Alberta’s Retail Market Design – Need for Refining and Updating

By Larry Charach
Strategic Results Consulting Inc1

The Alberta electricity market has been open to customer choice for 23 years, but the current retail market design needs updating due to challenges in the sector. Problems from the market’s opening in 2001 were addressed, but new issues include limited access for some consumers, high costs for independent retailers, and volatility in prices.

Introduction

The Alberta competitive model for customer choice through electricity retailers is entering its 23rd year. However, the retail market design requires updating and reforms to meet current adverse conditions resulting from the challenges facing Alberta’s electricity sector.

The opening of the retail market in January 2001 was fraught with issues around billing errors, complex bills that many consumers did not understand, and a price cap that led to rate riders for some consumers increasing their power rates in subsequent years. In contrast, the growth in supply and pricing of generation worked as expected, with average pool prices declining from $253/MWh in October 2000 to an annual average of $57/MWh over the first 20 years of deregulation.

“In 2023, the RRO does not provide long – term, predictable, stable, and affordable electricity rates. The government should consider options to ensure that all Albertans have access to the competitive retail market.”

Over the last couple of years, Power Pool prices have spiked, resulting in increased RRO prices. Moving off the RRO and signing up with a competitive retailer is a viable choice for most consumers. However, the retail market regulations are outdated and must be restructured to meet the needs of the market.

The retail market issues that occurred with the opening of the competitive retail market in 2001 were resolved by concerted government action, including new regulations and a joint government/industry 2022 Task Force on Electricity Billing Issues, which I co-chaired.

Today’s challenges in the retail market are different, including:

  • The retail market is not available to some consumers who cannot meet the retailers’ credit requirements.
  • A critical non-level playing field issue for retailers not linked to a Wire Service Provider (WSP) is the onerous cost of doing business by being required to post a security prudential deposit. The deposit equals 45 days of the customer’s total utility bill. Essentially, this is an interest-free deposit for the right to provide retail services to customers in each of the WSP’s territories. This puts independent retailers at a competitive disadvantage and negates the ability of some retail companies to offer consumers the promise of unencumbered consumer choice.
  • Regulated Rate Option (RRO) retail prices are exacerbated by the volatility and record-high Power Pool prices being experienced in Alberta’s wholesale market.

Previous Government Studies on Reforms to the Regulated Rate Option (RRO)

The Alberta government initiated a Retail Market Review Committee in September 2012. The Committee’s task was to analyze the default RRO rate and determine if it was still needed, and if so, how it should be designed, delivered, and what its purpose should be. The RRO regulation was due to expire in 2014. The Committee recommended that retiring the default rate and replacing it with a “provider of last resort” service was in the best interest of Albertans. That recommendation was not accepted.

In 2017, the Energy Minister requested that the Market Surveillance Administrator provide a report with options for enhancing the design of the Regulated Rate Option to provide long-term, predictable, stable and affordable electricity rates with minimized regulatory and administrative costs. That report did not result in any significant changes to the RRO regulation.

2023 Government Mandate Letter to the Honourable Nathan Neudorf, Minister of Affordability and Utilities

A March 2023 Government Announcement and the July 19, 2023, Mandate Letter to the Honourable Nathan Neudorf, Minister of Affordability and Utilities, include (emphasis added):

  • Reviewing Alberta’s electricity pricing system with the goal of reducing transmission and distribution costs for Albertans.
  • Addressing the cost of utilities for Albertans by exploring the potential phase out of the regulated rate option for electricity and otherwise protecting consumers from spikes in electricity and natural gas prices, while ensuring Albertans continue to have a competitive range of provider choices within those markets.

Clearly, in 2023, the Regulated Rate Option does not provide long-term, predictable, stable and affordable electricity rates, and it is time to update the previous reviews with follow-up actions.

Recommendations

  1. Alberta Electric System Operator’s (AESO) Market Pathways initiative to develop recommendations for a significant market design update is critical and timely. It is time to update the previous RRO Reports/Recommendations to reflect the current situation with follow-up actions.
  2. In 2023, the RRO does not provide long-term, predictable, stable, and affordable electricity rates. The government should consider options to ensure that all Albertans have access to the competitive retail market. A government-backed credit backstop is one option to consider.
  3. The prudential requirements were put in place prior to the opening of the competitive retail market. At that time, there were concerns about the sales approach of some of the new retailers. It wasn’t until 2008 that independent retailers became significant. UTILITYnet entered the electricity market as a small local retailer of electricity and launched Spot Power. This was followed by the growth of small regional retailers that now include an innovative network of over 32 Community Energy Marketers across Alberta being supported by UTILITYnet, in addition to another half dozen independent small retailers. (For a complete list, visit the Utility Consumers Advocate website.) It is timely to review the prudential requirements and create a level playing field for all Alberta retailers.

[1] From 1986 to 2003 Larry Charach headed the Alberta Government unit responsible for dealing with electricity policy issues.   Since his retirement from government in June 2005, he has consulted  (http://strategicresultsconsulting.com) for the public and private sector on a number of policy and regulatory issues mainly related to the energy industry in Alberta. His current clients include UTILITYnet who commissioned this article