Electricity Deregulation Restructuring

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Electricity Deregulation Restructuring

• John Davies, P.Eng. MBA
• Vice-President
• Lethbridge Iron Works
• April 24, 2002

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Why Me

• Large electricity user (5000 kW)
• IASA (Industrial Association of Southern Alberta)
• IPCCAA (Industrial Power Consumers and
  Cogenerators Association of Alberta)
• Member of several industry committees (ACE, EAC,
  RIS, MAP)

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Why Deregulate

• Other jurisdictions are doing it
• Cost of regulation
• Allow other types of generation (e.g. wind and
  co-generation)
• Customer choice
• Mitigate market power
• Competitive markets result in the best possible
  system (ideology)

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Why Not to Deregulate

• Alberta had an excellent system (25th of 173 in
  May 2000)
• Low debt
• Residual value
• Stable prices
• Lights were always on
• Alberta advantage!

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Alfred Kahn

• I've always been a skeptic about retail consumer
  choice in electricity. (Alfred Kahn aka the
  father of deregulation, IEEE Spectrum, January
  2002)
• Electricity is NOT the airlines or
  telecommunications it is very unique not a
  classic commodity

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History of Deregulation

• 1991/1992 concept reviewed
• 1993 general discussion
• 1994 government report
• 1995 EUA legislation
• 1996/1997 stakeholder input
• 1998 Bill 27 (EUA Amendment Act)
• Jan. 1 2001 deregulation began

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Goals of Deregulation

• two broad goals (1993)
• 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

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Before Deregulation ...

• Prices were set by regulator (EUB or City
  Council)
• Rates regulated and changed slowly
• No incentive to lower costs
• Generation built far in advance of need large
  scale projects
• Generation limited to 3 regulated utilities

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After Deregulation

• Prices are set by the market
• Rates fluctuate with supply and demand and change
  rapidly
• Incentive to be lowest cost
• Generation built by anyone
• Customer choice

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Power Pool Prices
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MondayPrices
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Provincial Governments Role

• Architect of deregulation
• Establish rules in a timely manner
• Disseminate information
• Ensure Alberta is attractive for new generation,
  retail, etc.
• Ensure system is working in a manner fair to ALL
  participants

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Deregulation Process

• Deregulation has taken 10 years
• Not complete for 4 more years
• Government did not have a coherent plan, only an
  ideological goal
• Expected stakeholders to develop it
• The lack of a plan caused players to adopt a
  wait see attitude

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Quote no road map

• 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)

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Quote temporary framework

• From what was originally intended as a temporary
  framework, we have amended our rules on a case by
  case basis (Power Pool of Alberta, October 17,
  2000)

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Quote reluctance toinvest in new supply

• 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 (Market
  Surveillance Administrator, October 13, 2000)

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PPA Auction

• Power purchase arrangement (PPA) auction was
  declared a success by government, but a failure
  by others
• The auction raised 1.1 billion
• All PPAs were not sold and are still in limbo
  today (MAP committee)
• Government refused to admit failure and moved
  blindly forward

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Quote 2 billion to 4 billion

• We did come up with a valuation that there should
  be somewhere between 2 billion and 4 billion in
  residual value (Minister Steve West, March 15,
  2000)

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Missing Items

• Consumer education at all levels
• Consumer advocates
• Consumer protection (ombudsman)
• Rules Rules and more Rules
• Other jurisdictions are not following
• Transmission remains regulated
• Impact of KYOTO

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My Observations

• Politics wordsmithing
• Politics control
• Politics ponderous decisions
• Politics lengthy approval process
• Politics industry first, consumers second
• No plan then, and no plan now

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Alberta advantage

• Albertas approach to deregulation is unique, and
  benefits are not here
• Prices are higher
• These prices are only in Alberta, the rest of
  Canada is not suffering
• The government is still making policy on the fly

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My role

• Be informed
• Question the governments to ensure that policies
  are in our best interest
• Share my knowledge with others
• Increase public awareness
• Take the provincial government to task and ensure
  they are acting in the best interest of all
  Albertans

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The end

• Thanks!www.iasa.ca