EDITORIAL

Progress, Not Perfection, Key Deregulation Goal

The question for Ontarians facing "deregulation" might be: exactly how well has Alberta done in the 14 months since the Alberta government launched that province into a deregulated power market?

Prices jumped initially and all electricity consumers felt the impact, especially large power consumers. For the average homeowner, the lights didn't go out and there were rebates to cushion the shock. But the transition has not been without its problems, either. That much is made clear in a recent study by Mark Jaccard of the C.D. Howe Institute, which we feature in this month's issue.

Jaccard, former chair of the B.C. Utilities Commission and an adviser to governments in Asia, Europe and South America with respect to electricity deregulation, says in his commentary on the Alberta electricity scene that from the very beginning Alberta's plans to introduce a competitive power market had problems. After all, nothing is perfect and maybe it's progress, not perfection that counts in the long run.

That observation will, unfortunately, be of little solace to the hundreds of industrial, commercial and business power consumers who warned then-energy minister Mike Cardinal and his predecessor, Steve West, the energy minister/godfather of deregulation, that the government's plan to move to a competitive market on Jan. 1, 2001 was problematic. Electricity consumers, after all, are the ones footing the electricity bill and in those areas of Canada where low electricity rates have historically been used to attract and stimulate large industry, their fears are real.

As Jaccard points out, there were signs of impending problems with Alberta's deregulation as early as August 2000, when the government's much-touted power auction raised a mere $1 billion instead of the $3 billion to $4 billion that had been projected by industry observers.

In addition, the auction attracted only a handful of bidders, with the result that two Alberta-based, municipally owned utilities, Epcor and Enmax, were able to capture the bulk of the generation available after a number of higher-profile American energy traders dropped out of the process.

Almost one-third of the available generation did not attract bids (although a good portion sold at a second auction, adding a further $1 billion to the pool of funds available to Albertans) and an important chunk of the province's power remains inexplicably under government control to this day.

Of greater interest -- for both taxpayers and ratepayers -- is Jaccard's pricing analysis that shows most purchasers of generation (Epcor and Enmax among them) paid so little at the auction that they will most likely pay off their initial investment in just one year.

That will leave those companies free to "earn substantial profits for the remaining life of the power purchase agreements, some of which last for close to 20 years", he claims.

That suggests the government -- in its eagerness to proceed with deregulation -- sold off generation too cheaply.

Enmax, for instance, is expected to report net profits of some $250 million for the last year -- compared to $44 million in 2000.

"When distribution and other costs are added to the wholesale prices and the rebate, Alberta's net residential rates for 2001 were about 12 cents per kilowatt hour, giving the province the dubious distinction of jumping from one of the lowest to the highest electricity rates in the country," Jaccard says.

That isn't the kind of picture current Alberta Energy Minister Murray Smith likes to paint when he talks about Alberta's new deregulated electricity market. And to listen to his Ontario counterpart (see news: Ontario Ratepayers To $ave Under Deregulation) Jim Wilson, ratepayers there are expected to save billions over the next eight years.

Perhaps this is because the rate caps and rebates imposed by the Alberta government during 2001 kept consumer prices to tolerable levels; a number of companies are contemplating building much needed new generation capacity and there is the semblance of a competitive marketplace. Not to mention that natural gas prices have fallen, a slower economy has checked consumption of all fuels and more and more capacity is coming on line.

All of this doesn't mean that the "deregulation" movement in Alberta has been a mistake or a failure, nor a smooth and problem-free shift. For Ontarians there is reason for concern as well as reason for optimism. There may be no need to abandon the pursuit of a truly deregulated electricity market. To paraphrase Mark Jaccard: Proceed with caution, but proceed. There are risks and benefits.

In an absolutely uncertain world, some things are almost certain: when it comes to electricity deregulation, politicians will always take the credit and always shift the blame. On the other hand, government will always be there to pick up the pieces and electricity consumers will always foot the bill for the entire process.

Randy Hurst
Publisher
rwh@istar.ca