Alberta Power Auction Raises Mixed Reaction

Alberta’s final power auction of 2000 has done little to appease frustrated electricity consumers and sellers facing a barrage of rule changes on the brink of deregulation in January.

The two-day auction, delayed a week by software problems, grossed $2.3 billion from 45 bidders on approximately 2 800 megawatts of power left over from August’s Power Purchase Arrangement auction. The bulk was sold to marketers, according to insiders, with a shortfall of approximately 120 megawatts from unsold 2003 blocks.

Resource Development Minister Mike Cardinal hailed the auction as a success, netting proceeds of $1 billion for consumer rebates to shield them from rising electricity prices, with the remainder paying operating costs at the Sheerness, Clover Bar and Genesee power plants.

Industry had other opinions. Calling the proposed market situation chaotic and characterizing industry consumers as panicked, analysts slammed the provincial government for failing to safeguard the auction from bidder manipulation, and imposing new regulations that they say will further deter new generation from being built in power-constrained Alberta.

Bid prices went as high as $175 per megawatt for on peak generation from the gas-fired Clover Bar units, to a low of $61.15 per megawatt for base load generation in 2003 from one of the coal-fired plants.

"This is a colossal travesty," Dale Hildebrand, Optimum Energy Management Inc. vice-president said. "These prices aren’t real."

Although the purpose of the auction was to put the power back into the market, more than half of the energy from the Market Achievement Plan was purchased by marketers, Hildebrand said. Optimum Energy had foreseen rates averaging $55 per megawatt hour in 2001, from $45-$50 this year, based on supply and demand calculations. According to auction results, the weighted average for 2001 is $122 per megawatt hour.

Industry members allege deep-pocketed marketers made overpriced bids on the units, turning perception of high prices into a bitter reality for manufacturers hard-pressed to align soaring electricity bills with incomes that have remained level.

"There’s chaos in the marketplace, quite frankly," Dan Macnamara, executive director of the Industrial Power Consumers and Co-Generators Association of Alberta said. "Everybody is afraid of what the hourly prices will be. The rules are not clear and those that are clear are changing."

Less than a week before the auction, Premier Ralph Klein directed the Alberta Energy and Utilities Board to suspend current hearings with utilities on proposed rate hikes, and unilaterally suspended $500-million worth of approved rate riders for 2001. There will be no rate increases in the province until July 2001, and then they will be spread over three years, to cushion consumers from punitive increases, said Klein.

The government also directed the EUB to hold "fairness hearings" for future rate increase applications, then direct their recommendations back to the provincial government for approval.

On the same day, the provincial government passed a ruling directing the Alberta power pool to exclude imported or exported power from the calculation of the pool price, in an attempt to stop high-priced imports from setting the pool price.

The Pool Price Deficiency Regulation, to be implemented by Dec. 15, will see the pool calculate two prices to "resolve structural and alignment issues of the Alberta markets with those of other jurisdictions."

The premier described those issues more succinctly at the Roundup Centre in Calgary during the launch party for the Alliance Pipeline Nov. 30.

"One is the extremely high price that power producers are now paying to import power from BC Hydro , good old socialist B.C.," Klein told reporters. "The other is just the phenomenal growth that is taking place in Alberta today."

The premier blocked accusations the rate freeze was a short-term political move to appease rural voters who have threatened to mutiny if power prices continue to climb. Residential, farm and small businesses representing almost 95% of the province’s power consumers – and a good portion of the voting populace that brought Klein into power eight years ago – fall under the regulated rate option for consumers of less than 250 megawatts power.

With a spring election in the works, there are few who agree with Klein. Many participants in Alberta’s power industry, consumers and marketers alike, called the new rulings vote buying.

"I think this is an unmitigated disaster that goes well beyond the problems with electricity deregulation," said D’arcy McGee, president of INTENCO Energy Consulting Inc. "I don’t know how anybody can have any confidence when the government is ready to throw all its polices to the wind."

Freezing rate hikes increases the uncertainty there will be a deregulated, competitive electricity market in Alberta and is discouraging new generation from coming on line, say players.

"Now it’s shifted from market volatility and price risks being the biggest risks, to it being a legislative risk holding off the market," said Sheldon Fulton, head of Alberta Watt Exchange , one of two forwards markets being established in the province.

Alberta Watt Exchange, or WattEx, opened its portals Dec. 1, a date chosen because it was supposed to be after the last electricity auction. Fulton realistically anticipates very little volume of trade crossing WattEx until a forward market structure is seen more as a "reliable, safe haven" for power purchasers. It could be well into 2001 before enough volumes are seen to establish a liquid market, he said.

"We have to get people used to forwards market, and get them educated," he said.

Total power sold fell slightly short of the power offered, to 2 805 megawatts power from the 2 923 megawatts on the block. The shortfall came from the 2003 offerings, proving the bidders foresee prices dropping within the next two years as new generation comes on line, said Wayne St. Amour , power pool administrator.

St. Amour said the pool is consulting with stakeholders on how to implement the new rules the pool has a requirement to develop within one year.

"We think that additional time for consultation with industry might be beneficial," he said, cautiously.

One option being considered is an uplift charge for unhedged parties within the market function. That implies sharing in the differential between the import/export paid and the market price.