January 24, 2002
January 29, 2002
British Columbia Energy Policy Task Force
c/o Eleanor Skakun
Dear Ms. Skakun,
Please accept the following comments on the electricity reform elements in the Energy Policy Task Force Interim Report, “Strategic Considerations For a New British Columbia Energy Policy,” Nov. 30, 2001.
Energy Probe, a national environmental and consumer advocacy group, broadly supports the report’s proposed direction of applying market forces to balance the electricity demand of British Columbians with the supply of electricity.
As the Task Force identifies, reforming electricity pricing in the province is critically important to the success of any market reforms. And as the report notes, “Energy prices are best determined in a competitive market environment.” The report also states “current pricing signals are inadequate and need to be strengthened” and “it is wise to price all energy at market rates.” It includes some specifics, such as “British Columbians enjoy relatively low rates for electricity. The long-term investments made on the Peace and Columbia Rivers are referred to as an endowment and paid British Columbians an estimated $1 billion dividend in the fiscal year 2000/2001. The dividend is the difference between market rates for electricity and the rates generated from the investments on the two rivers.”
Prices that reflect the full societal value of resources like electricity provide signals to both producers and consumers to optimize their decision making. Artificially pricing electricity either above its market value or below its market value diminishes the overall economic welfare of the community. B.C.’s practice of sheltering electricity consumers under a government-created rate regime of prices below market value has discouraged energy efficiency. Efficient pricing of electricity would help to guide investments in energy supply, whether from the competing alternatives of renewable energy or coal, or other alternatives.
Energy Probe believes that the most efficient market-based pricing regime would result from privatizing the power plants, opening the borders to exports and imports, and integrating B.C.’s electricity market in the electricity markets of its neighbors in a way similar to the continental integration of the natural gas market. The report does not contemplate this approach.
The report considers three mechanisms for transitional electricity pricing arrangements:
- constant-volume with price moving to market over time;
- constant-price with volume declining to zero over time;
- market prices now with rebates provided for a period of time.We suggest that the Task Force consider an alternative pricing approach based on tradable electricity entitlements designed to help B.C. consumers flourish in a continental electricity market.
Today B.C. Hydro makes cross-border sales with any surplus power it has and earns record profits but the volumes available for export are small since the vast bulk of its production is sold below its value to domestic consumers. As an alternative, B.C. Hydro could easily calculate a power entitlement for each customer, residential, commercial, institutional, and industrial, using the proposed endowment structure discussed in the Task Force Report. The customer would pay for the entitlement power at the historic price. Customers consuming less than their allotted amount would then have their surplus power sold on their behalf by their utility, or even by a third party marketer appointed by the consumer with a surplus on hand. The power would be sold in connected jurisdictions where electricity markets are open. The proceeds of the sale, net of the brokering costs and any applicable transmission costs, would be credited to the customer’s account. Domestic customers using more than their entitlement would pay market price for the excess.
Under this plan, customers who didn’t want to participate in conservation-based electricity trading would be at liberty to continue consuming their entitlement in the historic fashion. If prices in neighboring markets rose (or fell), the financial incentive to cut domestic usage for the benefit of trading would also rise (or fall). If the volume of electricity available in B.C., due perhaps to a drought-induced reduction in hydropower, the entitlement volume for each customer would contract accordingly.
We have attached some simplified schematics to illustrate how the financial saving to customers could be calculated.
The report’s proposed unbundling of B.C. Hydro into separate monopoly and competitive businesses is compatible and complimentary to our tradable electricity entitlements proposal. Relative to the status quo, B.C. Hydro would generate the same power and bring in the same revenue.
The energy conservation potential in the B.C. economy is so large that we expect a large amount of cross-border sales might result, bringing very significant dollar flows into the province. As an example of the conservation potential, a large portion of the residential heating demand is based on electric resistant heating, so the potential for heat pumps (at least in the highly populated south west region of the province which is blessed with mild winters) or fuel switching to alternative fuels is significant. In addition, insulation and winterizing appear to have substantial potential.
Under our tradable electricity entitlements proposal, consumers could be assured that there is no “California” risk to electricity market reform in British Columbia.
In the context of a study we are currently performing for Industry Canada called “Forces For Change In Canada’s Electricity Sector – How Will Consumer Interests Be Protected?” – which will be available in April – Energy Probe is in the process of demonstrating the financial benefits of this proposal to consumers in B.C. with an economic model. The value of the power sold out of B.C., is based on posted prices in the relevant border states and Alberta. We are creating illustrated cases based on different demand reductions and fuel switching scenarios. This model will allow us to estimate the financial benefit to a homeowner in B.C. had this entitlements concept been in place during the recent and future periods.
Our financial modeling would be greatly assisted if the Task Force, the provincial energy ministry, or B.C. Hydro made available some basic demand analysis data. Data that would be particularly useful includes KWh demand and revenues by rate class along with price elasticities estimates for these same rate classes. Bill distribution data would also be useful. Additional data that also might help includes space and water heating fuel shares in the residential sector, and annual load shapes by customer type (such as all-electric residential customers, and residential customers with non-electric space and water heating).
We would be delighted to discuss these submissions further or to answer any other questions you might have. Please contact us if we can assist in some way.