Electricity Deregulation is failing in Alberta. It is failing in California. It is on hold in numerous North American jurisdictions. The long term benefits of deregulation, if any, may never outweigh the short term problems. Alberta is at a fork in the road. Should we continue forward on blind faith, in the hopes that deregulation is the ideological path to salvation? Or, should we stop the process while we still can, before the Alberta Advantage becomes but a distant memory?
The Industrial Association of Southern Alberta (IASA) has been working aggressively for months to raise awareness of the problems facing Alberta companies in a deregulated environment. Many consumers are now questioning the process, and are indeed calling for a return to regulation. Many say that customers do not want choice, they want stable, reliable energy at reasonable prices.
In 1993 the government published two broad goals for deregulation, namely:
It is obvious that now, eight years later, the government has failed to achieve its goals for deregulation. The current mechanism is not fair for all Albertans. Small companies are at a distinct disadvantage. The process is seen by most as complex and confusing. Small businesses feel ill-prepared and ill-informed to move forward into the labyrinth of deregulation. Large corporations have the staff and expertise to deal with deregulation. Large corporations had the infrastructure to participate in the PPA auction, allowing them to purchase power at substantially lower rates. Large corporations also participated in the MAP auction. Small and medium-sized businesses have been left out of the process, and many are now subject to the default rate. The government's own 19-member Advisory Committee on Deregulation contained no representatives of small business.
It is also obvious now that the Alberta advantage of competitive electricity prices is a thing of the past. Jayson Myers, economist for the Canadian Manufacturers and Exporters, recently pointed out that Alberta will suffer greatly under deregulation. Employment loss may exceed 30,000 jobs. Alberta had competitive rates. In May of 2000, Alberta industries paid the 14th best rate for electricity in 173 North American jurisdictions. At a default rate of 17 ¢/kWh in 2001, Alberta industries would drop to 172nd place; only Hawaii would have higher rates.
The government has failed miserably at meeting its original goals. Why then do we proceed to deregulate? The government's unwillingness to admit there is a problem, and to deal with it, will be the downfall of many Alberta businesses. Tough decisions need to be made. Throughout the process, customer needs have been ignored, while generators and utilities have been favored. It is time for government to remember that deregulation was undertaken to benefit customers, not utilities. Deregulation must either be scrapped, or fundamentals changes need to occur which will ensure customers, not utilities, benefit from the process.
Not To Be?
The ideological belief that deregulation is good, no matter what it is applied to, may indeed be proven wrong in the case of electricity deregulation. The tight supply situation in Alberta has already demonstrated that prices can increase exponentially. In fact, short term prices are so high as to essentially wipe out any future gains that might accrue from deregulation.
California is now coming to grips with the devastation that can result from a tight supply situation. Isn't Alberta smart enough to learn from the situation in California? Apparently not. Our own situation eerily parallels that of California. California began the process with an excess of supply, as did Alberta. California's demand has been growing more rapidly than predicted, due to a burgeoning economy and an increased consumer appetite for electricity. Alberta's economy has also grown apace. California air quality standards have provided a roadblock for new generation. Premier Klein believes that the Kyoto summit has done the same for Alberta. We are following in California's footsteps, as we both walk off a cliff.
California Governor Gray Davis recently said that electricity deregulation has been a "colossal and dangerous failure. It has neither lowered consumer prices nor strengthened utilities. In fact, it has resulted in unconscionable price gouging and an unreliable supply of electricity." Governor Davis is now proposing establishing a public agency to construct power plants. The California Public Utilities Commission (PUC) recently voted unanimously to grant emergency rate increases. PUC commissioner Carl Wood stated that "we are voting the epitaph for deregulation in California today. Deregulation is dead."
California isn't the only state with deregulation concerns. New York energy officials are warning that this summer New York City could face the kind of energy shortage now plaguing California if electricity demand continues to grow at its current brisk pace. The looming shortage is a result of several factors, including deregulation of the state's power industry and New York's robust economy. No one has built any generation or transmission for a number of years, even though incentives to build generation were in place.
Alabama has put deregulation on hold, stating that it has not been demonstrated that all consumers in Alabama would continue to receive adequate, safe, reliable and efficient energy services at fair and reasonable prices under a restructured retail market at this time. Minnesota is not deregulating now because of potential shortfalls in available energy. Instead, it is proposing to change the tax structure to promote the building of new power plants, while simultaneously mandating statewide energy planning, and increased energy conservation. Mississippi recently concluded that a competitive electric power industry would not be beneficial to consumers at this time, since studies indicate that prices for residential and small consumers could rise in a competitive environment. Montana recently chose to delay retail competition because the state does not have a competitive power supply market in place. While the federal government in the United States has mandated deregulation for the states, many are balking at the idea, having realized that predicted price increases far outweigh potential benefits.
Alberta continues forward into deregulation, apparently blind to the harsh lessons being learned in other jurisdictions. Perhaps it is a simple truth that electricity is not suitable for deregulation. The concept of electricity as a commodity to be bought and sold in the classic sense is difficult to accept. There are two fundamental factors regarding electricity that separate it from other commodities.
Firstly, electricity cannot be stored. As a result, electricity cannot be hedged through physical purchases in advance of consumption. Electricity can only be hedged through financial contracts, and as such an efficient, functional forwards market is a necessity for the proper function of the electricity market. The government did not see to it that the forwards market was in place before allowing deregulation to proceed.
Secondly, electricity cannot be transported through any conventional means. On September 18th Minister Cardinal and ADM Stan Wenger came to Lethbridge and met with large power users. When questioned about current high electricity prices, Mr. Wenger stated that commodity prices go up and down. He said that sometimes canola prices are high and you have to deal with that. We pointed out to Mr. Wenger that when canola prices are high, they are high throughout North America. This is due to the fact that a company can readily purchase canola at one location and transport it to another. It does not matter whether the company is crushing canola in Lethbridge, or Winnipeg, or Halifax, it will be paying the same price as competitors in other locations. If the price is up, all must suffer or raise their prices. But at least they compete on an equal footing. We asked Mr. Wenger how we could transport Manitoba electricity to Alberta in the back of a truck so that we could remain competitive. Mr. Wenger didn't have an answer for us.
Electricity is simply not a commodity. In fact, it is a necessity of life and should not be subjected to the whims of the market. As a result, the deregulation of electricity may be doomed forever to fail. Albertans do not want competition. They want low, stable prices, which we had in the regulated world. IASA believes it is not too late to turn back, to admit our mistakes, and to preserve the Alberta Advantage. Does the government have the fortitude to swallow its pride and admit that deregulation is a mistake? We hope so.
To Be?
If deregulation is to continue, fundamental problems must be addressed. The government must first admit there is a problem, or they will never be committed to finding solutions. IASA has 5 main recommendations which are outlined below.
Consumers must become the focus of deregulation. Throughout the process the concerns of utilities have been addressed, while customers have been ignored. The government's advisory committee has 19 members, only 5 of which advocate for customers. No one advocates for small business, one of the biggest losers in deregulation today.
Demand side response must be developed. The Market Surveillance Administrator's report of October 13th stated that "at present, given the stage of deregulation and the incremental approach taken, significant demand side response is essentially nonexistent."
Supply must be rapidly increased. The basic problem today is a tight supply situation. Increasing supply should remove the opportunity for predatory pricing practices currently in use.
A level playing field must be established. Small businesses must be able to participate in deregulation, both as consumers and potential generators, without requiring the level of sophistication only available in large corporations.
The dysfunctional market must be repaired. Other than fixing the supply and demand imbalance, the biggest problem today is that a functional market has not developed. On October 17th the Power Pool stated that "from what was originally intended as a temporary framework, we have amended our rules on a case by case basis." It is time to build a new framework that has been developed from scratch with consumers in mind. The Power Pool also stated that "there are a number of real time market rules which provide generous flexibility and may accordingly provide the opportunity for market manipulation." The rules need to be changed to ensure customers are getting the benefits of deregulation. The government must ensure that the market is not skewed towards generators, and is not skewed towards the spot market.
To Be or Not to Be?
Whether deregulation is cancelled or whether it proceeds, it is clear that there are fundamental problems of a magnitude that will cause irreparable damage to Alberta businesses and Albertans if they are not soon resolved. IASA hopes that the government will take swift and decisive action to preserve the Alberta Advantage. On October 11th, 2000 Minister Cardinal stated that "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." IASA challenges the Minister to live up to his commitment to Albertans. Low, stable electricity prices are in the best interests of all Albertans. Deregulation is not!