SCIENCESQUE

Electricity Deregulation

Companies won; citizens lost

By Darcy Henton

Noel Somerville dabbles in stocks, but he refuses to gamble on his electricity bill. The Edmonton senior—like 57 per cent of Albertans—has chosen not to enter into a contract to purchase electricity from one of more than 30 retailers now selling power in Alberta’s unique deregulated electricity market. He can’t see why citizens should have to take a financial risk to procure an essential service.

“If I want to play the market, I can play the market,” said the 82-year-old chair of Public Interest Alberta’s seniors task force. “I don’t want to play the market with my electricity bill. I just don’t.” Somerville prefers to stay on the default rate for electricity—the regulated rate option (RRO) automatically applied to those who have not chosen an electricity provider since the retail power market was restructured in 2001.

Nearly two decades into deregulation, why are so many Albertans, a majority, unwilling to play? In 2013 the chair of an MLA committee tasked with implementing recommendations to reduce power price volatility and increase consumer awareness said Albertans have lost confidence in the system since it was deregulated. “I think they have lost that trust and they need to get it back,” said Everett McDonald, former PC MLA for Grande Prairie-Smoky.

Last December, Alberta’s Market Surveillance Administrator (MSA), the province’s power market watchdog, reported that information provided to Albertans on the cost of electricity is inadequate, insufficient, unclear and confusing. The MSA said lack of accurate information about the cost of residential electricity contracts makes it difficult for Albertans to choose the lowest-cost energy provider. Most of us don’t understand the electricity market and are reluctant to enter into a contract when we don’t know whether it is a good deal or not.

Even the owners of the power plants, giants such as TransAlta and TransCanada and city-owned Enmax, concede the difficulty of maintaining the public’s trust. “Ours is not a well-understood or popular business,” lamented Evan Bahry, executive director of the Independent Power Producers Society of Alberta (IPPSA). “One of the challenges we face, frankly, is public confidence in this marketplace.”

Alberta has the only fully deregulated power market in Canada but the jury is still out on whether it has been a success or a failure, or who, really, has benefited from the costly experiment. While the power industry touts the virtues of deregulation—particularly the fact that all new power generation facilities are paid for by private investors rather than taxpayers—its critics claim deregulation has jacked up prices and lined power plant owners’ pockets. Many Albertans still wonder why the provincial government embarked on this path in 1996, since Alberta’s electricity rates were among the lowest in North America at the time.

Utility owners touted deregulation, and “nobody had a better idea, so that’s what we did.” The market was built without a single calculation being done.

David Gray, former executive director of Alberta’s Utilities Consumer Advocate, a government-operated consumer agency, believes corporations reaped a bonanza through the auctions that redistributed ownership of power generation in deregulation’s first years. In an interview with Alberta Views, Gray said the rights to Alberta’s power generation were auctioned in such large blocks that only the largest players had the financial resources to bid on them. As a result, the blocks sold for a fraction of their value. This is supported by a declaration Enmax made in a tax document. The company stated that a power purchase arrangement it bought at auction in 2000 for $240-million was actually worth $839-million.

The auctioned rights to the lion’s share of Alberta’s electrical generation netted less than $1-billion for citizens. A 2001 study by three energy economists at the Alberta School of Business concluded the auction was “extremely lucrative” for the companies that purchased the rights to Alberta’s power. In the study, titled “Electricity Industry Restructuring: The Alberta Experience,” André Plourde and his two co-authors wrote that “the winning bids appear to have been quite low compared to the realized value of the contracts.”

“They went cheap, so billions and billions of dollars have been made in the Alberta power generation market—and we’re never getting that back,” Gray concluded.

Deregulation was controversial when it began, and it continues so. Noel Somerville believes that Ralph Klein’s decision to deregulate was motivated by ideology. “The former PC government accepted the Fraser Institute notion that there are ‘privatize’ solutions to any public policy problem,” he said. “I think that’s nonsense.”

Before deregulation, the province’s electricity was provided by private utilities and a few municipally owned ones. They constructed and operated power plants under government direction and distributed the electricity in exchange for their costs plus a profit margin of 9 per cent to 14 per cent.

“Before 2000 it was essentially a cost-plus system,” said Gray. Utilities presented their plans for meeting future demand for electricity to the provincial utilities board. If the proposals were acceptable, the board set power prices to cover the costs.

But in the 1990s disagreements arose. Rival utilities argued over whose plant should be built next. Friction existed between privately owned utilities and city-owned ones. Because southern Alberta utilities could produce power more cheaply than northern utilities, some electricity users in the south balked at having to subsidize the north.

Public assets were sold on the cheap: “Billions of dollars have been made and we’re never getting that back.” —David Gray

Electricity consultant Rick Cowburn, who was vice-president of tariff services at Edmonton Power (now Epcor and Capital Power) until 2007, recalls that Energy Minister Pat Black summoned utility executives into her office in the mid-1990s and directed them to resolve the issues in a way that ensured no one got hurt. Electricity deregulation, which was already occurring in Britain, California and the US Midwest, was put forward by utility owners and government officials as the solution. “Nobody had a better idea, so that’s what we did,” said Cowburn. “A competitive market was put in place without a single calculation ever being done as to what its benefits in dollars and cents might be.”

While some former senior government planners claim the system before deregulation was slow and cumbersome, Keith Provost, a former Alberta Power (now ATCO Electric) senior vice-president who sat on the provincial electricity system steering committee, contends it was a “finely tuned” operation. “The steering committee set out to provide electricity to the province at the lowest possible cost,” said Provost, now 89. “Every year until 2001, when deregulation went into effect, the rates in Alberta were among the lowest—if not the lowest—in Canada.”

Cowburn, who was later appointed to a blue ribbon electricity task force by Premier Alison Redford, believes complaints about the regulated electricity system were overblown. “I am hard-pressed to see where the evil was,” he said. “Reliability was high. Efficiency was high.”

Proponents of deregulation argued competition would make the system more efficient and result in lower electricity prices. Although government officials later denied they had ever promised lower prices, an Alberta Energy brochure in 2000 claimed, “Over the long term, prices are expected to be lower than they would have been under a regulated system.”

The restructuring began under Energy Minister Black, but her successor, Steve West, was a more vigorous champion of the idea. “I’m very confident we can lower the cost to the consumer,” he told Calgary’s Chamber of Commerce. But prices did not go down.
“The effect on consumers started in January 2001. Prices literally skyrocketed,” said Provost. “Generation costs went from 3.5 cents to 13 cents per kilowatt hour. That alone cost consumers $4-billion.”

Cowburn says that, in retrospect, there was no basis for expecting prices to drop as a result of deregulation. “You have the lowest prices already,” he noted. “What did you think was going to happen?”

Premier Klein offset the price spike with rebates but controversy raged.

Kellan Fluckiger, a senior official with the California Independent System Operator during that state’s 2001 electricity crisis, was brought in as “a hired gun” in 2003 to redesign Alberta’s retail electricity market. “There were some very glaring issues,” he recalled. According to him, the biggest failure of every jurisdiction embarking on power deregulation, including Alberta, has been the unwillingness of politicians to follow through on their decisions. “There was only will to do part of the change that was necessary to actually make the design choices work,” he said. “It was typical politics—forward some, then backward some. But if I had to articulate the largest failing, it was the government not showing leadership over a sustained period.”

More controversy erupted when West’s eventual successor as Energy Minister, Murray Smith, announced a new policy on transmission infrastructure that required consumers to pick up the full cost of new transmission lines, at a time of rapid growth in the system. The growth was said to be necessary to ensure no congestion on power transmission in the deregulated market, but Fluckiger describes it as an “overbuild.” “We’re way, way, way overbuilt,” he said. “It’s easy for me to say this, as I’m no longer involved, but it was because of a lack of leadership and a lack of political will to do the right thing at the right time.”

Part of the expansion was a high-voltage power line from Wabamun, west of Edmonton, to the Calgary area. Landowners opposed to the 500-kilovolt lines were outraged to discover that private detectives hired by the Energy and Utilities Board for security at public hearings in 2007 were eavesdropping on their conversations. This “spy scandal” caused the hearings to be aborted and the board to be disbanded and replaced by the Alberta Utilities Commission (AUC). Fluckiger said the board’s gaffe delayed transmission construction and prompted the government to unilaterally approve the lines without further public hearings.

Landowners, led by Rimbey resident Joe Anglin and other critics, suspected the Wabamun–Calgary line would be used to export electricity to the US. They railed against the $3-billion cost of that line and a proposed parallel line down the province’s west side. Even a report commissioned by the government’s own Utilities Consumer Advocate expressed doubts that the lines were needed. “Much of the data and logic presented by the AESO is unconvincing and overstates the sense of urgency,” noted a discussion paper prepared for the UCA by EDC Associates in 2009.

“It triggered a knee-jerk reaction,” said Fluckiger. “It was like ‘holy crap, we’re way behind,’ and then it started to slingshot to the other side.” Critics at the time claimed the transmission overbuild was comparable to expanding the Queen Elizabeth 2 highway to 32 lanes.

The Alberta Electric System Operator (AESO), created in 2003 to run the electricity grid and plan transmission infrastructure, estimates that expansions of the system could cost Alberta’s residential consumers an additional $14 a month by 2017, bumping total annual transmission fees to nearly $400 per household per year. Mike Deising, an AESO spokesman, said the new infrastructure is required to keep up in the fastest-growing jurisdiction for electricity demand in North America: “You’re seeing investment being made in transmission to ensure the lights stay on.”

The initial spike in electricity prices in 2001 was exacerbated by high natural gas prices, but even as the price of gas decreased, Albertans continued to pay among the highest prices for electricity in Canada when transmission, distribution and administration fees are factored in. Calgary’s average residential electricity price per kilowatt hour in 2012 was 17.47 cents and Edmonton’s was 16.40 cents, compared to 6.82 cents in Montreal, 7.68 in Vancouver, 7.31 in Winnipeg, 12.90 in Toronto and 13.79 in Regina, according to an annual price comparison survey conducted by Hydro Québec.

A further drop in natural gas prices and the construction and commissioning of the new Enmax/Capital Power 800-megawatt Shepard gas-fired plant have resulted in electricity prices on the spot wholesale market hitting record lows in recent months, but Hydro Québec’s 2014 survey placed Alberta residential electricity prices in the middle to high end of the pack. Based on April 2014 prices, it compared Calgary at 13.41 cents and Edmonton at 11.88 cents per kilowatt hour to Montreal at 7.06 cents, Winnipeg at 7.89, Vancouver at 9.71, Toronto at 13.78 and Regina at 13.95.

The cost to deregulate, along with 14 years of high prices, means “we’ve spent a lot of money with minimal, if any, benefits.” —Jim Wachowich

On the positive side of the deregulation ledger, the province’s supply of electricity has increased 50 per cent since 2001. Since 1996, according to Alberta Energy, the market has seen almost $16-billion of new investment. The new Shepard plant alone cost $1.4-billion.
Evan Bahry of the IPPSA claimed that the rapid expansion of supply would have been much more difficult under a regulated system whose required approval hearings went on for years. He pointed out the electricity industry has kept pace with significant growth in Alberta, while the provincial government has lagged behind on infrastructure such as roads, schools and hospitals. “We have seen the fastest-growing demand for power in North America—3 per cent per year,” Bahry said. “We can add supply very, very quickly under an open market—more so than we could in a regulated market.” He added that wholesale power prices have averaged about six cents per kilowatt hour since deregulation and have fallen to three cents over the past year—the lowest price in Canada. Consumer advocates counter that most Alberta residents don’t have access to the wholesale price and are paying substantially more for their electricity.

Bahry and other proponents of deregulation also claim consumers have more choice in a deregulated market. In Alberta’s open market, consumers can choose a fixed-term contract, the default rate, the spot market price or “green power,” or they can bundle their gas and electricity on one bill. Consumer advocates argue that the choices are limited and the variation offered in terms of price is also limited.

Power producers also like to note the province has no debt associated with power production, unlike provinces where Crown corporations build and operate plants. Consumer groups respond that Alberta consumers pay all the freight for transmission of power from those generating facilities.

Bahry doesn’t understand why people get so alarmed over electricity prices when they don’t raise a similar hue and cry over cable, cellphone or monthly parking bills. “Even at the average consumption of 600 kilowatt hours a month… that’s a tank of gas or two pizzas. It doesn’t strike me as a large number compared to everything else.”

Jim Wachowich, legal counsel for the Alberta Consumers Coalition, believes the cost of deregulation to Albertans—the massive transition costs initially, the auction losses, the cost of creating new agencies such as the AESO, MSA, Balancing Pool and Utilities Consumer Advocate, along with 14 years of high electricity prices—far outweighs the benefits cited by the proponents. “We’ve spent a lot of money—there’s been a lot of costs—[with] minimal, if any, benefits achieved,” he said. “It would take a long run of low prices to add up to any savings that would make having all of this worthwhile. I just can’t see that these current prices will be sustained.”

Wachowich is convinced the electricity system requires strong central planning and regulatory oversight because it provides an essential service rather than a commodity.

Fluckiger said Alberta’s electricity market was never completed the way he designed it. “I don’t want to paint it as a disaster, but just like everything that is finished halfway, it kind of limps along,” he said. “Has it benefited consumers? I don’t know, because we can’t know the answer to the road not taken, which is remaining on a regulated regime.”

He has no such reservations about whether deregulation has benefited generators. “Yes, unequivocally,” he said. “They’ve made more money, absolutely, without question. They are the ones who have been the biggest beneficiaries.”

The IPPSA represents 15 power generators. According to Bahry, they have not been generating outrageous profits. “Over time, have some plants and some investments done well? Sure,” he said. “But right now all current new supply is struggling in this price environment.” The entire market generates about $5-billion annually, but Bahry rejected the contention that companies have made out like bandits. “I just can’t understand that math. It doesn’t make any sense to me.”

Power companies used influence to get their way. “[They] came in and pounded on ministers’ desks and I had to clean the shrapnel off.” —Kellan Fluckiger

The problem in Alberta, according to David Gray, is that companies have been given too much market control. In most jurisdictions, companies would not be able to own more than 20 per cent of the total generating capacity. In Alberta, companies such as TransCanada can hold 30 per cent. Gray described the situation as a “pretty small pond, without any big connections to the outside world.” It is “dominated by a few big fish.”

Another issue that has dogged electricity deregulation since its early days is the system’s vulnerability to market manipulation. Think Enron. Wachowich says that potential for manipulation exists in Alberta’s market today.

Evan Bahry dismissed that concern, noting the market now has five major players and 200 buyers and sellers. “No market would attract new developers if there was a concern that the market could be manipulated,” he said.

But some companies have been caught straying over the line. Alberta’s largest utility, TransAlta, was fined $370,000 for price manipulation in 2012 and last year agreed to pay $149-million to settle unfair pricing allegations in California dating back to 2000. The corporation is still reeling from accusations from Alberta’s Market Surveillance Administrator that it deliberately shut down major coal-fired generators four times in 2010 and 2011 to drive up electricity prices. The AUC ruled in late July that the Calgary-based corporation indeed manipulated prices and engaged in insider trading.

TransAlta is facing penalties of up to $1-million a day for each day the infractions occurred and could be forced to return all profits arising from the contravention of market rules and pay the cost of the MSA investigation and AUC hearing. The utility may also be required to compensate consumers for the higher electricity bills they were required to pay as a result of the price manipulation.
Opposition critics expressed concerns that other utilities may be engaged in the same behaviour and said regulations must be tightened to protect consumers from price fixing. Energy Minister Marg McCuaig-Boyd said in August she has ordered a review of all electricity policy and will make changes, if necessary.

Fluckiger blamed politicians and regulators for failing to create a stringent regulatory framework to rein in big market players. Fluckiger worked under former PC energy ministers Murray Smith, Greg Melchin and Mel Knight, and noted that the power companies often used their influence to get their way. “Generators came in and pounded on ministers’ desks and I would have to go in and clean the shrapnel off.”
Fluckiger said large utilities have the power to control prices in the market, “not all the time, but sometimes enough to make a few million here and a few million there.” Fines, meanwhile, are a fraction of that. But this can still be fixed, says Fluckiger. “It can absolutely be done. I was going to do it.”

It seems doubtful that the New Democratic Party, which has always vowed to pull the plug on deregulation, will follow through on that promise given the cost and complexity involved. But the NDP has vowed to “smart regulate” the grid.

The Consumer Coalition’s Jim Wachowich is hopeful the new government will commission an analysis to determine what can be done to prevent market manipulation and reduce price volatility. “It’s not going to be easy, and it is going to raise concerns from vested interests.”
Wachowich insists that even the politicians who foisted deregulation upon Albertans are hard-pressed to defend it. “For the most part the only ‘benefit’ people saw was the advent of people knocking on their door to try to sell them a power contract.” #

Long-time Alberta journalist Darcy Henton lives in Edmonton and covers the provincial legislature for the Calgary Herald.

 

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