Three Provincial Generators Awaiting U.S. Government Decision
By Michael MacMillan
In Canada, international trade, and in particular trade with the United States, is often mixed with politics. Whether a symptom of Canada's lingering suspicion of its southern neighbor, or a healthy fear of being swamped by the culture and economy of the world's sole remaining superpower, trade disputes are big news.
Even minor trade skirmishes with the U.S. make their way to the front pages of Canada's major daily newspapers. Because of this, many a government has had to walk a political tightrope in an attempt to find middle ground in the area of lumber, wheat, and most recently, goods from Cuba. And if recent events are any indication, hydro-electricity may soon be added to that list.
With deregulation of the U.S. electric utility industry, Canada's largest power generators are looking to markets south of the border. The question of increased Canadian involvement in the U.S energy market now is not so much a matter of if, but when.
Provincial utilities have long sought full and open access to the U.S. electric power market. With their vast generating capacities, the Crown corporations routinely produce surplus electricity - power they would like to sell directly to American wholesale customers. Moreover, getting a leg in the U.S. market now would also favourably position the utilities in North America's increasingly deregulated environment. With this in mind, affiliates of Canada's three largest power generators, Hydro-Quebec, Ontario Hydro, and B.C. Hydro each recently filed applications with the U.S. Federal Energy Regulatory Commission (FERC) for a "marketer's license."
The permit would allow the utilities to sell power at "market-based" rates, that is, at rates determined by the forces of supply and demand, and to customers anywhere in the United States. In return, American utilities gain the right to wheel power over a provincial grid.
But so far the champagne remains uncorked. In a recent decision, the U.S. energy watchdog refused to grant a permit to the British Columbia Power Exchange Corporation (Powerex), an affiliate of B.C. Hydro. The Commission concluded that under Powerex's proposal, American utilities would not receive equal access to the province's transmission system.
As part of FERC's application procedures, parties with concerns or comments regarding a bid have sixty days to file motions, which FERC may take under review. Several of these were filed in response to Powerex's bid, including a brief from Washington-based Bonneville Power Administration (BPA), a wholesaler of electric power produced in the northwestern U.S.. B.C. Hydro, they insist, is too closely associated with Powerex, leaving in question the parent company/s intention to keep an arm's length distance from B.C.'s grid. What worries them is the potential for internal favouritism, and discrimination against American generators.
"What we're trying to do is eliminate an advantage," said Perry Gruber, a BPA spokesperson. "B.C. Hydro can put up barriers to transmission and limit our access."
FERC also requires applicants to file an open access transmission tariff, which all parties, including the utility itself, will be charged. In theory this proves that the applicant no longer has influence over their local transmission grid. While FERC later found Bonneville's allegations to be "insupportable," the Commission's conclusions seemed to bear them out. In the case of Powerex, FERC found the tariff "(did) not meet the standard that is required for a transmission-owning utility...to mitigate market power and be authorized to sell power a market- based rates."
Thus, as far as FERC was concerned, B.C. Hydro still had effective control of the market. "³If we're going to allow you to sell at market-based rates, you can't have market dominance," explained Barbara Connors of FERC's Press Services Division.
Response to the ruling was swift. Hydro-Quebec withdrew its bid entirely, while Ontario Hydro took their application strategy back to the drawing board. Neither utility wants their bid to be an exercise in futility. But the matter is far from over. FERC is willing to continue hearing their cases. In the matter of Powerex, The B.C. Hydro affiliate does have the right to reapply if their grid mitigation measures change. Undeterred, the three utilities have taken the ruling in stride, preferring to view it more as a temporary setback than failure.
Canadian involvement in the U.S. electric energy market is nothing new. Electric power trade between the two countries dates back to 1901, with the opening of the first international transmission line at Niagara Falls. But the relationship then, and now, remains one-sided. Continual surplus capacity, cheap sources of generation, and differing seasonal peaks have made Canada the traditionally dominant partner. As a result, electricity has developed into one of Canada's fastest growing energy sectors. Globally, Canada ranks fifth in total electricity generating capacity and electric energy production.
And the market grows more profitable each passing year. In 1995, Canada exported nearly $1.2 billion in electricity, all of it to the U.S. That may only represent five per cent of total energy exports, but that share is growing. Electricity exports more than tripled in the earlier part of this decade, from 16,494 GWh in 1990 to nearly 44,823 Gwh in 1994. Many American utilities close to the border now rely on a steady diet of Canadian power.
Hydro-Quebec, for example, has been quite active in the U.S. It has already formed a partnership with Noverco Inc., (owner of Gaz Metropolitain, Quebec's only natural gas supplier) and Consolidated Natural Gas, and is currently in a contract with Con Edison, New York State's largest electric utility, for a block of firm power until 2004. Nearly nine per cent of the utility's revenues are a result of U.S. sales. In B.C., Powerex trades power with utilities all over the southwestern U.S., while Ontario Hydro regularly supplies power to New York state.
Such arrangements are worked out between the utilities as separate contracts, and do not usually involve selling power directly to American customers. Without a marketer's license, the truly lucrative deals -- direct customer sales to any region in the U.S. -- remain out of reach. Obtaining one has become a key issue for the three utilities. "Increased activity in the U.S. is still a definite priority,² confirmed Marie Archambault, spokesperson for Hydro-Quebec.
Nor is the timing of the three applications an accident. According to Hans Konow, President and Chief Executive Officer of the Canadian Electrical Association (CEA), rapid deregulation of the U.S. wholesale and retail markets is pressuring Canadian utilities to act fast. They risk losing marketshare if they wait much longer. Selling to the border utilities, he said, has historically provided an important source of revenue. Nevertheless, it is small potatoes compared with revenues that await them if FERC gives the green light. So determined are they that Konow expects they will do what it takes to obtain the permits. "It's just basic economics and the changing circumstances of the markets," he said.
Mike Barry, Senior Market Analyst at the National Energy Board of Canada agrees. He feels that with so much talk of deregulation south of the border, the provincial utilities are being forced to take some kind of action. "I think they're under a lot of pressure," Barry explained, "they want to be seen doing something."
Just what approach each utility will take to convince FERC, however, is not entirely clear. Despite changes sweeping the North American electric energy industry, and recent efforts to distance themselves from their respective grids, the three still enjoy monopolistic status in their jurisdictions. Ontario Hydro ‹ whose U.S. sales have amounted to more than $1 billion over the past three years ‹ in particular faces a serious dilemma. Since their number of wholesale contracts is greater than B.C. Hydro's and Hydro-Quebec's.
"They are in a more difficult position because of substantial sales to municipal utilities," Konow said, "and they'll have to make a choice at some point, depending on what FERC says is required."
Nonetheless, the jury is still out on the application, filed last December under the auspices of Ontario Hydro's international arm, Ontario Hydro International Markets, Inc (OHIM). Thirteen intervenors, including representatives from U.S. generators to local industry filed motions prompting OHIM to make several concessions. After reviewing these changes, FERC deemed that their position had changed enough to warrant re-application.
"In one sense it's probably a good sign that they are giving it serious consideration, but it restarted the clock as far as interventions are concerned," said Barry Green, Marketing Regulation Manager at Ontario Hydro.
Among the more outspoken critics of the OHIM bid is the Independent Power Producers' Society of Ontario (IPPSO), a non-profit organization representing 600 companies and entrepreneurs associated with the province's independent power generators. For them, the very notion that American generators could soon be wheeling into Ontario, while local generators watch from the sidelines, is tough to swallow.
"Can you imagine a bigger snub to Canadian sovereignty," wondered Jake Brooks, IPPSO's Executive Director, "than somebody applying to an American regulator... to allow American utilities and independents to provide services to Ontario customers without allowing Ontario generators to do the same?"
Green, however, dismisses this argument. To attain a permit, he said, the OHIM chose to make concessions that directly benefit the producers IPPSO represents. It has offered FERC both wheeling access to the provincial grid, and to give generators the right move power from one source in the province to the U.S. So even if IPPs are being shut out of one market, Ontario Hydro insists they are making a much larger one available. "If someone in Ontario has a generator, and wants to sell some of the output from that generator into the U.S. market, then we would facilitate that," Green explained.
He also disregards Brooks' claims that a marketer's license will bring rate increases for Ontarians. Brooks insists that in order for Ontario Hydro to meet U.S. demand, given their relative lack of hydroelectric facilities and recent problems with their nuclear division, Ontarians will foot the bill for increased generation. Green agrees that U.S. customers will pay less, but says it will have nothing to do with the financial state of Ontario Hydro. Local customers receive "ancillary" services, power specifically geared to a customer's needs. Americans do not. "So the price comparison is not really valid," he added.
Not all intervenors are necessarily as critical as IPPSO. Some simply take advantage of the process to have their voices heard in Washington. Owners of the contentious Churchill Falls hydroelectric station in Labrador, for instance, filed an intervention regarding Hydro-Quebec's application. Their goal: to make FERC understand that Newfoundland can independently produce and sell power to the U.S. They also wanted to alert the Commission to Newfoundland's vital interests in the matter.
"There's no point of contention, we just want to make sure that whatever the ruling is by FERC, that we're going to be able to live with it as well," explained Don Barret, Manager of Corporate Affairs at the Churchill Falls (Labrador) Corporation.
Electricity from the station, indeed all power generated in Newfoundland earmarked for the U.S., must be wheeled through Quebec. At the time the two provinces struck a deal regarding the Churchill Falls project, Quebec refused to accept outsiders on their grid. Faced with little option, the company signed an agreement in 1969 to sell power to Quebec, which in turn began selling it to the U.S. What no one foresaw was just how one-sided the deal would become. Skyrocketing utility rates during the seventies made electricity extremely profitable. Quebec now earns huge returns on cheap energy generated in Newfoundland. This has the Newfoundland government up in arms, leading to a heated inter-provincial row. "Hydro Quebec is buying Churchill Falls power at 1969 prices and re-selling it at 1996 prices. The windfall profits are immense ... and unconscionable," declared Newfoundland Premier Brian Tobin during a speech given to Montreal's Rotary Club last year.
Not surprisingly, the Churchill Falls Corporation is toying with the idea of constructing a second generating station. Exports to the U.S. could bring much needed cash to the beleaguered island province. For now, though, they are monitoring the Hydro-Quebec - FERC relationship very closely.
"Sometime down the road we may want to develop this second location on the Churchill river, and we just want to know what the rules are going to be," Barret added.
Despite limited opening of Quebec's transmission grid, Hydro-Quebec's chances of a successful bid remain uncertain. But of the three, Hydro-Quebec appears to have the most to gain. Since nearly 93 per cent of their generating capacity is hydroelectric - unheard of in a utility of its size - Hydro-Quebec is well positioned to compete in the U.S. market.
All three utilities also insist there is more to gain from a marketer's license than profit. Anyone who benefits from electricity, they claim, will also benefit from increased power trading. Besides the obvious advantages of improving an already healthy trading relationship with Canada's neighbor, the increased revenues U.S. sales inevitably bring means that in the future hydro rates will not increase as much, or as often.
Consumer advocates agree. At worst, they view the FERC applications as irrelevant, and at best, a continuation of surplus power-selling that has kept rates relatively low in Canada for years. Particularly in B.C. and Quebec, where nearly all generation is hydroelectric in origin, rates have been kept reasonable in part by border sales. Any chance to expand this source of revenue, supporters say, should be welcomed.
"To the extent that B.C. Hydro can sell (excess power) in the United States, that keeps the rates down for consumers in British Columbia. It always has. It's been doing that for years," affirmed Dick Gathercole, Executive Director of the British Columbia Public Interest Advocacy Center, and a longtime representative of low-income residential hydro users. "Ultimately, it's very beneficial to everyone in the province," Chatterton agreed.
In the end, the matter is out of their hands. On the Canadian side, the legalities of direct U.S. sales have already been established. Barry says that if the FERC applications are successful, the utilities themselves (not affiliates or associated companies) are already covered by a "blanket permit" from the NEB to trade power to the U.S. But since the only successful application thus far is from TransAlta, - a province where the utility industry structure is unique to North America - he is not sure what the three utilities can do to please FERC.
Representatives from the big three utilities seem to know. They have been hard at work rethinking their applications. But they are keeping their strategies to themselves. Archambault would only quote from an earlier interview with Hydro-Quebec President and CEO Andre Caille, who at the time stated, "Hydro-Quebec does not have the option not to open its grid." B.C. Hydro is equally reluctant to discuss the matter. "We're addressing all concerns in our re-application," said Bill Chatterton, Media Relations Manager.
Their ultimate chances of success seems favourable. For now, all they can do is wait.
"The expectation is that in the end, they will get their licenses," Konow said, "But we wait upon FERC's pleasure."