Canada

Canada

GROWING FREE MARKET DILEMMA

Canada's public electric utilities are being increasingly challenged by electricity deregulation in the United States. Growing pressure across the border for open access to power transmission lines -- through the introduction of wholesale and retail wheeling to the US power market -- is presenting Canada's utility monopolies with a dilemma. If Canadian utilities do not change their policy they face major losses both in current and future market share. Canadian customers might easily be persuaded to look or move south of the border for the cheaper power available in the USA.

Canada's provincially owned public electric utilities are being increasingly challenged by electricity deregulation in the United States. Growing pressure across the border for open access to transmission lines -- through the introduction of wholesale and retail wheeling to the US power market -- is presenting Canada's utility monopolies with a dilemma.

If they adopt similar policies, they face major structural changes and direct competition from other suppliers, both US and Canadian, seeking access to currently captive markets. Privatisation and unbundling of transmission, distribution, and generation would become matters for open debate. If they do not seek change, new market opportunities for Canadian utilities and independent power producers, including wind plant operators, could well be lost. What's more, the economic position of Canadian utilities could be eroded as US competitors become low cost and more flexible suppliers of electricity. Major customers in Canada might even be lured south of the border by the promise of cheaper power available in the US.

In a new report, the Canadian Embassy in Washington has asked its government to prepare for possible US utility participation in the Canadian electricity market and to provide a "complete and clear" analysis of Canada's electricity trade obligations under the North American Free Trade Agreement (NAFTA). The embassy recommends this exercise to help ensure continued access to US electricity consumers by Canadian utilities. "We are bound to feel the impact of retail wheeling experiments in the US and pressures for lower costs following the on-going deregulation," states the document, which advocates a determination of the nature and scope of international obligations under NAFTA to see whether Canada needs to plan further regulatory changes.

Since the 1992 US Energy Policy Act (EPA), US utilities and independent power producers gain access to new markets in their own country by securing a mandatory order from the Federal Energy Regulatory Commission (FERC), or by joining emerging "Regional Transmission Groups" (RTGs) under FERC jurisdiction. These groups facilitate regional electricity wheeling.

The embassy report says that while Canadian utilities are likely to benefit from increased US market opportunities -- provided their services are competitive -- it is by no means certain. It is not yet clear whether US regulatory authorities will allow Canadian utilities to request transmission access from the FERC, or join FERC-regulated RTGs. Exclusion could effectively bar them from markets in the future. If they are allowed in, the report continues, Canadian utilities joining RTGs might need to open up their systems and wheel power for US exporters to Canadian customers.

Even after NAFTA, US suppliers still face high barriers to entering the Canadian market. While the EPA is facilitating US utility competition and restructuring, Canada has no legislation like it. Canada's National Energy Board (NEB) has no authority to order such access. Domestic electricity regulation is constitutionally a provincial responsibility, even though power exports to the US are federally regulated by the NEB. Wheeling of power between two Canadian provincial utilities on third party transmission lines is not currently pracitised.

Lack of reciprocity

The US Department of Energy (DOE) has noted the apparent lack of "reciprocity" in access to transmission lines between the two north American countries. Doubts about the fairness of the system have been expressed at recent technical meetings in the Canada-US Energy Consultative Mechanism framework, says Guy Saint Jacques, author of the embassy report. He observes that NAFTA calls specifically for "national treatment" (in which the other nation's firms are treated like domestic firms), but not the reciprocity which is an organising principle of the RTGs (and according to some, the EPA).

Canada has no policy of open access and the country can simply argue that it is already giving US suppliers "national treatment" by denying their requests for wheeling access. Yet on the other side of the border, the DOE appears to favour full and reciprocal access to markets and transmission and distribution networks, apparently extending the spirit of free trade beyond the scope of NAFTA.

This spirit might even be taking hold in the field, even if it is lacking in the Canadian power sector's regulatory framework. Alongside the embassy report, a recent NEB review of inter-utility trade in electricity found that British Columbia Hydro and other leading Canadian electric utilities are actively considering -- with their US neighbours -- the formation of RTGs that could straddle the international border. But the NEB cautions that full participation by Canadian utilities in RTGs could trigger legal problems between FERC, the NEB, and provincial regulators. Dispute resolution by the courts or by NAFTA mechanisms may be required.

The Canadian Wind Energy Association (CanWEA) has told the NEB that increased trade in electricity between provinces should be encouraged through more utility co-operation. However, free trade in electricity between provinces was exempted from a federal and provincial free trade agreement signed in July. This exemption has only served to heighten the political and regulatory dilemma arising from the rigid structure of the Canadian utility sector.

Wind suffering already

NAFTA concerns in Canada may well have already clouded the prospects for a Canadian wind company's bid to supply electricity to Snohomish County in Washington State (Windpower Monthly, August & September 1994), according to Jason Edworthy of The Chinook Project Inc (TCPI). TCPI teamed with Canadian Enhanced Energy Developments Ltd to propose a 94 MW Albertan wind farm following a Request for Proposals (RFP) from Snohomish. "Not one Canadian project made it to the short list, even though ours and several others offered better economics than some of the chosen projects," he says. American wind company, Kenetech, has made it through to final negotiations with Snohomish Public Utilities District with a 100 MW wind farm proposal. A Canadian industry publication has reported that TCPI was at one point considering an appeal of the decision under the provisions of NAFTA. The project is still alive and being considered for other US utility RFPs and could even become a model for further Canadian proposals which could flourish under open access. TCPI is a co-developer with US firm Kenetech of phase two of Canada's 18.9 MW Cowley Ridge wind farm in Alberta, now fully on line.

Financial crisis looming for monopoly

The Canadian utility most at risk from open access and wheeling may be the public power monopoly, Ontario Hydro. In 1993 it froze all new wheeling. Reflecting the picture emerging for electricity trade under NAFTA, a recent Hydro report claims that profound realignment is necessary to meet mounting competition in the Ontario and US northeast electricity sectors. Large customers seeking cheaper power sources, and suppliers with surplus to sell, are forcing electricity prices down. Full and open competition is becoming increasingly likely in Ontario as in California and elsewhere.

Hydro and the electricity industry, including the municipals and non utility generators, need restructuring in response to the dynamic market competition and increased risks to both ratepayers and taxpayers, indicates the report. Hydro's surplus capacity, calculated at 3,000-5,000 MW, its high proportion of depreciation, debt service and other fixed costs, and highly leveraged capital structure, present a "tremendous risk" that certain assets will be stranded, which would "threaten Ontario Hydro's ability to service its debt at a time when the province, as guarantor, may have limited flexibility to assume it." Hydro's major stranded asset is the $14 billion, 3740 MW Darlington nuclear generating station east of Toronto, completed in 1990-1993. If subject to open competition, up to 20% of Hydro's domestic energy sales could be displaced by imports through New York and Michigan. Hydro's total revenues could fall 6%, or about $500 million annually, worsening the utility's present financial crisis.

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