Background of electricity deregulation and marketing

Time and again during the past few years, ever since the electricity industry had become deregulated in Alberta, we have become subjected to a number of aggressive promotion campaigns by one or another energy producer or marketer, designed to entice people into signing energy purchase contracts.  All such sales campaigns have in common that they stress that a given energy "product" will permit electricity consumers to budget with the knowledge that their energy costs will not fluctuate from month to month, that their energy costs will be locked into a fixed rate, the rate offered under a given contract.

It is not easy anymore to make a wise decision as to what the best rate at which energy can be purchased may be.  The default by consumers is to accept the default rate, the regulated rate option (RRO), which was for a while still attractive but did not fit the Alberta government's deregulation ideology.  There was much opposition by consumers to the government's plan to end the fixed RRO and to force all consumers into purchasing deregulated energy.  Soon the government appeared to cave in to those demands and instituted a plan for a gradual conversion of the RRO from a fixed base to one whereby the RRO was to be based over the years on a gradually increasing portion of its price that reflects a "flow-through" rate, an average price for energy during the month preceding the billing date of the power bill.  Over the years, a portion of the RRO was to be comprised first of 20 percent of that flow-through rate, increasing 20 percent per year until it reaches 100 percent of  that flow-through rate.  The gradual conversion of the fixed RRO to a flow-through rate that changes from month to month in step with monthly price changes much like and closely related to those for natural gas would thereby condition small consumers who failed to sign energy purchase contracts at fixed prices to become used to monthly fluctuating energy prices. That scheme for training small consumers for the realities of a deregulated electricity market came into force on July 1, 2006.

Traditionally, energy costs had been more or less stable over the years and varied little as time went on.  A regulated market ensures that energy costs vary no more than is necessary to assure energy producers and distributors a reasonable profit margin.  In the electric energy market, it was generally held that a rate of return of six percent on investment was satisfactory.  The regulatory process ensured that no large deviations from that guideline occurred.

In a deregulated market, such as the one that has been forced upon Albertans, the objective to provide for a reasonable rate of return for energy producers and distributors no longer exists.  The objective of a deregulated market is simply nothing other than to ensure conditions whereby energy producers can charge what the market will bear.  That is called competition.  Theoretically, competition will provide consumers of a given product a price for that product that is fair for producers as well as for consumers.  It is assumed that competition in a free market will drive consumer prices down, while a regulated market tends to keep competition away and to invite inflation.

The free market principle will work fine when the ostensibly free market is not being interfered with, either by government imposing protective duties or providing tax breaks, and provided that the producers for a free market don't collude to become engaged in price fixing.

The government of Alberta decided some years ago that deregulation would entice energy producers to flock to Alberta, there to vie with one another to produce and sell energy in a competitive market, and on account of that to drive down prices for electric energy.  The deregulation ideology dictated that competition would drive prices down and provide advantages to all consumers of electric energy.

The reality of deregulation is that large consumers, mainly heavy industry, did benefit from deregulation.  Long before deregulation became effective for small consumers, large consumers made contractual arrangements for low-cost energy produced largely through coal-fired thermal power plants.  For small consumers the reality of deregulation became something entirely different.

The Alberta energy market is small and isolated.  It is generally accepted by the electricity industry that a market consisting of less than three million consumers of electricity will not be competitive when it is deregulated.  Alberta has no more than just over one million consumers of electricity.  That is not enough of an incentive to attract many energy producers.  The majority of electricity users have not much to choose from or to negotiate with.  They will be buying relatively high-priced energy that is not only largely produced by gas-fired thermal power plants but energy whose pricing structure is locked into the cost of energy produced through gas-fired thermal power plants regardless of the source of energy consumed, be it from coal, water, natural gas or wind.

That principle of pricing is comparable to having an auction sale for cattle and having the price for the best steer paid on a given day determine the prices for all other cattle sold that day.

For small energy consumers the outcome of deregulation was that the price per kWh jumped over night (Dec. 31, 1999 to Jan. 1, 2000).  It quadrupled over night.  It no longer followed inflation but became one of the forces that drive inflation.

Ideally, small consumers would on account of that try to find better alternative sources of the electric energy for their homes and businesses.  For most that did not happen.  It is bad business for individual small energy consumers to invest a large amount of time and effort into researching the energy market, so as to be able to determine the lowest price at which electric energy can be bought for a two- or three-year term.  The costs of doing that exceed by far the amount of money that could be saved.  One reaction by consumers to excessively high energy prices is that they either relocate their businesses or shut down operations.

There is a better alternative, that is to have consumers form groups and to have those groups band together to make bulk purchases for their members.  Unfortunately, the government's plans for implementing the deregulation ideology prohibited consumer organizations not only from making bulk energy purchases, but such organizations were even prohibited from recommending to their members where the best buy could be made.  Sales to members were out of the question, unless they were ready to provide very large securities first, the size of which was in many cases far greater than individual REAs could cope with.  The deregulated market was to function without interference by consumer organizations.  That, in essence, left the deregulated market to be interfered with and controlled only by commercial marketers of energy and by the government.

Since that time intensive lobbying by the members of the Alberta Federation of Rural Electrification Associations (AFREAs) resulted in concessions for REAs.  Those concessions now permit REAs to purchase energy in bulk and to sell the purchased energy to their members and only to their members.  So much for free enterprise.  The spirit of competition was to operate for large corporations but was not to extend to associations of consumers of electricity.  The large corporations argued that the consumer associations would otherwise  have an unfair advantage.  In a free market, competition by consumers is unfair, and to give the privilege to compete freely only to sellers who are not consumers, essentially to give it only to a closed club is more fair?  Who can fathom the logic of that?

Nevertheless, even small REAs cannot justify to hire market research analysts to make their power purchases for them.  Large REAs can.  They are now legally permitted to buy energy on the whole-sale market and to sell it to their member services.  Some REAs sell electric energy to their members for as little as 4.9 cents to 5.9 cents per kWh.  That is a good thing, because it protects their members from predatory marketing schemes such as that shown in the following example.

An example of a seriously flawed and extremely deceptive sales scheme

 Through that scheme consumers can have the wool pulled over their eyes and be made to purchase electric energy for 10.15 cents per kWh.  The scheme does not mention at all that 10.15 cents per kWh is an outrageous price, but it stresses the good side of that price: it is a fixed rate that permits consumers to budget accurately.

Click on image to download a full-resolution copy of that letter (1MB jpg file)

If you received such a letter from Alberta Energy Savings L. P. (AES), don't be in a hurry to cash the cheque attached to it.  There is a lot of fine print on the back of that letter, and by cashing the cheque you will have accepted all of that fine print.  The fine print that you have read and signed by cashing the cheque is a contract that forces you to pay 10.15 cents per kWh for all of the electric energy you consume during the next five years. 

That scam is perfectly legal, but does the approach used to rook people into such a deal seem unethical to you?  Why be so squeamish?  The letter is an example of free-marketing principles in action in our deregulated energy market.  However, do you honestly believe that a corporation that resorts to such practices to sucker you has your best interests at heart?

Have a look at the fine print on the back of that letter:

Click on image to download a full-resolution copy of the fine print on the back
of that letter (2.4MB jpg file)

The fine print on the back of that letter specifies some important things, such as that AES will not be responsible and cannot be held liable for any damages caused by their failure to deliver what they promise, and that if the consumers it rooks in through their shady sales practice fail to pay up or are late by even a single day in paying for AES's high-priced electric energy, the poor rooked-in consumers will pay a late payment fee at an annual percentage of 43.4 percent. 

AES appear to guard themselves, again in a perfectly legal manner, against accusations of being called usurious.  They do that by calling that annual percentage rate of 43.4 percent not "interest on payments due" but a "late payment fee".

That is the free-market-system-through-deregulation in action.  Well, the electricity market is now deregulated all right, and it appears that wise electricity consumers may well wish to exercise their right to a free choice of energy supplier by staying as far up-wind as possible from entering into a contract with anyone who offers deals such as that offered by Alberta Energy Savings L.P.

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How to make an intelligent, informed choice of an energy provider

If you wish to make an informed decision on which source of energy it is best to purchase energy from, check the retailer contact information accessible at the Alberta Government's web page Who provides electricity & natural gas?.  Write to all of the parties identified and ask them about what they can provide for you and what that will cost you.  Then tabulate and compare their answers.  Only after you have done that should you decide who your energy provider should be.  Don't fall for any sales marketing schemes.  Let the facts speak for themselves.

The Utility Consumer Advocate's office constructed a new website with information intended to help you in making a wise choice of energy provider.  Based on the evidence provided at that website, Alberta Energy Savings L. P. does not live up to the requirements prescribed through a plain language contract.  If you should choose to purchase energy from anyone like that, insist on having your purchase information provided in the form of a plain language contract.  It is your right to do so, and it is in your best interest not to deal with an energy provider who fails to live up to the conditions necessary to make the plain language contract procedure work.  Don't deal with an energy provider who refuses to provide energy to you based on a plain language contract form.

It will most likely be a wise decision to stay away from all sellers of energy who provide the terms of their contract in legalese and in fine print on the back of promotional letters such as that in the example provided by AES.

As of December 2006, the Bruderheim REA went through its last month of existence as an independent REA.  As of January 1, 2007 it ceased to exist and became part of the Battle River REA.  The members of the Bruderheim REA will now have an opportunity for purchasing deregulated energy at a fixed price that will stay in effect for one year.  The Bruderheim REA news page will lead you to a few directions on how to go about doing that.  However, it is also necessary to comply with certain government provisions regarding attempts by REAs to sell electric energy to their members.  Some of those requirements are dealt with through the tips provided above.  To make sure that things are perfectly above board and in compliance with the rules that apply to sales of electric energy by REAs, here is a statement by the Battle River REA that applies specifically to its members, whom the members of the Bruderheim REA joined January 1, 2007.

Battle River Rural Energy Division would like to inform current and future members & customers that they are free to select a retailer of their choice. For more information about the changes to the electricity industry and for a list of licensed Alberta retailers, visit the government's website at www.ucahelps.gov.ab.ca or you can call 310-4822 (toll free in Alberta).

Competitive Retailers — Contract Rates *

Information available as of Feb. 1, 2007 indicates that competitive retailers offer the following retail prices for 5-year contracts for residential consumers: