Background of electricity deregulation
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
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
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
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
Click on image to download a full-resolution copy of the fine print on
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
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
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
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
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
or you can call 310-4822 (toll free in Alberta).
— Contract Rates *
Information available as of Feb. 1, 2007 indicates that competitive retailers
offer the following retail prices for 5-year contracts for residential
||Price per kWh
|Alberta Energy Savings
|(Source: Utility Consumers Advocate of
* Fair Competition Statement:
Electricity products and services are competitive. You are free to choose a
retailer. Regulated wires services are not dependent upon the retailer you
choose. You can find a listing of licensed Alberta retailers at
www.ucahelps.gov.ab.ca or call 310-4822 (toll free in Alberta).