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Deregulating the Electrical Energy Industry

In order to understand deregulation, it is necessary to briefly explore the history of ownership and regulation of the electric industry in Canada and the United States:

• Originally, groups of private investors controlled the ownership and production of electrical energy in both the United States and Canada.
• Over time, electrical energy came to be considered as a natural monopoly, where economies of scale and the importance of electrical energy led to public ownership of most generation facilities.
• In most cases public ownership was at the state or provincial level. In Canada, with the sole exception of Alberta, this was accomplished through the formation of Crown corporations, such as BC Hydro.
• The end result was vertical integration, where one utility generated, transmitted, and distributed electricity within a certain area.
• The utility had a monopoly over electrical production and distribution in a given area. Customers were unable to choose between different energy providers.
• The vertically integrated companies operated primarily under state or provincial regulations.
• However, in the United States, authority over the wholesale electric market was given to a federal agency, the Federal Energy Regulatory Commission (FERC).

Deregulation: What is it?

Here are deregulation's basic features:

• Instead of vertical integration, generation, transmission, and distribution are unbundled, so that a different company handles each process. This is a necessary first step to allow for competitive pricing in the area of electrical generation.
• The electrical generation market is available to a large number of players, with price competition between them.
• Power is bought and sold through a Power Pool. Basically, a power pool is a market place for the buying and selling of electricity. Both the cost of generating electricity and market forces plays a role in determining the price.
• On the other hand, to ensure reliable access, the transmission of electricity is still treated as a monopoly and handled by one company. There may or may not be competition in the distribution of electricity.
• In the case of publicly owned electrical companies, ownership is often, although not always, returned to the private sector.
• Experts argue that the term deregulation is misleading and that “restructuring” would be more accurate, since governments are still involved at some level.

What Brought About the Move for Deregulation?

Rising energy costs were a large factor behind the push for deregulation. In states such as California, prices rose dramatically during the 1980s, as vertically integrated companies tried to recover the cost of building generating plants featuring older, expensive technologies such as nuclear power. At the same time, the cost and the fact that there was an energy surplus meant these companies were reluctant to build new plants.

As prices rose, industries and companies with high electrical needs began lobbying local governments for deregulation. With excess electricity available and newer, cheaper technologies being developed, it made less sense to think of electricity as a natural monopoly. Business and industry believed that they would be able to purchase energy more cheaply if they were able to choose between several energy providers in a competitive market.

Another impetus for deregulation came from the recent trend in North America toward privatization. For pragmatic and ideological reasons, state and provincial governments have been offloading services they previously performed to the private sector. The most famous example of Canadian privatization is former Ontario Premier Mike Harris' “Common Sense Revolution”. In 1995, Harris ran on a platform of privatizing everything from the delivery of certain health care services to the sale of liquor. The lynchpin of his privatization strategy was to sell Ontario Hydro, Canada’s largest supplier of electrical power. (His successor, Premier Ernie Eves, was subsequently forced to abandon the plan after it was successfully challenged in court).

Why Deregulate?

In general, proponents of electrical deregulation hope to gain some or all of the following benefits:

• Cheaper electricity rates for customers through competition, particularly industry and larger businesses who purchase wholesale electricity
• Improved service for some customers through competition
• Greater freedom for customers choosing between different types of energy, including environmentally friendly technologies such as solar energy and wind turbines
• Prevention of companies that gain market power by lowering the price of generation and making up for it by raising the cost of transmission and distribution, which can happen when the three systems are bundled together

Wholesale and Retail Access

An important deregulation question to consider is whether or not to include retail access. Under wholesale access, a number of generators compete to sell wholesale electricity at market prices to distribution companies, independent marketers, and large consumers. This has little impact on the general public, as electricity is still sold to end-use consumers through one distribution company at regulated rates.

Under full retail access, customers can purchase electricity from a number of retailers, and the price is no longer regulated. However, there is no actual competition between physical distribution systems. For example, in Calgary, end-users have the option of purchasing electricity directly from a distribution system (Enmax), or from a marketer who has purchased electricity from a producer and pays Enmax a fee for using their distribution wires. To persuade customers to switch, marketers offer benefits such as a guaranteed rate for a specific period of time, giving the customer protection if energy prices soar.

Several Canadian provinces have implemented wholesale access. However, only Alberta and Ontario have implemented retail access.

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Electricity Deregulation in Canada: The Alberta Scenario