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1 The case of Alberta Lessons and Reflections ***** Raymond Lee (July 6, 2014)

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1 1 The case of Alberta Lessons and Reflections ***** Raymond Lee (July 6, 2014)

2 2 Questions of “W”?  Why Alberta opened its markets?  When Alberta de-regulated its market?  Who were involved in the market de-regulation?  What have happened since the market opening?  What did we learn?  What could have done better in Alberta if we can start it over?

3 3 Why Alberta opens its market? Pricing disparity between customers who live in the northern part vs. southern part of the province: –Power companies (privately owned and crowned owned) have their own turf to serve. –“Take it or leave it electricity service” - customers were refrained from selecting a new provider unless customers move into other city or town. Better control/manage on generation addition costs –Historically, costs of new generation addition were borne by all customers, utilities tend to over build. –Generation hearings took long time to complete and very costly. –Market driven on generation addition rather than purely rely on utilities’ decision – market prices to determine the need

4 Why Alberta opens its market (cont’d) ? Unbundled electricity prices to better reflect the cost of service –Transparency on electricity pricing (e.g. customer knows more on cost components such as fuel cost and delivery cost). –More billing information appears on the bill, e.g. peak demand and electricity consumption data. Enhance customer choice –More Options to select electricity supplier (similar to mobile phone provider). –Flexibility of pricing plan for customer to select (e.g. lock-in contract at fixed rate, e.g. 3, 4, 5 years term) –Contract is portable with the customer. –Customer without contract remain at the regulated rate option, which is so called a “flow-through rate”. 4

5 Spinning off energy related business opportunities –Invest on retailing services to attract customers, creating competition among retailers, e.g. furnace/AC upgrade program. –More innovation for conservation and/or load management on energy use, e.g. light bulbs exchange/replacement program. –New generation opportunities, e.g. distribution generation; micro-generation initiative (solar panel manufacturers). –New technology used for meter data capturing to replace manual reads, more efficient, accurate and cost savings. –Smart grid initiative. Independent power producers and power marketers wanted to participate both generation and retail –Selling exceed electricity to other customers and flexibility for interconnection –Fair market prices for electricity generation. 5 Why Alberta opens its market (cont’d) ?

6 When Alberta de-regulated its market? De-regulation could not occur over-night! The Government of Alberta has a long history of being governed by the Progressive Conservative (PC) government. In early 90’s, the PC administration initiated a policy review of the Alberta’s electric industry and with stakeholder consultations for more than three years. In 1995, the government passed the Electric Utilities Act (EUA) through legislation. The inception of an independent agency called Power Pool provided a trading platform of selling and purchasing electricity. 6

7 7 Steps to de-regulation (re-structuring) … Electric Utilities Act (EUA) Passed – energy traded through Power Pool May 1995 June 1995 Jan 1 1996 June 1998 Aug 2000 Jan 1 2001 Power Pool (PP) Council formed EUA takes effect Power Pool begins operation, wholesale market starts. Amended EUA to allow retail competition. Appointed Independent Transmission Administrator (TA) and Market Surveillance Administrator (MSA) Gov’t auctions Power Purchase Agreement (PPA) of the generation output Open Retail competition Summer 2003 Alberta Electric System Operator Model (AESO) – Combine TA and PP into one organization Jan 1 2008 Alberta Utilities Commission (AUC) is formed, based on the Commission Act.

8 Who were involved in the market de-regulation? Electricity de-regulation is NOT a one-man show. Government must take a leadership role. Formation of independent agencies to –setup clear market rules, clarify roles and responsibilities –administer and operate the markets –compliance monitor –rule enforcement Stakeholders’ involvement and collaboration. 8

9 9 Alberta Market Players: Government (Energy Department) Through an Act/Regulation, forming an impartial regulatory body (e.g. Utilities Commission, Market Surveillance Administrator) to oversee utilities businessAct Wire CompaniesRetailers Customers Transmission Companies Generation Companies ISO

10 10 Policies setting Broad public consultations Legislative Assembly debates Royal consent to pass Act/Regulations (Law) Government’s Roles and Responsibilities:

11 11 Utilities Commission Roles and Responsibilities: 1.Commission is an independent, impartial, quasi-judicial agency of the Government 2.Development and assurance of rules related to the operation of electricity retailing market 3.Oversight of ISO rule making process 4.Adjudication of enforcement issues 5.Review and approval of utilities’ facilities 6.Review and approval of General Rate Application (GRA) 7.Conduct negotiated settlement and public hearings, if necessary 8.Rule Making (e.g. Settlement System Code, Micro- generation Rule) 9.Rule Enforcement (e.g. Impose penalties on contraventions

12 Market Surveillance administrator (MSA) Monitor Alberta’s electricity and natural gas markets to ensure a fair, efficient and openly competitive manner Bring forward cases of “wrong doing”, “prices fixing”….etc. to the Commission for compliance enforcement. 12

13 13 ISO’s Roles and Responsibilities 1.Transmission planning –New/upgrade of transmission lines –Sizing, location and timelines 2.System Operations –System reliability, including inter-connection tie –Energy management system (e.g. dispatching sequence…) 3.Market operations –Pool price setting –Financially settling the energy market among generators, distribution companies and retailers

14 14 Generation Company –Resources planning –New plant addition Transmission Company –Transmission planning (tower location/routing) –New lines addition Wire Company –Distribution planning –Wire business –Metering functions –Load settlement agent functions Retailing Company –Retailing electricity –Pricing scheme to attract customers –Billing customers Other Market Players’ Roles and Responsibilities

15 What have happened since the market opening? 1996 to 2000, only wholesale market was opened. The bids and offers process took place allowing electricity to be traded on an hourly basis. Power companies were selling electricity and purchasing electricity for the customers within their own turf. In 2000, traditional vertically integrated utilities were segregated into domains of “generation, transmission, distribution and retail.” Most people hear the term “electricity de-regulation”, they assume that all aspects of electric utilities are un-regulated. In reality, only the generation and retail aspects are un- regulated. Transmission and Distribution companies are still regulated under the Commission. 15

16 What have happened since the market opening? (Cont’d) On the generation side: –More than 2000 MW of new generation (mainly gas fried) capacity were added to the province. –New wind generation capacity of 600 MW were added and was concentrated in southern province. –Several new transmission lines were added. A new 500-kV line running from north to south is under construction and expected to be fully operational in 2005. –Renewable energy initiative (Micro-generation Regulation) allows customers to generate own electricity to meet their needs and sell back excessive electricity to the grid. 16

17 What have happened since the market opening? (Cont’d) 17 On the retail side: –More than 60 new retailers were added to the province. –Consumers living in Alberta have choices to pick or switch electricity supplier. –Around 46% of the total customers (1.3 million) has signed electricity fixed rate contracts (e.g. 7 cents/kWh). –Retailers offer more energy service options: e.g. energy audits/ furnace cleaning/security monitoring, renewable energy equipment installations (e.g. solar panel rentals…etc.). –Bundling gas and utilities to one energy supplier and receiving billing credit. –Large consumers can purchase electricity directly through AESO

18 What have happened since the market opening? (Cont’d) During retail market opening, electricity prices were up significantly due to supply shortage. Government issued electricity subsidy ($40/month) instead of putting price caps. It was proven subsidy is more effective than price caps as no government direct intervention to the markets. Pool prices relatively stable thereafter. In a response to high electricity prices, new generators were added. 18 Historical Pool Price ($/MWh) 2000200120022003200420052006200720082009201020112012 2013 Average pool price 133.2271.2943.9362.9954.5970.3680.7966.9589.9547.8150.8876.2264.3280.19 On-peak average pool price 72.5253.1428.4746.8864.0385.35101.4184.37112.9758.0462.99102.2284.72106.13 Off-peak average pool price 181.0885.5156.0464.5335.7240.3739.5432.1143.9227.3626.6724.2223.5128.29

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20 What did we learn? 20 Phase-in approach: –Start from wholesale market followed by opening retail market. Do not open all markets at once. –Allow time for stakeholders to fix “bugs” and correct issues. –Allow time for consumers to understand and absorb changes over time. –Consumer awareness and education (web-site, TV ads, booklets…etc.). Most consumers anticipate electricity price will drop significantly when the industry is de-regulated – an incorrect concept!

21 What did we learn? (Cont’d) Government takes leadership role. –Stakeholder consultations and dialogues. Set up task force or working group to provide recommendations. –Pass act or legislation granting power to implementation agencies. –Chart out a timeline and set goals for re-structuring and the expected deliverables from agencies. No hidden agenda. –Establish agencies to implement policies or regulation. –Don’t interfere agencies processes. Let the experts handle all issues. –Don’t amend or change policies or regulations frequently, stay on course. 21

22 What did we learn? (Cont’d) Regulatory agencies (ISO,Commission..etc.) must understand the mandates and to: –write clear market rules and ensure rules are doable; –clarify roles and responsibilities for all market players; –take a leadership role and setup effective market compliance monitoring and enforcement; –protect public interest and maintain same level playing field for all players to ensure no gaming; – Consider how to meet the need of vulnerable customers during the re-structuring process; –Impose penalty to contraventions. 22

23 What did we learn? (Cont’d) Huge IT involvements – IT systems play a major role in electricity re- structuring, especially on: Electricity trading – offers and bids (merit order) Customer and billing information Metering data history Load settlement calculations How to deal with customers with no interval meters? – Cost of replacing interval meters. – Load profiling approach with valid sampling. – Deemed profile for streetlights, traffic lights…etc. – Clear rules in running load settlement calculations. 23

24 What did we learn? (Cont’d) Electricity re-structuring is NOT a “one-man” show project! – all stakeholders need to contribute and work toward the set goals. – team approach is vital! – Not afraid of change and stay on course. No jurisdictions can be held up as “MODEL” of best practices. “Cookies cutter” approach is not recommended. – factors such as customer mix, political climate, government in charge….etc. certainly drive different results of the de-regulation. 24

25 What could have done better in Alberta if we can start it over? It would be more effective and efficient if we could –centralize load settlement functions into one zone –centralize metering data repository –centralize customer information in a single repository –phase-in smart meter installation –have more IT work done up front More consumer awareness and education programs during the re-structuring period. Get more on-going stakeholder dialogues and make sure rules are doable. 25

26 External review of the Alberta’s market 26

27 27 Questions/comments? Raymond Lee, Senior Advisor, email: Phone: +1-403-592-4442 Issues of electricity de-regulation!

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