Energy Market Regulation in Alberta
Both Alberta's retail residential electricity and natural gas markets are currently deregulated, and Albertans now have a choice of who provides their energy supply. But how and why did the electricity and natural gas markets in Alberta evolve into what they are today?
Electricity
The electricity market in Alberta is unique in Canada in that the province has never owned or operated a utility that served the province as a whole. It is also different to many other deregulated electricity markets because generators are paid only for the energy that they deliver onto the grid, and not for their capacity. How did the Alberta electricity market evolve into what it is today?
A Short History of Electricity Market Regulation in Alberta
Electricity service in Alberta first developed at the community or municipal level, often as vertically-integrated companies that were responsible for the entire chain of electricity supply from generation to distribution. Three major vertically-integrated utilities came to dominate electricity service in the province (TransAlta, ATCO, and Edmonton Power - now EPCOR), with each utility responsible for a specific service area. Municipally-owned utilities and rural electrification associations (REA) served the areas that were outside of the territories of these three companies. Their prices for electricity and rates for service were regulated by the Alberta Public Utilities Board, which was created in 1915 and is now known as the Alberta Utilities Commission (AUC). Until deregulation, electricity rates were set using a cost-of-service approach.
Alberta began to transition away from a traditional regulated electricity system and towards a competitive market in the 1990s. During the 1980s and 1990s, the central regulation system seen to have encouraged over-development of generation capacity and an inefficient electricity pricing system. Recent advances in transmission technology at the time also meant that vertically-integrated monopolies were no longer necessary for providing every step of electricity service, and opened the possibility opening up sections of the electricity systme to market competition.Deregulation was chosen as a way of reducing the costs of electricity regulation and to make generation investments a market decision (as opposed to a political one).
In 1996 the Electric Utilities Act restructured the electricity system in Alberta. Under it electricity generation was deregulated and open competition was introduced. This meant that the electricity market was open to investors to build and operate their own generation facilities. It also introduced the possibility for open access to transmission lines, which was a first step towards allowing retail competition. The Electric Utilities Act also created a market in which electricity in the province was to be bought and sold, called an open-access Power Pool. The introduction of the power pool meant that - for the first time in Canada - electricity prices were established through market forces.
Further amendments to the Electric Utilities Act required retail competition in Alberta's electricity markets to begin in 2001. This allowed Alberta consumers to shop for electricity, and to choose an energy provider based on the price and service terms that best fit their needs. Customers had previously bought their electricity from their local municipality or rural electrification association, or from one of three large utilities (ATCO Electric, EPCOR, or then TransAlta). With the opening of the retail electricity markets these large utilities were obliged to split up their activities into several companies, or sell off certain assets.
At this time a "default" rate was established as part of a transitional period to allow consumers to get used to this new system. This default rate is now known as the Regulated Rate Option (RRO). When it was first introduced the default rate was based on long-term price estimates, and was relatively stable. However, with time - and in order to encourage the growth of the retail electricity market - it was changed to closer reflect market prices. In 2006 the default rate was replaced by its current incarnation, the regulated rate option (RRO). Like the default rate, the RRO is in theory meant to be a temporary measure, and was intended to be implemented for a limited amount of time. In reality, however, the RRO has been extended every time a decision about its existence has to be made. It was most recently renewed at the end of 2013, and will continue until April 30th, 2018.
The Government of Alberta has continued to pass further legislation supporting the development of the competitive retail electricity market. A 2003 amendment to the Electric Utilities Act introduced the Alberta Electric Systems Operator (AESO), which operates the wholesale electricity market. The Alberta Utilities Commission Advocate (UCA) was also launched in 2003, in order to educate and represent the interests of Alberta energy consumers. In 2008 the Alberta Utilities Commission (AUC), the main regulatory agency for Alberta electricity and gas markets, replaced the Alberta Energy and Utilities Board. It continues to regulate electricity rates for RRO providers, as well as electricity transmission and distribution rates.
Did you know?
Approximately 1 in 3 Albertans have chosen to get their electricity supplied from a competitive energy provider.
Natural Gas
A Short History of Natural Gas Market Regulation in Alberta
Did you know?
Natural gas was discovered in Alberta in 1883 in what is today Alderson
Natural gas was discovered in Alberta at the end of the 19th century, though it was not until later that the commodity was developed extensively. Similar to the development of the electricity industry, natural gas distribution first developed at the community and municipal level. In fact, the first natural gas utility in Alberta was established in 1901 in Medicine Hat. Throughout the 20th century, two vertically integrated companies owned and operated most of the gas transmission systems in Alberta (they merged to form ATCO Gas and Pipelines Ltd in 1998).
During the 1960s and 1970s, the federal government was fairly involved in regulating energy policies in Canada. Energy was seen as a highly strategic resource, and at the time thought that it needed to be protected from the open market. The majority of natural gas pipelines throughout the country were owned and operated by the TransCanada Pipeline Ltd., with companies operating at the provincial/regional level to provide local distribution and supply.
This system began to change in the 1980s, and the natural gas market in Alberta began to open to market competition. Transmission pipeline policy changes were made so that some consumer companies had access to the distribution pipelines of the two major utilities in the province (Northwestern Utilities Ltd and Canadian Western Natural Gas Co. - now ATCO Gas). Some of these companies were large industrial plants that wished to purchase their supply directly from gas producers, at better rates than what was offered by their utility. At the same time, gas consumers outside of the province were also seeking direct access to producers. These pressures for a separation between transmission and supply led to utilities and regulators working together to establish a new system, in which eligible customers were given access to pipelines but could make their own arrangements for acquiring and shipping their gas supply.
At around the same time as these provincial changes were taking place came a new direction in national energy policy. Before 1985, natural gas prices in Alberta were set by agreements between the provincial and federal governments. This changed with the Agreement on Natural Gas Markets and Prices, signed between the federal government and the provinces of Alberta, British Columbia, and Saskatchewan. This agreement introduced market competition in natural gas prices for the first time in Canada, and by1986 natural gas prices were set by agreements between buyers and sellers. While at first only large-volume producers had choice in purchasing their natural gas supply, Alberta legislation passed in 1990 began the process of developing a competitive gas supply market for residential and small commercial customers.
Further legislation promoting the development of a retail market for natural gas for all Albertans was passed in 1995, and after several inquiries at the beginning of the 2000s, the Gas Utilities Act was amended in 2003 to allow for retail competition for natural gas. The Act allowed for competition in the retail market for natural gas in Alberta, but through the Default Gas Supply Regulation it also provided for a default regulated rate for Albertans who did not wish to purchase a contract for their supply. Since 2004, therefore, Albertans have had a choice of who supplies their natural gas.