Electricity deregulation under fire

Lily Nguyen
Globe and Mail
January 3, 2001

Now that Alberta has officially exposed its electricity industry to market forces, the cry to pull the plug on deregulation has reached fever pitch.

Businesses, which once urged the move to an open market in hopes of cheaper power, now warn of shutdowns and mass layoffs as a power crunch creates electricity costs that could be triple or higher this year.

Experts predict the province could be headed for a situation similar to California’s, where deregulation has been blamed for an energy crunch so severe that consumers were begged to forgo Christmas lights, and blackout warnings have become a way of life.

Ralph Klein’s Tory government, under immense political pressure just months before a provincial election, has responded by throwing vast amounts of money at the problem.

Since September, the government has announced plans to distribute $2-billion in rebates to shield households and businesses from the impact of higher electricity prices this year, and Resources Minister Mike Cardinal has said point-blank there will be more coming if prices keep rising.

The government also made a flurry of policy changes as the clock ticked down to Jan. 1, so-called D-day, changes it says were designed to protect the consumer, such as rate caps.

But critics charge the government with flailing under political pressure, and warn it is creating a climate of uncertainty that will drive away investors needed to build much-needed new generating capacity and provide competition in the market.

“This is meltdown,” said Allan Warrack, a former utilities minister under Peter Lougheed’s government, and a critic of the deregulation process. “They’ve thrown in the towel on deregulation.”

The beginning of deregulation Jan. 1 means the opening up of the retail electricity business to market players so consumers can sign up with any supplier they want. Wholesale prices have been exposed to market forces since 1996, with the creation of the Alberta Power Pool exchange. (The government has not opted to break up existing power generators, however, and instead auctioned off their capacity to retailers.)

But despite the increased choice offered consumers under deregulation, many are saying they’d prefer no choice to skyrocketing power costs.

In California, deregulation is being blamed for driving wholesale electricity prices up from an average of US$30 a megawatt-hour a year ago to peaks of $1,400 currently.

California’s utilities, which can’t pass on the increase to consumers who are protected by a rate freeze, are saying they are in danger of bankruptcy.

Alberta is not at that stage yet, but experts say it may be only two years away.

Like California, Alberta prices have also climbed steeply, albeit not to the same heights. Prices averaged about C$40 a megawatt-hour a year ago. In a recent auction of wholesale electricity opened to industrial consumers and other large users, bidders ponied up more than $150 a megawatt-hour in an attempt to lock in their electricity supply for the new year.

But it is not the utilities on the hook as it is in California, but consumers, particularly businesses that aren’t protected by a small-user rate cap the government put in for 2001.

Late last month, Foothills Steel Foundry, a Calgary steel company, told 25 of its workers, or one-third of its staff, that they would be let go in the new year because of higher electricity costs.

From around 5 cents a kilowatt-hour a year ago, the company was being quoted prices of 20 cents and higher for 2001, said company president Harry Irving, more than enough to send the company deep into the red. A rebate of 3.6 cents a kilowatt-hour announced by the government last month will make little difference.

Mr. Irving said he may have to move his business, which has been in Calgary since his family founded it in 1913, to another province or risk closing its doors.

“I don’t think a lot of people stay in business when they are losing money,” he said.

Jayson Myers, chief economist the Canadian Manufacturers and Exporters, said whatever “Alberta advantage” existed to attract investment will be eroded by the expected rise in power costs. At an estimated average of 17 cents a kilowatt-hour, next year, power prices will drop from 16th-most competitive among 173 North American utilities, to 169th most competitive, behind only Hawaii utilities.

The experiences of California and Alberta the front- runners on deregulation in their countries are causing cold feet among the rest of North American jurisdictions trailing them. Of the 24 states considering deregulation, one-third are now publicly considering backing out. Doubts are similarly mounting in Ontario, the only other province taking steps toward freeing up its electricity industry, said Tom Adams, executive director of Energy Probe, a Toronto-based environmental and consumer advocate.

“There is the feeling that we should go back to regulation,” said Mr. Adams, who supports deregulation in theory but said he is concerned that Ontario’s process is as flawed as Alberta’s.

How did Canada’s most energy-rich province come to this pass?

The Ralph Klein government, which began its deregulation initiative in 1994, blames the increase on a booming economy that has increased demand, and on natural gas prices. These have made their own steep climb to levels three and five times what they were at the beginning of last year. Natural gas is used to generate about 30 per cent of Alberta’s power.

But experts say these are only part of the equation.

Mr. Warrack, now a professor with the University of Alberta’s business faculty, said the problem started more than five years ago when Mr. Klein’s Tories embarked on the untrammelled route to deregulation without spelling out the rules of the road.

“The government announced deregulation with no details, and a year later, they said ‘the details are coming,’ and two years later they said ‘the details are coming,’ and three years later they said ‘the details are coming.’ In the meantime, the people who would make the investments to grow electric power supply had too much risk to make those investments,” he said. “Electricity supply in Alberta has been stalled since the deregulation announcement in the middle of the decade.”

There are several factors that may keep Alberta from the chaos now gripping California. One is that Alberta has its resource wealth to draw on. While high gas price drive up the cost of electricity generation, they also create a huge flow of royalty money into government coffers. Both Premier Klein and Mr. Cardinal, the Resource Minister, have hinted that money will be used to cushion the impact of the energy crunch in the transition period to greater competition and more supply.

Another factor brightening Alberta’s gloomy prospects is that there have been a spate of announcements from companies planning to build new electrical capacity, the only long-term fix to the power crunch.

On Dec. 15, Epcor Inc., a utility owned by the City of Edmonton announced it would expand its coal-fired Genesee plant by adding another 400-megawatt unit. That was followed on Dec. 20 by an announcement from AES Corp. of Arlington, Va., the world’s largest power generating company, that it would build a 525-megawatt gas-fired plant in Calgary. A day later, Enmax Corp., Calgary’s utility, announced it was mulling over plans to build a 400-megawatt coal plant in southeast Alberta in partnership with Fording Coal Ltd., a subsidiary of Canadian Pacific Ltd. The total new supply would be more than enough to power the city of Calgary.

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