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Deregulation in Canada
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
- 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).
In general, proponents of electrical deregulation hope to gain some or all of the following
- 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
Several Canadian provinces have implemented wholesale access. However, only Alberta
and Ontario have implemented retail access.