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Deregulation introduction
Analysis of the impact of deregulation
Increased complexity of power bills
Enron tested deregulation ploy in Alberta
Transmission lines will cost us
Utility industry is in shambles
12 years after deregulation in the UK

Transmission lines will cost us

Consumers are the losers again, say Liberals

Copy of e-mail message sent to various individuals and organizations 2003 05 06.


My comments are appended after the forwarded article.


---Forwarded Article---
[The article was also published in the Edmonton Journal, 2003 05 06, p. A3]

Edmonton Sun

http://www.canoe.ca/EdmontonNews/es.es-05-06-0012.html (The link no longer works.  Searching the Internet has no yet produced an archived copy of a file of the Article.)

NEWS Tuesday, May 6, 2003

Power lines will cost us

Consumers are the losers again, say Liberals


BANFF -- Alberta power consumers will pay the whole cost of building new transmission lines between Fort McMurray and Calgary, under a regulation announced yesterday by Energy Minister Murray Smith.

Smith said the new lines will cost about $1 billion over the next two decades and will be covered by all ratepayers in the province.

The new regulation, which Smith hopes to have approved by June, overturns an Energy and Utilities Board decision from last November that said new transmission line costs would be "shared equally between electricity generators and consumers."

But in his speech to energy regulators at a conference in Banff yesterday, Smith said the new regulation would encourage the growth of new power generation in the province by placing a "postage-stamp" policy where everybody pays.

"Ultimately, the rate base is all consumers, all part of the market - industrial, residential, small business, petrochemical - everybody will pay," said Smith.

"But by doing that, we'll send a signal that we want lots of generation, which increases supply, which generally puts downward pressure on prices."

Hugh MacDonald, energy critic for the Alberta Liberals, said it was "a cause for concern" any time the province's regulatory board was overruled by the energy minister.

"Nothing surprises in this province any more with electricity deregulation," said MacDonald.

"Electricity deregulation continues to have winners and losers, and the consumers are the losers once again," MacDonald said from Edmonton.

The energy minister said the previous system was "a matrix of different signals" whereby rates were different depending on where and what type of power was being generated.

Smith said getting rid of the "congestion-management" idea of making the generator pay leads to the most expensive type of gas-fired electricity being generated.

"This is in fact delivers low-priced and best-use electricity generation."

"So the companies can get on with the job of building new transmission in Alberta that will last Albertans for the next 50 years."

New Democrat energy critic Brian Mason said Smith's announcement that new transmission lines will be covered by consumers represented "one more reason that deregulation has not benefited consumers."

Jim Wacowich, a spokesman for the Consumers' Coalition of Alberta, said people will unfairly be footing the bill for the facilities required to export electrical power out of the province to other markets.

"Now, whether these companies will profit or not is hard to say, but the expectation is that these companies, which are sophisticated commercial entities, would like to profit. It seems to me that they lobbied government to rethink its policy and to push costs onto the consumers' side of the equation."

---End of forwarded article---

There is nothing new about consumers paying for the costs of transmission-line construction, and nothing is wrong with that. Consumers always paid for that. The power companies had the consumers pay by applying to the AEUB for rate increases that would be sufficient to cover the cost of the money (the interest costs) required for the construction of new power generating plants, of new transmission lines and even for the construction, upgrading and operating of distribution systems.

The AEUB ostensibly made sure that the power companies did not make excessive levels of profit. Apparently that worked well, for as long as the energy industry was regulated. For example, when Epcor had wanted to construct a new coal-fired power plant to increase generating capacity that would give it a greater share of the market, the provincial funding for it and the rate increases triggered didn't come forth for a long time, for as long as the government felt that the plant and the additional capacity it would bring on-line weren't needed.

When new generating capacity construction was needed, and if new transmission lines had to be built, the need for either or both had to be demonstrated at rate-case hearings of the AEUB, because the funding for them would ultimately be derived from the consumers' power bills or out of all taxpayers' pockets. Generally, increased power costs were covered through increasing [the price for] power consumption rates -- the price per kWh.

Conversely, if it was found that the estimated costs of construction were in excess of actual costs or that capacity increases that had been added were in excess of what was actually required, refunds to consumers were ordered by the AEUB. Those refunds would generally be provided in the form of rate riders that would reduce the price per kWh of energy consumed for the period of time needed to recover the cost of the excessive construction [for which consumers had been over-charged].

That worked fairly well for as long as the AEUB had control over regulating the market and market prices, and for as long as the AEUB felt it had the mission to ensure that consumers paid a fair price for the energy they consumed. It is debatable whether the composition of the AEUB in any way influenced it to make decisions biased in favour of the producers, distributors and retailers. The vast majority of the board members were generally products of the players in the energy market, the utility companies. However, consumers had at least theoretically the capability to keep the play fair by being able to intervene at rate case hearings.

That, in essence, was the nature of regulation. It was an ongoing audit of the business of producing, transmitting, distributing and selling electrical energy, with the intention being to keep profits for the producers and distributors within set limits. It was also designed to prevent losses, to guarantee profits, thereby to entice producers and distributors to operate in a secure business environment, and to ensure consumers a secure, reliable and safe supply of electrical energy.


Enter deregulation.

Deregulation was ostensibly intended to entice competition for power generation, -transmission, -distribution and -retailing to enter the Alberta market. It was alleged that the competitive market climate would attract new players by opening the market to new players and by having prices based not on what it costs to provide electrical energy but by what electrical energy is worth to consumers. Still, in the words of Ed Stelmach, under the new scheme, "The Alberta Government is committed to putting more money back into the pockets of Albertans"

One of the problems with that is that in a closed market that provides no opportunities for export, the prices would essentially still be determined through the cost of production, delivery and fixed profit limits. Barring price fixing (which the AEUB would curb), whatever players were in place would compete within the limits of their ability and willingness to operate within the lowest possible profit margins and hope that no competitor would under-bid them.

It didn't turn out that way. That was predictable, and only history and full disclosure will eventually tell us to what extent that was design.

Along with deregulating the market, the Alberta government decided that a closed market would not be enough of an incentive for competitors, that Alberta has an excess of energy resources that can be exported in the form of electrical energy and thereby provide a source of lavish revenues that cannot be exhausted within the lifetime of anyone living now.

Deregulation is essentially a misnomer. Our energy market had not been deregulated. What had happened was that the market philosophy had been changed from being constrained by reasonable cost recovery and profit margins to one driven by what consumers are willing and able to pay.

In the 1950s, when the REAs came into existence, electrical power was considered to be more of a luxury than a necessity. Today it is a necessity without which we cannot live. Our homes, farms and business operations cannot function without it; they are designed to depend on electrical power. We depend on electrical power as much as we depend on the air we breathe, the water we drink and the food we eat.


Exporting power

There is nothing wrong with exporting anything, except one thing. When we export anything, we at home, where the commodity to be exported is produced, have to live with the fact that we then have to pay at home the full price for what the expanded market is willing to pay for the commodity we wish to export. That is true for exporting grain, cattle, hogs and any other farm products. It is true for exporting oil. It is true for exporting water. It is true when the air we breathe is considered to be a world-market commodity. It most definitely is true when we export electrical energy.

When we export anything, we no longer worry about the cost of production and reasonable profit margins, we then must worry about whether we at home, where the commodity to be exported is being produced, can afford to pay the world price for that commodity.

If our costs of living were to be lower than the average cost of living in the expanded market, we would come out ahead. Our lower living costs would give us an advantage. However, our living costs are *higher* than the average living costs in the expanded market to which we intend to export electrical energy.

We pay more in taxes. We pay more for heating. mainly because we must on account of the cold climate in which we live. We pay more for electricity because we consume more of it per capita on account of our climate and geographic location (after all, we have only eight hours of sunshine on a winter day).

We import much of our food and many consumer goods because they are cheaper to produce elsewhere, even if we take into account the cost of transporting them to the point of consumption. We pay more because of the large distances involved in obtaining and transporting consumer goods and services. That is a function of our low population density. Most of all, our dollar buys on average far less than the American dollar does.

table with population figures for various countries

We could theoretically still break even, overall, if we were to pay only for the costs of producing, transmitting, delivering and selling the electrical energy we consume, but that is not the intention of Murray Smith and the Alberta government. They want the Alberta consumers to pay for the cost of transmitting power to the USA.

That will be a great advantage to the producers of electrical energy. It will be an enormous handicap to Alberta consumers. It will be a greater handicap yet to rural consumers in Alberta. It should be the consumers in the markets into which we export electrical energy whom must pay for the cost of producing and delivering the energy that is being delivered to them.

Is the Alberta government intent on "putting money back into the pockets of Albertans"? Not at all. The Alberta government is intent on having Alberta consumers pay for the ability of increasingly foreign-owned energy producers operating in Alberta to sell electrical energy in the USA.

"Deregulation" already more than doubled our power bills, even though our population numbers didn't grow that much by a long shot. The increase happened overnight, not gradually, and Alberta consumers presently have to live with the highest prices for electrical energy in all of Canada. Paying for the cost of a billion-dollar transmission line from Fort McMurray to Calgary (and then to the Canada/US border) will increase the bottom line on our power bills, and it won't be the last increase we will see. The investor-owned utilities have us over the barrel because our government no longer looks out for our interests but promotes those of the increasingly foreign-owned energy producers in Alberta.

The "Alberta Advantage" is anything but that for rural Albertans.

Walter Schneider

Director, AFREAs District #7


Posted 2003 05 06