Electricity Deregulation Albertas Power Failure

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Electricity Deregulation Albertas Power Failure

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

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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
• Source Government of Alberta publication Moving
  to Competition - A Guide to Albertas New
  Electric Industry Structure

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Future Impact of Deregulation

• 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.
• Source ref. slide 2 (previous slide)

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Key Purposes of The Electric Utilities Amendment
Act

• 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.
• Source Background Facts http//www.resdev.gov.a
  b.ca/electric/rgeneral/fsheetmain.htm

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Key Purposes of The Electric Utilities Amendment
Act (cond)

• 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.

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Key Purposes of The Electric Utilities Amendment
Act (cond)

• 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.

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PPA Auction Objectives

• To facilitate mitigation of market power and to
  promote competition in the generation of
  electricity
• To optimize auction revenues
• To establish market values
• Source Final Report on PPA Auction Design,
  Charles River Associates, December 30, 1999

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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)
• I say auction was a complete failure
• Only seven bidders
• Only 5 buyers
• Only 2/3 sold
• Only raised 1 billion

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Quote - allow the bidders torecover their
investments

• 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 (Mike
  Cardinal, August 24, 2000)
• This quote demonstrates a fundamental lack of
  understanding of deregulation
• It implies prices are cost based not market
  driven
• It implies market power, i.e. the ability to fix
  prices to recover costs (regulation!)

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Quote - we have anorderly transition

• California, on the other hand, tried to do
  everything too fast. They tried to do in a year
  and a half what weve done over five years. We
  have an orderly transition - they dont. (Mike
  Cardinal, August 24, 2000)

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Quote - a patchworkquilt of market controls

• California lost the confidence of the market and
  investors by imposing a patchwork quilt of market
  controls. (Mike Cardinal, August 24, 2000)

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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)

13
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 market power

• It has to be observed that the combination of the
  following suggests the possibility of the
  existence of market power, the opportunity to
  exercise it, and the successful exercise of at
  least some market power in this jurisdiction
  (Market Surveillance Administrator, October 13,
  2000)

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Quote market manipulation

• There are a number of real time market rules
  which provide generous flexibility and may
  accordingly provide the opportunity for market
  manipulation (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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Quote demand side response

• At present, given the stage of deregulation and
  the incremental approach taken, significant
  demand side response is essentially nonexistent
  (Market Surveillance Administrator, October 13,
  2000)

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Implications forLethbridge Iron Works

• No contracts being offered
• Last January we paid 70,000
• Default Rate will be more than 200,000
• 1 Year Rate would be 198,000
• 3 Year rate would be 152,000
• 5 Year Rate would be 127,000
• Government has killed competition before it even
  gets started, by forcing consumers to choose long
  term deals

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Other Choices

• Graveyard Shift would yield some savings
• 1 Year Rate would be 154,000
• 3 Year rate would be 119,000
• 5 Year Rate would be 101,000
• Go out of business
• Self - Generate
• Move to Manitoba

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Solutions

• Delay Deregulation until July 1, 2001
• Fast track new generation
• Educate individuals and businesses to reduce the
  consumption of electricity, and to change the
  time of day away from the rush hour
• Change how prices are established to ensure that
  market power is not being exercised
• Allow retailers time to prepare for the market

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The end

• Thanks!
• http//www.lethbridgeironworks.com/lethiron/IASA.h
  tml