Lily Nguyen

June 6, 2002

CALGARY — Alberta businessman John Davies has spent a year and a half on the deregulation roller coaster, and he’s now tired of the ride.

Mr. Davies, who owns Lethbridge Ironworks Co., blames the deregulation of Alberta’s electricity markets for power costs soaring so high that he considered moving his 104-year-old family business out of the province.

“Our monthly power bill is up about 60 per cent from where it was before deregulation,” said Mr. Davies, who said he will stay in the province for now. “Seventy-two thousand dollars would be a typical month for us now. Before, it would’ve been in the order of $45,000 to $50,000.”

Lethbridge Ironworks is an iron foundry.

“The benefits of deregulation have not materialized,” he said, echoing the sentiments of many who have experienced skyrocketing power prices and market chaos in Alberta and California, two jurisdictions that recently opened their power industries to competition.

But despite the increasing cynicism about deregulation, experts argue that Alberta’s experience has not been a disaster as it was in California.

After rampant blackouts and multibillion-dollar bankruptcies, that whole system needed to be redesigned.

In fact, deregulation, completed on Jan. 1, 2001, is delivering many intended benefits, including greater supply, increased business and trade opportunities, and a more efficient, environmentally friendly industry, observers say.

“We see new plants being built, plants being built more efficiently and greater care taken on how we operate those plants,” said Joseph Doucet, a University of Alberta business professor and deregulation expert.

Wholesale power prices – the cost of large power blocks bought from the electricity generators – have fallen dramatically, he said.

Unfortunately, the benefits of lower prices have not yet trickled down to end users such as Mr. Davies and most household customers. For small businesses and residential customers, that’s largely because various temporary measures taken by Ralph Klein’s Progressive Conservative government to shield consumers from price shocks continue to muddy the waters. In addition, many mid-sized businesses such as Lethbridge Ironworks entered into contracts for power prices above current spot market levels.

“There’s a tremendous number of companies that will be unhappy with deregulation for five to 10 years,” Mr. Davies said. “They signed long-term contracts.”

Nancy Janes, a spokeswoman for the Alberta Power Pool, the central power exchange, confirmed that wholesale prices have fallen.

The province’s total power capacity – the amount that can be produced if all power plants are running and feeding their power into the grid – rose by 700 megawatts or 7 per cent last year, she said. That’s enough to power a city twice the size of Calgary.

Another 1,248 megawatts are planned for this year, and a total of 5,000 megawatts are expected over the next five years, she added.

As a result of increasing supply, wholesale power prices have eased dramatically. In 2000, wholesale electricity averaged $133.22 per megawatt-hour. In 2001, after deregulation was completed, it averaged $71.29. So far this year, it has averaged $37.32.

Dan Macnamara, executive director of the Industrial Consumers and Cogenerators Association of Alberta and an outspoken critic of deregulation, acknowledged that Alberta’s system is improving.

“We are progressing,” said Mr. Macnamara, whose membership represents the province’s large industrial users, which make up about half of the province’s electricity demand. However, he added that the retail electricity market needs more players to be competitive.

Tom Adams of Toronto-based Energy Probe said deregulation also should be credited for Alberta’s power supply diversifying into a cleaner mix of fuels, away from its reliance on coal, which produces high greenhouse gas emissions.

“Alberta’s experience has helped the province move to a much less coal-dependent power system,” said Mr. Adams, executive director of the environmental and consumer advocacy group. “That counts for something.”

Mr. Adams said coal-fired plants require long time horizons of about five years and huge capital outlays to build, and therefore are suitable for regulated systems where producers can count on getting their costs back plus a fixed return. Under a deregulated system, producers are less willing to lay out capital on long time frames, and so tend to opt for gas-fired plants, which cost less, take half the time to build and produce far less emissions.

The Alberta Power Pool’s Ms. Janes said that, as of the end of 2001, gas-fired power made up 4,000 megawatts of electrical capacity, up from 2,500 megawatts at the end of 2000. Coal-fired power increased only marginally to 5,770 megawatts at the end of 2001 from 5,650 at the end of 2000. Less significant sources include hydroelectric power and wind power.

Mr. Adams said the diversified energy mix could serve Alberta well if Ottawa ever implements carbon taxes to reduce emissions under a plan to meet targets set out in the Kyoto Protocol.

Fair enough, said Lethbridge Ironworks owner Mr. Davies, but that means little to smaller customers who built their businesses based on the consistently low power prices of the past.

“There’s about 10 winners in Alberta and three million losers.”

Jim Wachowich, a consumer advocate and lawyer for the Consumers Coalition of Alberta, said that not only are consumers paying higher prices now than before deregulation, they must grapple with greater complexities on a commodity they used to take for granted.

Mr. Wachowich said the province’s various measures to ease the shock of power prices have made for a confusing power bill, full of line items detailing extra charges.

“Here consumers are being told it’s a competitive marketplace and you can make choices, but they can’t even understand the status quo services because they’re confused by the bill,” he said.

In 2001, an election year, the Tories spent a total of $2.3-billion on a $40-a-month rebate on residential power bills, plua a per-unit rebate for small businesses. The government also forced utilities to defer until 2002 to 2004 some of the rate increases consumers would have paid in 2001.

At Enmax Corp., Calgary’s electrical utility, spokesman Tony McCallum said the average residential power bill charged by the company is $76 a month this year, compared with $67 in 2001. But by factoring out the rebates and other measures, the average monthly bill this year would be $72 compared with $107 in 2001, he said.

It’s still higher than the $43 a month that consumers paid before deregulation, but the trend is clearly downward, he said.

And, as Mr. Doucet points out, power prices probably would have climbed even in a regulated system because the price of natural gas, an input, had soared. Power prices also were indirectly driven by California, because the power imports that were usually available from British Columbia to ease tight supply in Alberta were headed down the U.S. West Coast instead.

But for Mr. Davies, the fact that the Alberta power market appears to have avoided a meltdown similar to California’s and that it is on the path to recovery brings little comfort. “The fact that we’re better than California doesn’t mean we’re great; it just means we’re better than them. You would be a success story if you had both your legs chopped off and the other guy’s killed.”