Business Presentation ''' Impact of Deregulation

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Business Presentation ...Impact of Deregulation

• John R. Davies, P.Eng., MBA
• Vice-President Engineering Operations
• Lethbridge Iron Works Co. Ltd.
• Alberta Federation of REAs
• Annual Conference and General Meeting
• February 7, 2001

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Electricity Deregulation

• All is wonderful
• And they all lived happily ever after
• The end
• Questions?

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Electricity Deregulation

• Past
• Or what were the promises
• Present
• Or what is the reality
• Future
• Or what is the dream

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The past what were the promises Governments
goal

• Goal was to 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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The past what were the promises Key purpose of
the EUA

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

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The past what were the promises 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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The past what were the promises Orderly
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.
• 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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The past what were the promises 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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The present what is the realityGovernment
indecision

• Decisions occur at the last minute, or later
• RROT 2001 at 8 November 30, 2000
• RROT 2001 at 11 December 20, 2000
• RROT 2002 November 29, 2002
• MTC July 6, 2001
• PPA Auction August 20, 2000 (1,693 days for
  government vs 133 days for customers)
• MAP Auction December 5, 2000 (27 days to go)
• PPDCR December, 2001
• Transmission ???

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The present what is the realityVolatility
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The present what is the realityUncertainty

• Development of retail choice
• Rate riders (unsold PPAs)
• New generation
• Transmission expansion
• Other jurisdictions
• Future prices
• Competitiveness of offers

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The present what is the realityComplexity

• Difficult to understand
• Difficult to compare
• Lack of knowledge / education
• Lack of confidence
• Result bad decisions
• How do I get out of my contract?
• 5 years at 9
• 10 years at 8

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The present what is the realityIndecision

• Many non-RRO consumers are still poorly equipped
  to make decisions
• Homeowners dont know what to do
• Commercial consumers are also unsure and running
  out of time

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The present what is the realityCost

• Cost of electricity
• Cost of retail charges
• Cost of distribution
• Cost of MCAF
• Cost of expert advise
• Time investment
• many more mouths to feed

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The present what is the realityResult

• Competitiveness is eroded
• NOT achieving the goal to preserve and enhance
  the Alberta advantage of competitive electricity
  prices
• Many are way out of the money for them,
  deregulation is an utter failure
• Bottom line costs are up and benefits are
  nowhere to be seen

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The present what is the realityLethbridge Iron
Works

• Night shift January to July 2001
• Very early (500 a.m.) shift now
• Self retail
• Time consuming
• Increased costs
• Uncertain future
• Reduced capital expenditures

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The present what is the realityLIW costs

• 1998 5.18
• 1999 5.38
• 2000 7.40 (rate riders 25 and 50)
• 2001 6.72 (10.32 without rebate!)
• 2002 forward is unknown difficult to quote jobs
  (Balancing Pool riders, electricity prices,
  transmission costs, etc.)

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The present what is the realityGlobal
competition

• Part of the Alberta Advantage is slipping away
  for large electricity consumers
• Stability and lower prices are offered in
  Manitoba and British Columbia they are not in
  the same boat
• Business is fast paced and competition is fierce
  we cannot hang in there and wait for the
  promised success

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The future what is the dreamRetail competition

• Will retail competition emerge?
• I've always been a skeptic about retail consumer
  choice in electricity.
• Alfred Kahn (the father of deregulation), IEEE
  Spectrum, January 2002
• I personally share Kahns skepticism
• Electricity is NOT the airlines or
  telecommunications, it is VERY unique

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The future what is the dreamIssues

• Load settlement is a mess
• Transmission is a major issue
• Reserves tight supply
• Market power concerns
• Volatility electricity is NOT a classic
  commodity
• Unsold PPAs ongoing rate riders
• Alberta a leader but will others follow?

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The future what is the dreamNeeds

• Vision
• Stability
• Cohesive plan
• Leadership
• Avoid complacency history repeats itself
• Certainty
• Simplicity

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The end

• Thanks!
• www.iasa.ca