Electricity consumers can expect price hike

After mysteriously holding the report under wraps for nearly six months, the Alberta government finally released

After mysteriously holding the report under wraps for nearly six months, the Alberta government finally released the Retail (Electricity) Market Review Committee’s report to the public on Jan. 29.

Upon releasing the report, the government accepted two of the report’s 41 recommendations immediately. They accepted 33 recommendations in principle, and rejected six recommendations outright.

The six recommendations rejected by the government all relate to the elimination of the regulated rate option (RRO). The RRO is the variable rate option to purchase electricity. The other option to purchase electricity in Alberta is a fixed rate contract with a private retailer. Roughly 65 per cent of all Albertans (including the minister of energy) purchase their electricity using the RRO variable rate option. It wasn’t surprising the committee recommended the elimination of the RRO given that one of the committee members has a financial interest in a private electricity retailer. It is appropriate, however, not to eliminate the RRO variable rate option. Consumers need choice if the market is going to work.

The 33 recommendations accepted in principle mirror many of the 2003 recommendations that were accepted in principle some 10 years ago. None of those recommendations was implemented and there is little reason to expect any will be implemented in 2013 either. For the most part, accepting recommendations in principle is this government’s way of saying, “Thanks, but no thanks.”

Of the two recommendations accepted immediately, the first recommendation is to remove the freeze on ancillary costs. Ancillary costs are all those extra costs added on an electricity bill over and above the cost of electricity. For most Albertans those costs add up to more than 50 per cent of the total bill. Prior to the 2012 election, the Alberta government froze ancillary costs and commissioned this market review to study those costs. Now one year later with the report’s release, there is little information in the report relative to any study of ancillary costs — or how to control those costs. Simply stated, after all is said and done, Albertans are now going to pay for 11 months of ancillary costs that have accumulated in arrears.

On the presumption that it will help reduce volatility, the second recommendation accepted immediately is to extend an electricity provider’s ability to purchase retail electricity to 120 days from 45 days. Energy Minister Ken Hughes claims this will mitigate or somehow reduce market volatility. This demonstrates that he and his ministry do not understand the market they are trying to manipulate. Consumers on a retail fixed rate contract have already eliminated retail market risk.

Those on the RRO variable rate are mostly unaffected by this government’s decision. Allowing retailers to purchase electricity out to 120 days may help retailers manage their business more efficiently but there is no guarantee they will pass along any efficiency savings to consumers. Hughes’ decision will most likely help the bottom line of electricity retailers but it will have little effect on market volatility.

The wholesale market, also known as spot market, is the primary cause of market volatility and the minister and this report do not address that issue. The wholesale market is traded hourly where prices can fluctuate by 1,000 per cent or more in a matter of minutes. Wholesalers (generators) cannot sell their electricity beyond the hourly limitation. This leads to allegations that companies manipulate prices by shutting off generators and/or employing other nefarious tactics.

To correct this problem, the solution is to simply allow generators to compete to sell their electricity on the spot market at least 24 hours or even 48 hours in advance. This is called day-ahead firm pricing and it would transfer the wholesale market risk from consumers to the generators. Generators contracting in a day-ahead firm pricing market would be responsible for delivering their electricity at the prescribed hour for the price contracted. Consumers would not suffer all the risk.

The Retail Market Review Committee was a dud.

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