Dr. Swann Debates Bill 16 – An Act to Cap Regulated Electricity Rates (Second Reading) – 24 May 2017

Taken from the Alberta Hansard for Wednesday, May 24, 2017.

Bill 16 – An Act to Cap Regulated Electricity Rates (Second Reading)

Dr. Swann: Thanks, Mr. Speaker. I’m pleased to speak to Bill 16, An Act to Cap Regulated Electricity Rates. I think it’s important to call it what it is. A cap suggests that there’s a limit. Indeed, the government is putting a limit on what people will pay in the short term, but clearly they’re hiding the real price of electricity from consumers when it goes over 6.8 cents.

When it goes over 6.8 cents to produce, somebody’s going to have to pay it. So why not be honest with people? Why not send them the true price of electricity so that we will all change behaviour if we need to? We will start to look at more efficient appliances. We will start to look at different ways of using our electricity and, potentially, make the changes they say that we’re needing to make instead of hiding it and passing it on through taxes and through, I guess, whatever’s left of the carbon levy, although it’s been relegated to so many different areas, I’m not sure how that will go.

Frankly, Madam Speaker, it’s disingenuous to pretend that we’re actually going to protect people. If we really are trying to protect vulnerable people from high electricity prices, help them financially, those who need the help, but don’t fail to give Albertans the true cost of our electricity. That, I think, troubles me as much as anything because we’re already racking up other debts, but here we’re hiding a debt instead of being honest with people about where we’re going with this.

Since 2001 Albertans have been able to choose to receive their electricity either from a retailer that’s regulated by the AUC or from a competitive retailer. The regulated rate option was established to provide a default option for consumers who decide not to choose a competitive retail product. To be clear, the regulated rate option does not ensure a single low rate; rather, rates change from month to month depending on the real price of power.

In 2006 the regulated rate regulation was changed to encourage customers to switch to competitive retail products and foster devel-opment of the competitive retail market. But retail statistics from the Alberta Market Surveillance Administrator indicated that as of last year about half of residential customers had switched to competitive contracts and half remained on the regulated rate option. That means that despite the availability of the product from competitive retailers, consumers did not choose that option. Fair enough. However, the problem with the current regulated rate option is that it actually leads to higher electricity costs for consumers.

When the electricity market was deregulated, the promise that was made was one of low energy costs and reduced price volatility. However, the deregulated market clearly did not deliver that in all cases. Something definitely needs to be done. In fact, over the many years that I’ve served here as MLA, one of the most frequent concerns of constituents was the high cost and volatility of energy bills. Clearly, the default option for electricity needs to be afford-able and protect consumers, but it also has to send an honest price to people so that they can change their ways.

I support the government’s efforts to create a market for renew-ables and diversify our electricity generation. However, simply putting a cap on the regulated rate option is not the answer. It could potentially, I believe it will, cause serious problems down the line, as prices inevitably increase with all of our expensive new infrastructure. Consumers should always have a price reference based on the actual costs in order to make efficient and effective consumption and investment choices. If energy costs are deemed to be too high, vulnerable folks can be reimbursed with rebates and subsidies, but we should never mask the true price signal. Otherwise, we could end up moving much closer to Ontario’s reality.

A price cap will not reduce the cost of electricity. It merely defers payment to another pocket, to our children, to our grandchildren. It will undoubtedly have a negative impact on the viability of the competitive market. It basically sends the wrong message to real competition and incentives for people to build new stuff and to try and get into the game of producing electricity and getting some income in a business. As I said, it won’t change behaviour and it won’t change purchasing if we stifle the real price.

Funding the RRO from carbon revenue is the worst possible policy that the NDP government could have picked. The RRO retailers will continue to get what they always got, which is quite high revenue, but rather than reforming the RRO, which is what I suggested in Motion 502, the government took the political way out, hiding the real price from Albertans. The four-year time frame of the regulated rate option cap appears to be more about political expediency than fixing the system. The only change that happens is that the NDP government removes the risk of a price spike during the next election. I think that’s disingenuous.

The important question is: what is the NDP’s real motivation? It must be contemplating other changes such as turning back the PPAs to the owners, converting the coal plants to gas, which would significantly increase prices in the next four years. It has to because making these changes will be expensive. Fair enough. But let’s start paying it now and not pass it on to our children and our grand-children and take it out of a new tax. We’re going to have to start paying some of these extra expenses.

Specific recommendations that I think I’ve made before in relation to the regulated rate option. Number one, preserve and enhance the integrity and operation of some competitive retail. Most economists believe that competition rather than regulation has the best chance of achieving economic efficiency. I’m one of those. A competitive market will force down prices and encourage inno-vation and change behaviour.

Alberta has embarked on a program to restructure the electricity market by setting an objective of 30 per cent of renewable energy by 2030 and implementing a capacity market. I applaud that. A highly competitive retail market will help ensure that the benefits of changes in the wholesale market will be transferred to retail customers.

The second recommendation: preserve the ability of consumers to choose the retail service that best meets their needs. Don’t treat Albertans like ignoramuses. It’s very unlikely that a single product or service can meet the needs of all consumers, so let people choose what is best for them. It’s because of their interests, needs, and preferences that we have new businesses in Alberta who can meet some of the unique needs of every person.

Funding the RRO from the carbon revenue: I’ve said that already.

Electricity is no different from any other product. For example, some consumers prefer fixed prices and are willing to pay a pre-mium to eliminate volatility, some prefer variable prices to obtain the lowest costs, and some consumers simply don’t care and are price takers. That’s their choice. Consumer choice is a key feature of Alberta since it was regulated in 2001, albeit not as well as it could have been managed. I’ve made some suggestions about how the regulated rate option, in particular, could save people $12 a month if we did a flow-through option instead of the current approach.

It’s worth noting that consumers already have the ability to protect themselves from volatility and can choose a retail product that best serves their needs. The implications of the government’s strategy is that it eliminates the incentive for consumers to make any decision or to make any changes. That’s not really what we want. It makes consumers who don’t choose a competitive retail product for whatever reason into free riders. In other words, the regulated rate option people will get subsidized by the carbon tax if the price goes over 6.8 cents. The rest of us will be paying for those on the regulated rate option. Guess what people are going to choose? It unfairly penalizes consumers who have made the effort to educate themselves and try for more efficient, competitive retail options.

The third recommendation: drop the requirement that consumers should know the price of energy in advance of consumption. The RRO is based on the presumption that consumers should know in advance the price of energy before it’s consumed. While this is an important principle for virtually all other consumer products, it is not for the purposes of electricity prices. Electricity is an essential good that consumers cannot function without. I know of no consu-mers who can monitor the RRO price prior to consumption. As a result, consumers tend to be price inelastic and consume electricity regardless of price. Consumers tend to respond more to price trends and price spikes when making decisions about the purchase, management, and consumption of their energy.

The fourth recommendation: the RRO should be renamed the default rate option. The name of the RRO is a misnomer. RRO is not a regulated price in the traditional sense. Default rate is a more appropriate description and reflects exactly what it is, a rate that applies when consumers decide not to choose a competitive option.

The fifth recommendation: the default rate should be based on the pool price. As I spoke about in Motion 502, the pool price is the actual cost of power and ultimately is the price paid by consumers. All other prices are derivatives of the pool price. Because the pool price is the cost of power, it will tend to be the lowest price over time.

While other prices may be lower from time to time, particularly the forward price, the long-term tendency is for the pool price to be the lowest price because it represents the actual cost of power. The price differential between the pool price and the forward price fluctuates and is based on the time value of money and other factors related to varying perspectives amongst buyers and sellers concer-ning the future price. The spot power floating rate likely includes adjustments for its consumer load profile and other costs related to the risk of supplying the floating rate, and the RRO rate includes the risk and return premium that increases the cost of power.

There are many reasons supporting the use of the pool price as the default rate, but three reasons stand out. Number one, the pool price will tend to be the lowest cost over time. Number two, the pool price will serve as a benchmark. It will allow consumers to accurately compare the cost of energy products among different retailers. Number three, the pool price is the closest thing we have to a price signal that will guide consumers in terms of making effective energy efficiency decisions and policy-makers in terms of resource allocation in the Alberta energy economy.

The number one issue related to the use of the pool price as the default rate is the fact that it is the most volatile price. As I said, if it’s too volatile and vulnerable people need to be supported, then let’s support the vulnerable people. Let’s not compromise the whole system on the basis that volatility might compromise our most vulnerable.

Government has implemented two structural changes in the electricity market that will have a profound impact on reducing future pool price volatility. This will happen because the transition to renewable energy will likely be financed by capacity payments to cover the fixed cost of generation. As the reliance on capacity payments grows, it will change the composition of the pool price into a weighting of capacity payment plus energy costs. In effect, the pool price will be self-stabilizing and will substantially con-tribute to the realization of the government’s pricing objective.

One possibility that could accelerate the transition to a capacity market is the recent proposal by ATCO and TransAlta to convert coal-fired generating plants to natural gas. If adopted, this proposal would accelerate the phase-out of coal plants, thus achieving our transition to a low-carbon economy sooner than anticipated, but the method of financing this transition is still unknown. Using capacity payments for this has the benefit of providing a way to facilitate project financing that is acceptable to financial lenders. In addition, this will benefit consumers in terms of helping to stabilize the pool price.

The proposal is not without its challenges, however. For example, how will the capacity payment be determined in an environment where a fair competitive price might not be available in this particular instance? The capacity market will take time to develop. In the short term there are, fortunately, several very effective and low-cost ways of mitigating the volatility inherent in a pool price. Two of these methods are price caps and fixed prices.

A final comment on the use of the pool price flow through as the default rate is the significant reduction in regulation burden. The regulatory process surrounding the review and approval of the RRO is complicated and time consuming. It requires significant commit-ment by stakeholders, consumers, retailers, and regulators in terms of money and staff. Adoption of the pool price as the default rate will eliminate all of that requirement.

Madam Speaker, I am once again appealing to this government to reconsider eliminating all price signals to our people. It may not be a perfect system that we have, but let’s retain some element of the price signals so that people actually get real, honest feedback on how their use of energy is costing them and costing the environment in that sense. You don’t have to eliminate the deregulation comp-letely. You have the best of both worlds right now. By putting a price cap and not taking advantage of a different way of calculating the regulated rate option, I don’t think you’re getting what you want. I haven’t been able to get that through, but I hope the govern-ment is listening and will consider those options further.

Thank you, Madam Speaker.