Yellowhead REA

RR1
Evansburg, AB
TOE OTO
Telephone 727-3939
Fax 727-3939

December 11, 2000

Honorable Ken Kowalski,
Member, Legislative Assembly,
Government of Alberta.

Dear Mr. Kowalski:

We are writing you today with two serious concerns in regards to the deregulation of the electrical industry.

The first is in relation to the new regulations regarding the Capped rate for the Regulated Rate Option.

The REAs acting together initially proposed the stable rate option to ease consumers into the deregulated environment. The initial proposal saw the Government accepting the risk of market fluctuations so as to provide stability to consumers. The industrial sector would be left to pursue market opportunities, and manage their own risk.

Later in the process the Stable Rate Option was changed unilaterally by Government to a Regulated Rate Option, where the Distribution Utilities, including REAs, were charged with procuring their energy requirements for the RRO from the market. This had the effect of making the Regulated Rate Option into a regulated market price.

The shortage of electricity in recent months has driven the pool price extremely high. Contrary to Department of Resource Development assertions, the market price is not this high because of the drastically increasing cost of natural gas. Gas only provides approximately 20% of the generation capacity, and the fuel is only part of the cost of gas-fired generation. At most, this accounts for a 15% increase in current electricity costs, not the 200-300% increases we are seeing.

The pool price is extremely high because supply/demand markets spike or plummet based on relatively small surpluses or shortages of supply, and we are now in the grip of a serious shortage.

The recent spate of regulations force us to sell energy for less than our cost to acquire energy. We believe we have acted prudently by forming an energy load aggregating Company. Prairie Power Ltd. has been involved in sourcing energy through off-take agreements under the initial Power Purchase Arrangements Auction, and the most recent auction as well. Even so, we cannot supply our members needs for the capped amount of $.08/ kWh.

We cannot apply for a recovery of these legislated losses until next October, and even if the EU Board approves the requested increase, the Minister may overrule and disallow any recovery of losses.

We object in the strongest possible terms. Even if it were possible, we are not interested in financing the Governments mistakes for one year. We are even less interested in being driven out of business if the Minister disallows necessary rate increases next year. Please understand we are charged with protecting our members' interests, both as consumers of electricity, and as owners of a Distribution Utility.

There are two possible reasons for the capped rate regulation. The Minister may be sincere in his belief that pool prices will fall substantially by the end of 2001, allowing recovery of the 2000 and 2001 deferrals, without a large increase in rates. Conversely, this exercise may have been designed as a stop gap measure to get through the next election without major increases in costs to voters before the election. The first, market prediction, is a dangerous game, while the second will be seen as political expediency.

It is rapidly becoming apparent that the rate increases are not sustainable. Industry is looking elsewhere to do business. Many Provinces did not jump on the deregulation bandwagon. Their energy costs are a fraction of pool prices today. The Alberta Advantage is being seriously eroded.

This leads to our second major concern.

Momentum is building to scrap the whole thing and return to a regulated environment. We are not sure this is even possible under law, but if the media and public frenzy take control of the situation, there is a possibility of further unnecessary and extreme damage to the public interest. Level heads need to prevail.

In an attempt to be constructive, we are suggesting that an independent body of properly motivated industry professionals, government regulators, and consumer and industry representatives be created to look for the least unacceptable compromise so that we can keep the good of deregulation, and mitigate the bad.

We do not trust the Department of Resource Development to fix a mess of its own creation, immediately before an election, in a manner that serves the public interest. Recent regulatory actions have served to illustrate our point.

Your Government has received poor advice from the Past and Present Ministers of the DRD, and their senior staff. We believe it is time for the majority of elected officials to take responsible action to protect the public interest. We believe responsible action means acting on independent and informed advice. Further damage to the credibility of your Government may be avoided in this manner.

Sincerely,

Gordon Stobbe (On behalf of the Board)
Chairman, Yellowhead REA