December 17, 2000

Members of the Alberta Legislature:

I am writing to you today to express my deep concern on the state of electricity deregulation in Alberta. I hope that you will read and respond to my letter immediately, since I believe this issue is of critical importance to all Albertans.

The government of Alberta's Electricity Deregulation plan is NOT working. We are following in California's footsteps and are doomed to failure if we don't correct the fundamental problems that currently exist.

The government has implemented the 8¢ RRO at the last minute because it feared losing a March election when voters received their first power bill in February. The government has simply delayed the pain, since homeowners will be paying for 2000 rate riders, 2001 rate cap, and 2002 rates as of January 1, 2002. It could well be horrific for persons on fixed or low incomes.

The City of Lethbridge recently hand delivered an offer from Enmax to all businesses that were not eligible for the RRO. The City realized at the last minute that many businesses (estimated at 200 in Lethbridge, 5,000 to 10,000 in Alberta) had not signed contracts and would therefore be subject to the default rate of about 16 ¢/kWh. However, the government's price cap on the RRO blindsided Enmax and Epcor, causing them to withdraw all offers. The December 11 deadline for signing a contract came and went, with businesses unable to sign a contract, since no contracts were being offered! The government has touted deregulation as the "Power of Choice" and the "Power of Competition." As we are all now acutely aware, deregulation is a failure. Competition is nonexistent. Choice is not being offered. Small businesses have been abandoned by the government, left to suffer the horror of deregulation.

The government's goals for deregulation, established in 1993, were:

• Establish a mechanism that is fair from a province-wide perspective.
• Introduce industry structure and regulatory reforms that preserve and enhance the Alberta advantage of competitive electricity prices.

The Alberta Advantage is quickly becoming the Alberta Disadvantage, as prices are predicted to skyrocket on January 1, 2001. The government has NOT met it's original goals, yet blindly moves forward, placing businesses and jobs at risk in Alberta.

In 1993 the government predicted that the future impacts of deregulation would be:

• In the long term, increased competition and incentive regulation are expected to result in lower costs than the old structure would have provided. This will maintain Alberta's competitive electricity rates, which are among the lowest in North America.
• In turn, lower rates help the province's industries to remain competitive in international markets and maintain economic growth and opportunities.

The government's vision of deregulation has NOT come true. Industries will no longer be competitive as of January 1, 2001. Economic growth will dwindle, and opportunities will only exist outside of Alberta, where electricity prices ARE being maintained at historic levels.

In 1998 the government finally produced the Electric Utilities Amendment Act, which better defined the rules behind deregulation. However, many issues were still left to be decided, causing tremendous uncertainty in the market. The government is still dealing with many of these issues, and deregulation is only 2 weeks away. The government has had 5 years to prepare for deregulation, but businesses have only a few days. The government identified the key purposes of the Electric Utilities Amendment Act in 1998 to be:

• Complete the orderly transformation of Alberta's electric industry into a competitive, market-driven structure that benefits all Albertans.
• Bring the benefits of competition to customers by providing them with choice over their retail supplier of power, the types of services they receive and how they participate in the market.
• Complete deregulation of the generation market, creating incentives for efficient capital investment in generation and for efficient operation. This creates a lower-cost industry and competitive rates for consumers.
• Ensure a level playing field for all buyers and sellers of electricity so that customers benefit from open competition.
• Ensure fairness in the changes to both customers who buy electricity and owners of existing regulated generating facilities. Owners will have a fair opportunity to recover investments made in generating plants. Customers will continue to receive the benefits of low-cost power from existing generating facilities.

Once again, the government has failed to meet the goals it established for deregulation. The transformation to deregulation is definitely NOT orderly for any participants, including customers, retailers, and generators. The benefits are NOT being realized, since choice is NOT being provided and thousands of Alberta businesses are stuck with the obscenely high default rate for electricity as of January 1, 2001. Incentives for capital investment in generation are NOT in place. In fact, generators will not even consider building in Alberta because the government's continuous changes create too much uncertainty. A level playing field is NOT in place. Today, the retailers seem to be in control and have the customers at their mercy. And, the most disgraceful of all, is the fact that customers are NOT going to continue to receive the benefits of low-cost power from existing generating facilities. In August the government sold the rights to much of the existing regulated generation to a select few large companies at fire sale prices. These large companies will continue to reap the rewards for years to come, while Albertans will be paying dearly for the government's mismanagement.

"We did come up with a valuation that there should be somewhere between $2 billion and $4 billion in residual value," said Minister Steve West, March 15, 2000 when discussing the PPA auction process. The government declared the auction a success, when the truth is that it was a complete failure. I say that the auction was a failure because:

• Only seven bidders participated
• Only 5 were buyers
• Only 2/3 of the generation was sold
• Only $1 billion was raised, far less than Minister West's own estimate

"If the auction had generated an unrealistic amount like $4 billion, Albertans would have had to pay more in electricity rates to allow the bidders to recover their investment," according to Mike Cardinal in his news release of August 24, 2000. This quote demonstrates the Minster's fundamental lack of understanding of deregulation and how a market price is arrived at, because:

• The quote implies that prices are cost based not market driven, i.e. that the market price of electricity should somehow reflect the cost of producing it, which is not true in commodity pricing, where the price is based solely on supply and demand
• The Minister's statement also implies that market power exists, i.e. that suppliers of electricity have the ability to fix prices to recover their costs

I am truly shocked by the Minister's statement. He should have a much better understanding of the market for electricity that his government has created. If the Minster himself does not understand the fundamentals of market pricing of electricity, then we have a very serious problem.

On August 24, 2000, the Minister of Resource Development also stated that "California, on the other hand, tried to do everything too fast. They tried to do in a year and a half what we've done over five years. We have an orderly transition - they don't." The Minister went on to say that "California lost the confidence of the market and investors by imposing a patchwork quilt of market controls." Our government is now making the same mistakes that California made. Each week the government comes up with more changes to try to make the situation appear better. However, the changes are not helping, so then the government tries something else. Industry participants are so alarmed by the uncertainty that the government has created that they are abandoning Alberta as fast as they can. Deregulation is in shambles, and the government needs to admit it and get on with trying to fix the problem, rather than simply trying to mask the problem until after the next election.

"There is no road map for this process - but we are committed to making the transition to a competitive market a smooth one. And one that happens in the best interests of all Albertans (Minister Cardinal, October 11, 2000)." Minister Cardinal now knows that the transition is not smooth for thousands of Alberta businesses. It is NOT happening in the best interests of all Albertans. But the government stalwartly refuses to address the fundamental problems of deregulation and get on with solutions that will be in the best interests of all Albertans. I believe that the government must delay deregulation until July 1, 2001 to allow time for retailers and customers to develop an understanding of the new marketplace. Basically, a "cooling off" period is required so that the recent changes can be dealt with using due diligence by all participants. If the government is unable or unwilling to delay deregulation, then a price cap of 8¢ should be put in place for the next 6 months for ALL consumers of electricity. Over the next 6 months, the government must aggressively pursue a plan of action which will address the fundamental problem of deregulation today, namely the lack of supply (generation) necessary to meet Alberta's increased demand for electricity. If the government does not address the fundamental shortage of electricity in Alberta, then we will suffer high prices and the risk of shortages for years to come.

The Market Surveillance Administrator's report of October 13, 2000 stated that "Uncertainty associated with the original Electric Utilities Act, as to the ultimate deregulated industry structure and the staged-in approach to deregulation in Alberta caused to some degree reluctance to invest in new supply." The reluctance to invest in new supply is still evident in Alberta. Minister Cardinal repeatedly quotes numbers showing that lots of new generation is coming on line in Alberta over the next few years. Industry insiders, however, do not share the Minister's optimism. Even if 1400 MW does come on line in the next three years, it will barely cover the projected demand growth in Alberta over the same period. We will be no better off in three years than we are now, but if the Minister's information is correct, at least we hopefully won't be any worse off.

The Market Surveillance Administrator's report also said that "At present, given the stage of deregulation and the incremental approach taken, significant demand side response is essentially nonexistent." Demand side response is a NECESSITY in a well functioning market. If the demand for electricity does not react to the price, then the market will never function properly. By establishing a rate cap for homeowners of 8¢, the government has ensured that 35% of the demand for electricity will not be price responsive. The market will never develop. The government has effectively killed the market before it was even born.

One of the most serious issues for businesses is that the price cap of 8¢ is currently available to some businesses but not others. Some restaurants, landlords, gas stations, etc. are too big for the RRO and will be paying 16¢ in January. Some of their competitors will be paying only 8¢. The government has now put some businesses at a competitive disadvantage, while favoring others. By drawing a "line in the sand," our government is now picking winners and losers amongst Alberta businesses. The arbitrary, discriminatory cutoff established by the government infuriates businesses.

It is my understanding that deregulation will be discussed at the government's caucus meeting on Tuesday morning. At that time, it is my fervent hope that the government will admit that deregulation is in deep trouble, and immediate, forceful action is required to put deregulation back on course. If the government truly wants deregulation to be in the best interests of all Albertans, then they must show that their actions speak louder than their words.

It has been speculated that the next big government announcement will be the rebate of an additional $1 billion, representing the proceeds of the most recent auction. Rather than refund the money, I would like to see the government offer the money to industry in the form of a grant that industry would match one for one to fast-track new generation in the province. A total of $2 billion ($1 billion from the government and $1 billion from the private sector) will build at least 2000 megawatts of new generation. In the long run this is the best use of Albertans' money, since the long term benefits of lower, competitive power prices will far exceed the $1 billion that Albertans invest.

It also must be noted that the PPA auction proceeds and the MAP auction proceeds are a return to Albertans representing the residual value of the regulated generation facilities that all Albertans paid to build over the years. To rebate it to consumers to battle current high prices means that decades of investment by Albertans will disappear in a heartbeat. That would truly be a shame.

For further info, check out the IASA website at: http://www.lethbridgeironworks.com/lethiron/IASA.html

Also, the website includes a letter written by Joseph A. Doucet, H.&R. Drilling Professor of Regulatory Economics at the University of Alberta School of Business. The letter is entitled "Alberta's Electricity Market: Supply is the (only) answer!" It is a fresh perspective from a new Albertan with extensive knowledge in government regulation of industry. Check it out at the IASA website.

I look forward to your swift response. I hope that you will take action to fix the fundamental problems of deregulation, rather than simply throw more rebates at it. Albertans are counting on government to see to it that deregulation is indeed a benefit to all Albertans, not just to a few large corporations that now hold the province's generation.

Also, please see the attached article from the New York Times. It is quite enlightening.

Thank you.

John R. Davies, P.Eng. MBA
Vice-President Engineering & Operations
Lethbridge Iron Works Co. Ltd.
P.O. Box 967, Lethbridge, AB, Canada T1J 4A2
phone 403/380-1555
fax 403/327-1131
e-mail john.davies@lethbridgeironworks.com
http://www.lethbridgeironworks.com