cost of utility debt was not factored properly into the rate. So, I ask, how is this any different? Albertans for the next year, or maybe two, will live with artificial prices subsidized by government until government allows producers to increase prices to a much higher level. In the meantime, the government will also compensate producers for interest incurred on their debts because they were not able to sell their power at the prices they needed to cover their costs.
At some point, however, the true price will have to be paid for through rates. When the rebate money runs out, it will be time to assess the real value of deregulation to electricity consumers.
How does this play out in other parts of the country? Ontario is poised to deregulate its market next year some time and large power consumers and producers alike are eyeing the Alberta experience with great skepticism.
So far, California and Alberta experiences with deregulation are giving the term "deregulation" a black eye. ET