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Insecure power supplies in Alberta boost private profits

Province should heed failure of electricity deregulation.

Acuña: Companies have no incentive to raise generating capacity, which only reduces prices, Ricardo Acuña for Vue Weekly

July 18, 2012: Back in 2002, the front page of the Alberta Energy website boasted, "Alberta has deregulated its electric industry to develop a competitive market for power generation and electricity services that will benefit consumers across the province." Ten years later, Alberta's electricity customers are still waiting for those benefits to materialize. This is especially the case after a perfect storm of spiking demand and failed generators resulted in rolling blackouts through Edmonton and Calgary last week, and will also result in some hefty power bills for the same period.

Alberta's Electricity System Operator (AESO) ordered the blackouts after four coal-fired plants and two gas-fired plants went down at approximately the same time on the afternoon of July 9, the hottest day of the year thus far in most parts of Alberta. The plant failures resulted in there being significantly more demand in Alberta than there was supply, so the blackouts were necessary to avoid complete disaster.

  "Deregulation of Alberta's electricity market has resulted in an incredibly flawed system which actually encourages reduced supply for the sake of increasing profits to power companies."

Although the blackouts were short-lived, and were more of an inconvenience than a crisis for most people in affected neighbourhoods, they did raise a significant number of questions about Alberta's electricity market.

Wildrose MLA Joe Anglin articulated the thoughts of many Albertans when he suggested that six plants going offline just as demand was peaking seemed "suspicious". He equated it with driving down the highway and getting four flat tires at the same time for completely unrelated reasons. Anglin's suggestion, of course, was that this was no accident and that there may have been price manipulation going on by some of Alberta's electricity companies.

Despite assurances from Energy Minster Ken Hughes and the AESO that there is nothing to suggest market manipulation, Albertans cannot be blamed for being wary. Just last fall TransAlta Corp admitted to manipulating the market by blocking cheaper hydroelectric power from BC for 31 hours, creating an artificial shortage and a spike in prices. That event alone cost Albertans an extra $5.5 million in inflated electricity costs. Many will also recall the degree to which Enron manipulated prices in California for years by purposefully creating shortages. It's hard to imagine that there could have been that degree of collusion among power companies in Alberta, but it is definitely worth an investigation.

The bigger issue is that, even without outright manipulation, deregulation of Alberta's electricity market has resulted in an incredibly flawed system which actually encourages reduced supply for the sake of increasing profits to power companies.

Since Ralph Klein deregulated the market in 2001, electricity prices in the province have been set on a spot supply and demand basis. What this means is that the power companies make the most profit when tight supply and high demand result in increased prices. The result of this dynamic is that there is absolutely no incentive for power companies to increase their generating capacity, as adding more electricity to the system will only serve to reduce prices and, consequently, profits. Because we currently only have about seven percent excess capacity in Alberta today, compared to 18 percent in the early 90s, we are always on the brink of having demand outstrip supply — a situation which is great for the producers, but not so great for consumers. This is why prices have only moved in one direction since regulation.

On July 9, the pool price of electricity spiked from $11 per megawatt hour (MWh) in the morning to $1000 between 3 pm and 6 pm (it would have likely climbed higher, but the government caps prices at the $1000/MWh rate). Because there was no difference in what it cost to produce the electricity in the morning as compared to the afternoon, it becomes clearly evident how supply shortages benefit the power companies and how the system hurts Albertans.

With deregulation, Alberta has gone from having some of the lowest electricity prices in the country to some of the highest, which not only hurts Alberta families, but also damages the competitiveness of Alberta businesses. At the same time, our supply is less secure than ever and there is no interest from the power industry in making it more secure. The only ones who have seen any benefits at all from deregulation are the power companies who have been making record profits for the last 10 years.

Before the election this spring, Premier Redford promised to set up an independent panel, which would see if there is a way to "reduce volatility and costs" of electricity in the province. The reality is that we don't need more studies, review panels, reports or investigations to confirm what everyone in Alberta already knows: electricity deregulation in Alberta has been a complete failure and it's time to reverse it. Hopefully the events of last week will finally convince Ms Redford of this reality.

Ricardo Acuña is Executive Director of the Parkland Institute, a non-partisan public policy research institute housed at the University of Alberta.

Links and sources
  Power to the people? Alberta's deregulated electricity market may have proved itself a failure.

Posted: August 01, 2012

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