Canada: The Structure Of The Alberta Electricity Market

History and Evolution

Alberta's Electricity Market is unique in Canada. Its uniqueness is best understood through the historical context from which it developed.

Unlike most other provinces in Canada, Alberta did not form one province-wide vertically integrated utility to generate, transmit and deliver electricity when the Province was initially electrified. Instead, the majority of Alberta's electricity infrastructure was developed and owned by either investor-owned or municipally-owned entities.

These entities have now either been taken over or evolved into some of the players that currently operate in the Alberta Electricity Market. For example, in Southern Alberta the Calgary Power Co. Ltd. generated 99% of Alberta's power at one time. It subsequently changed its name to TransAlta, a large generator in today's Alberta Electricity Market. In the City of Calgary, the distribution of power was done by Calgary's municipal power authority that later became ENMAX, another large player in today's market. In the City of Edmonton, the City formed Edmonton Power to generate and distribute power within that city until it became EPCOR, which was later separated into publicly traded Capital Power for generation and municipally-owned EPCOR Utilities for transmission and distribution. Rural Alberta was serviced mostly by Canadian Utilities Limited until 1980, when it was taken over by ATCO. We say this simply to point out that many of the big existing participants in today's Alberta Electricity Market, like TransAlta, EPCOR, Capital Power, ENMAX and ATCO, have, like BLG, a long history and deep roots in the Alberta Electricity Market.

By 1995, on the generation side, Alberta was serviced mainly by three large vertically-integrated utilities, namely TransAlta, ATCO (then Alberta Power), and EPCOR (the "Big 3"), that collectively generated 90% of Alberta's then 8,600 MW of generation capacity. Of that total, 75% was generated by large baseload coal facilities, with the rest split between hydro and natural gas facilities. The Big 3 operated within specific service areas under a cost-of-service regulatory model. Electricity prices in Alberta at that time were set by a central regulatory body.

Creation of the Power Pool – 1996

With the coming into force of the Electric Utilities Act (the "EUA") on January 1, 1996, Alberta moved away from cost-of-service regulation on the generation side. Instead, it established the Power Pool through which all electricity, whether generated in Alberta or imported, in Alberta's Interconnected Electrical System (the "AIES") or grid would be dispatched competitively in a fair, efficient and openly competitive manner. The Power Pool was Canada's first competitive open-access market for the exchange of electricity.

All electricity that is generated and not consumed on site in Alberta must pass through the Power Pool. The Power Pool itself does not buy or sell electric energy, but acts only as a trading platform with financial settlement. It is also "energy only" in that currently generators only receive payments for the electrical energy delivered into the AIES. They do not receive payments for capacity.

The EUA also mandated open access to all transmission facilities in order to support competitive generation. It also put in place financial mechanisms or hedges intended to protect the then existing generation investments of the Big 3 from the new competitive market, while at the same time preventing them from exercising their concentrated market pricing power. The result was that, though developers of new generation were exposed to the risks of the Power Pool and low prices, the existing generation of the Big 3 was protected in 1996, and effectively continued as if it was still operating under the old cost-of-service regulatory model.

Power Purchase Arrangements – 2000

The next big change in the evolution of the Alberta Electricity Market came when Alberta mandated that the existing generation facilities owned by the Big 3 when the EUA was enacted be deregulated and exposed to the risks of Power Pool prices. To do this, Alberta removed the financial mechanisms or hedges that it had put in place when it passed the EUA. They were replaced with a forced auction, whereby the rights to the power from the output from the generation facilities of the Big 3 were sold to qualified bidders. This avoided the Big 3 being forced to divest themselves of their facilities.

The auction was completed using "Power Purchase Arrangements" ("PPA" or "PPAs"). Note the use of the word "Arrangement," as distinguished from the word "Agreement" that we typically equate with the acronym "PPA." In fact, the PPAs are not negotiated contracts – they are statutory instruments determined by Alberta, and enacted by the Alberta Government as Alberta Regulation 175/2000, with "quasi-contractual" characteristics.

The PPAs were used as a way to introduce competition into the Power Pool. The PPAs were intended to allow the "Owners" of the generation facilities the opportunity to recover their fixed and variable costs while transferring the right to offer the output of those generating facilities into the Power Pool to the "Buyers" who were successful in the auction.

The PPAs were, in a sense, a virtual divestiture of the power generated by the existing facilities of the Big 3. They left the ownership and operation of the plants with the Owners, but gave the Buyers of the PPAs the right to offer the electricity into the Power Pool at prices determined by each of the Buyers. The PPAs require that the Buyers pay the Owners their remaining fixed and variable costs, plus a reasonable return on assets – the PPAs mimic the historic cost-of-service model. Accordingly, the Buyers take market risk, and make money if the Power Pool prices exceed the amount they are required to pay to the Buyers under the PPAs, but lose money if the Power Pool prices do not exceed the amount they are required to pay to the Buyers under the PPAs.

The main PPA auction of 12 PPAs occurred in August of 2000, though only 8 PPAs were sold in that auction. Additional auctions for the unsold PPAs or power contracts/strips under those unsold PPAs were held later in 2000, and again in 2002-2003, and in 2005-2006. The approximate $3-billion of proceeds received from these sales was returned by the Province to electricity customers in Alberta as a refund on their bills.

Any unsold PPA was held and managed by a government entity called the Balancing Pool, with it acting as the Buyer under that PPA who offers the electricity from that PPA into the Power Pool. The Balancing Pool is required to manage the PPAs in a commercial manner, which includes managing associated payments, forecasting revenues and expenses, and participating in appropriate regulatory, dispute resolution or other proceedings.

The PPAs expire on the earlier of December 31, 2020 (20 years) or the then estimated end of plant life for the applicable facility. At the end of the term of the PPA the right to the output from the facility reverts back to the Owner.

Currently, there are seven PPAs for coal facilities that have not expired and remain in effect in Alberta:

As a result of changes in Alberta's climate change laws, the Buyers identified below have recently exercised rights under the PPAs to terminate their obligations under the PPAs and turn them over to the Balancing Pool. Though this right of termination (really just a turnover to the Balancing Pool) is now being challenged in court by the Alberta Government, the effect is that the Balancing Pool has, for now at least, become the Buyer under all of the existing PPAs and the party who offers that power into the Power Pool. This development is discussed in more detail below in the section titled "Termination of PPAs."

Retail Market Competition – 2001

Effective January 1, 2001, Alberta also permitted competition to occur in the retail component of the Alberta Electricity Market for residential and small commercial customers. This permits independent non-regulated companies to retail electricity to customers in the form of fixed-price contracts, flow-through contracts, dual fuel contracts (natural gas and power), green power or on-site generation (e.g. roof top solar). Retailers also provide billing and consumer services to these customers.

Any residential and small commercial customer who does not choose a retailer is provided a regulated rate option ("RRO") at a price that is set by the Alberta Utilities Commission ("AUC") for most of the RRO providers. RRO was meant to be a temporary option until more retailers could penetrate the market, but RRO has been repeatedly extended to provide an alternative for these small customers.