SHORT CIRCUIT
A DECADE AFTER POWER DEREGULATION, ALBERTA CONSUMERS FACE A WILD RIDE WITH ELECTRICITY PRICES
Calgary senior Stan Nykiel doesn’t want to gamble on his electricity bill.
Like many Albertans, he has refused to shop for electricity in the competitive retail market.
Since the province moved to deregulate the retail electricity market in 2000, less than 30 per cent of Alberta electricity consumers have taken the plunge.
Instead, they are sticking with the volatile Regulated Rate Option (RRO), a monthly power price approved by the Alberta Utilities Commission, which has spiked 46 per cent to record highs in January.
Consumers who aren’t signed up to contracts could end up paying nearly twice as much for their power this month as those who are. They paid 13 cents per kilowatt- hour in December, and are now paying 15 cents in January, nearly 100 per cent more than they were paying this time last year.
Driven by supply problems, Alberta electricity prices are now among the highest in the country.
But Nykiel, who lives on a fixed income, refuses to sign a contract because he doesn’t want to be locked in at a high rate if prices drop. He is no fan of deregulation.
“It’s not working to our advantage, for sure,” he says.
Nykiel’s last utility bill, which included electricity, water, sewer and garbage pickup, was more than $250 — higher than his mortgage payment used to be.
“It’s horrendous,” he laments. “We’re getting further and further behind. My bill is just escalating like you wouldn’t believe and it doesn’t seem to be stopping.”
The answer to volatile price spikes is not to sign long-term contracts at higher than average prices. Consumers don’t win there. LIBERAL MLA HUGH MACDONALD
Nykiel isn’t the only Albertan wondering what’s going on with power prices today and the province’s historic decision to deregulate the electricity market.
Noel Somerville, the chair of Public Interest Alberta’s seniors task force, also hasn’t signed an electricity contract on principle because he doesn’t believe people should have to speculate on a deal for an essential service.
“I have never bought into any of the package deals that various companies have been selling,” he says. “My attitude all along is if I wanted to play the futures markets, I would play the future markets, but I don’t want to do that. I want to keep paying the regulated rate for Albertans.”
In the decade since regulation of Alberta’s power market ended, consumers have been on a wild roller-coaster ride when paying their electricity bills, but the recent spike has sharpened the focus about whether the province made the right call.
Electricity producers contend Alberta annual average prices, when everything is taken into account, are not out of line with prices in comparable jurisdictions that don’t have access to cheap hydro power, such as Quebec or Manitoba.
Evan Bahry, executive director of the Independent Power Producers Society of Alberta (IPPSA) which represents the electricity generators, says Alberta wholesale prices have been averaging 7.7 cents per KW-H in 2011, just 10 per cent more than the wholesale price a decade ago.
During the same period, housing prices climbed 126 per cent.
“From the producer’s perspective, we believe Alberta’s open market has worked as intended,” he says. “It has shifted investment risk to developers . . . and wholesale prices have been below replacement cost for some key fuel types that Alberta relies upon.”
The retail market price for electricity and the formula for setting the regulated rate option are another matter, he adds.
“Maybe there are problems with its design, I don’t know,” says Bahry.
“I think the challenge with the regulated rate option is that consumers may think it’s supposed to be a low-cost option — and it is not.”
Alberta’s regulated rate op- tion — the rate consumers pay if they haven’t signed contracts with electricity retailers — was designed by the provincial government to encourage retail consumers to purchase contracts, which would theoretically attract more competition.
In July 2010, the governing Conservatives ended long-term hedging of electricity prices and collapsed the protective umbrella that had previously shielded residential, farm and small commercial consumers from wild price spikes.
Residential consumers paying the regulated rate option will feel the impact of that decision sharply this month as a result of a supply shortage caused by premature shutdown of two coal-fired power units and an unexpected maintenance shutdown of a new plant.
Alberta’s Market Surveillance Administrator, the province’s electricity watchdog, has acknowledged the RRO has its flaws.
Last year, ratepayers paid repeatedly for a facility shutdown that never happened.
Plans to close for maintenance the tie line that allows Alberta to import power from B.C. when demand is high boosted the price of electricity in the forward market, but that maintenance shutdown was subsequently deferred twice.
“RRO customers appeared to have paid for the transmission outage twice already and will still have to pay for it again when it is rescheduled in the future,” the MSA revealed in a recent quarterly report.
Energy Minister Ted Morton says prices go up and down, but on average Alberta consumers are benefiting from deregulation, and the electricity prices they pay are roughly middle of the pack compared to other Canadian jurisdictions
“On balance, when compared to other jurisdictions, we’re giving Alberta consumers competitively priced electricity given our lack of cheap hydro,” he says.
Since the province began restructuring the electricity industry in 1996, the province has added 6,600 megawatts of power — representing a $12-billion investment — and that has helped the province keep up with its tremendous economic growth.
But Liberal MLA Hugh MacDonald, who has been one of the legislature’s most vocal opponents of deregulation, said Albertans believe electricity is an essential service and want it delivered at the lowest possible cost.
Albertans do not want to pay an inflated contract rate to have stable electricity prices, he says.
“The government is driving them into the waiting arms of marketers,” Macdonald says. “The answer to volatile price spikes is not to sign long-term contracts at higher than average prices.
“Consumers don’t win there.”
Kathryn Wood, Alberta Energy’s electricity market executive director, says many experts believe any retail electricity market that attracts more than 25 per cent of consumers to sign a contract — as opposed to staying on the regulated price — is “doing very well.”
“Notwithstanding that, it still seems like we haven’t been terribly successful, and we don’t have a lot of major competitors coming to Alberta,” she concedes.
After deregulation was first introduced, rigid terms and conditions of some of the initial power contracts offered to residential consumers were “offputting” and many Albertans are now reluctant to look at a contract, she says.
Today, there are 12 players in the Alberta retail market offering 19 products and most contracts no longer require consumers to sign on for long terms and pay penalties to get out of the contracts, Wood says.
But she says the province dropped the ball on educating Albertans about how the market works or talking about some of deregulation’s success stories.
She notes Albertans are paying the true value of electricity, unlike other jurisdictions, which are subsidizing the costs or paying for the generation plants and accumulating debt.
And high power prices in December and January are a mixed blessing because they will signal to consumers the need to conserve electricity and consider signing a fixed rate contract.
“High prices will make us sit up and take note and that might make us change our behaviour. It is one of the most effective ways of changing behaviour.”
Prices will level off once supply increases, Wood predicts. In the interim, consumers can either sign contracts with retailers or request their regulated rate provider to average their bills over the year to soften the price spikes.
But consumers should look before they leap into contracts sold door to door, cautions University of Alberta energy economics associate professor Andrew Leach.
He urges consumers to recognize that current electricity prices won’t likely continue to be as high throughout 2012 and they should be wary about locking into a fixed contract at an inflated price.
“Do not sign a fixed contract based on the January prices,” he warns. “Look at what you paid out over the year — not just what you paid in January.”
Epcor spokesman Tim le Riche, representing Edmonton’s city-owned power utility, says the average RRO has been about eight cents per kilowatt-hour during the past three years and, while it seems high now, it could be a lot lower in a few months.
While Leach says he is probably ahead of the game with his own electricity contract, the amount consumers save with a contract is not huge because the actual cost of electricity makes up less than half of the average residential utility bill. The rest of the bill comprises distribution and transmission costs, along with municipal franchise fees.
He believes the government should reverse its decision to eliminate long-term hedging of the regulated rate default option.
Consumers, however, should expect to pay a small premium for price stability — insurance against future price spikes, says the energy academic.
“It’s not like people are leaving $10 bills on the sidewalk by not signing these fixed price contracts,” Leach says.
“Over the long-term, prices are expected to be lower than they would have been under a regulated system,” the province predicted in a brochure in 2000.
Another brochure, titled How to Shop for Electricity, suggests “consumers of electricity will now have more choices for the services they require and will benefit from competitive pricing.”
A January 2000 information booklet called Power of Competition quoted a U.S. Department of Energy estimate that consumers could save more than $20 billion annually once retail competition is introduced in all states.
So far, only about a dozen states have ventured down that road.
While the provincial government conceded the traditional structure “worked reasonably well,” it warned that Alberta “risked the erosion of its lowcost power advantage compared to other markets” if it stood pat.
At the time, Alberta’s electricity sector was made up of generating plants that were either investor-owned or municipally owned.
Consumers weren’t clamouring for the move and some industry stakeholders were skeptical.
They were concerned about the pace, direction and commitment to further restructuring, the government conceded in one information pamphlet.
Jim Wachowich of the Consumers’ Coalition of Alberta says the Klein government saw competition as the solution to all its problems.
“Why did we get into deregulation? The people who advised this government believed in the Enron model that competition is good,” he says.
David Gray, the former Utilities Consumer Advocate executive director in Alberta, says the province was caught up in a popular international trend. Britain, Australia and New Zealand were all actively deregulating their electricity industries.
“It was all the fashion,” he says. “It was the rage throughout the Commonwealth.”
But Dick Frey, who worked 30 years in the industry, mostly with the former Alberta Power electrical utility, says he couldn’t understand why the Klein government wanted to deregulate when it already had the fourthor fifth-lowest electricity prices in North America.
“My argument was, why are we going there?” he recalls. “Why don’t we just hold off and see how this worked out in the United States and Britain? But it was going ahead regardless.”
Former Alberta Power senior vice-president Keith Provost said the roots of deregulation sprouted under former cabinet minister Pat Nelson, but onetime energy minister Steve West was the champion of the change.
“I think he was schmoozed by Enron,” Provost says.
Enron was promising there would be savings through innovation and efficiency improvements, and West bought it and sold it to the Klein cabinet, says Provost.
“They thought they were going to see large savings with innovation and improved effi- ciency without ever really looking at what innovations were to be made or what efficiency improvements would be made,” he adds.
West couldn’t be reached for comment, but boldly made the case for the change when speaking to the Calgary Chamber of Commerce on Sept. 23, 1997.
“I am very confident we can lower the cost to the consumer,” he said.
At the time, controversy arose when the demand for electricity in Alberta dropped just as two utilities were building four new coal-fired power plants.
A power struggle erupted over which plants would be built and commissioned first. One regulatory board approved construction of the plants, but a second regulatory entity refused to commission them because there was a glut of power.
“The government was watching all of this and thought it was bad,” Provost says. “It was the result of pretty keen competition between the utilities, but they thought it was costing a lot in regulatory hearings.”
Alberta Power’s Frey said the government policy of blending electricity rates — instead of charging different prices in various parts of the province — was also proving to be a political minefield for the Tories.
Transalta was able to provide electricity to consumers in southern Alberta more cheaply than Alberta Power, which had to service the scattered population in northern Alberta, but evening out the rates meant a rate increase for southern Alberta residents.
“The rate differential became a real issue,” says Frey. “The government saw this as a real political problem.”
Politicians initially sold the idea to voters by promising the move would lower electricity prices.
But over the years, they backed off the lower price pledge and instead began highlighting the amount of new generation and private investment in the province.
Epcor senior vice-president Guy bridge man, a former alberta government electricity planner, says there was a recognition in the mid-1990s that the structure in place with three utilities was “a very heavy government-orchestrated system” and “there was a fair degree of unhappiness around how new development occurred in Alberta.”
Bridgeman, who worked for Alberta Energy from 1989 to 1995, said the government-planned system was “slow and cumbersome and brought generation on way too early. There was a lot of drama around who was going to be the winner.”
The United Kingdom had already moved to deregulation and some Alberta planners thought it would work here, he adds.
“The idea was that rather than having a fully regulated system with all the bureaucracy and machinery that comes with that, you could turn loose the decision where and when to build power generation and you could bring the market forces in and let investors make those decisions,” he says.
“We didn’t need any central planner with a big heavy hand deciding those things. It’s up to investors and, surprisingly, it has worked extremely well.”
But Wachowich, of the Consumer’s Coalition, remains unconvinced.
He says the government believed competition would eliminate market power abuses and deregulation would reduce cost overhead.
“Truth be told, those weren’t problems with the system at the time all this was embarked upon and — had the whole system continued to be properly regulated — may never have become problems.”