Small and medium-sized businesses in Alberta are being warned to brace for change next year as electricity deregulation in Alberta surges forward.

As deregulation enters its next phase on January 1, 2004, commercial operations in Alberta that use less than 250,000 kilowatt hours per year will lose the regulated rate option (RRO) they now enjoy.

This comes as a number of large commercial and industrial electricity users – in a deregulated market since 2001 – cite rising electricity costs as a concern for their business, and after an Alberta Department of Energy draft annual report for 2002 showed that Edmonton, followed by Calgary, had the highest residential electricity costs among six major Canadian cities.

On the business side, only about 25 per cent of Alberta’s small and medium-sized companies have signed contracts to lock in prices.

To get an idea of where individual operations fall, a convenience store would use an average of 2,200 kWh/month, a greenhouse 50,000 kWh/month and a 12-storey office tower 300,000 kWh/month.

A large industrial company, on the other hand, could average more than 32.5 million kWh/month, according to government figures.

Residential consumers, farm or irrigation users, however, can remain on their RROs until December 31, 2005.

The head of an Edmonton consulting firm that specializes in the energy sector says reaction from business to the loss of the RRO has been muted – so far. “I think that many people don’t realize this is coming upon them and they’ll be caught in a situation where they can’t get a competitive offer or end up paying more than they should,” said Chris Vilcsak, president and CEO of Solution 105 Consulting Ltd.

For businesses on the RRO, they will have one of two options: shop around for electricity contracts or default to the flow-through rate – current market prices – from their existing supplier.

Deregulation, meanwhile, does not apply to electricity users in Medicine Hat, which owns its gas and electric production and distribution facilities.

The city, with some of the lowest utility rates in Canada, has been providing its own power since before Alberta was incorporated as a province and is exempt from deregulation. Users are serviced through a modified regulated rate.

While the provincial government maintains that deregulation is working, John Davies, vice-president of engineering and operations for Lethbridge Iron Works, disagrees.

“We were thrown to the wolves three years ago,” Davies said. A large electricity user – above 250,000 kWh per year – the manufacturer of custom iron castings for the automotive, agriculture, rail, and oil and gas sectors has seen its electricity prices rise between 40 and 60 per cent.

“On the other side of the coin,” said Davies, “the price we sell our product for hasn’t gone up, because our competitors are outside of Alberta. So we’ve had to absorb the increase.”

Davies said the company can still compete, but not as well. “In the past, we were going through a growth phase, and we’re finding that more difficult now,” he said.

Even with more than 20 companies on the province’s electricity retailer registry, all offering power to large users, Davies said competition isn’t strong enough.

“Until you have aggressive, active competition in this province, you will not see prices being driven down. There is much more choice at the large level than the small level, but choice hasn’t led to low prices,” Davies added.

“Maybe the government should admit defeat and realize that retail competition not only isn’t here, but it may never be here, ” he said.

For Nexen Chemicals, another large electricity user and a division of Calgary-based Nexen Inc., its sodium chlorate plant in Bruderheim near Fort Saskatchewan isn’t as competitive as another sodium chlorate operation it runs in Manitoba.

“As a result of power pricing and volatility, we’re running the Bruderheim plant at less than capacity and we are expanding in other locations such as Brandon,” said Keith McLeod, Nexen Chemicals’ vice-president, manufacturing.

The company produces environmentally friendly bleaching agents for the pulp and paper industry, and one of the primary products it uses in the manufacturing process is electricity.

“It probably accounts for 70 per cent to 75 per cent of our product cost, so power cost is very critical to our profitability and competitiveness,” said McLeod.

Nexen has already closed a plant in Louisiana due to high electricity costs, but, McLeod said, it would be premature to talk of shutting the Bruderheim facility.

“We haven’t made any decisions one way or the other. We continue to work to improve the situation, to purchase electricity at a rate where we can keep it a profitable operation and sustain it long term,” said McLeod, though he added, “everything is on the table.”

The province, for its part, points to other concerns that must be factored into the electricity equation.

“It’s important to recognize that electricity is but one business overhead cost, said Alberta Energy spokesman Gordon Vincent.

“As such, comparing operating expenses across provinces on the basis of electricity costs alone is inappropriate.”

As an example, he said these comparisons do not include other “Alberta advantages” such as lower corporate taxes and no sales tax. “Furthermore, Alberta does not have any public debt associated with its electric infrastructure because we pay the true cost of electricity,” he said.

In contrast, Manitoba Hydro, a Crown corporation, has amassed approximately $7 billion in long-term debt to taxpayers, translating to $6,342 in electricity debt for every Manitoban.

Similarly, every Ontarian owes $2,875 and every Quebecer owes $4,822 as their portion of the electricity debt, said Vincent.

The Independent Power Producers Society of Alberta (IPPSA), with 150 members, also backs deregulation. “We’re supportive of industry restructuring because we believe competition is the best way to deliver goods and services,” said IPPSA executive director Evan Bahry.

The option chosen to meet Alberta’s growing power needs was to let the market invest and take the risk, not consumers, and to keep the market open to competition and choice. The market responded, said Bahry, by investing about $3 billion into building power plants, and since 1998, Alberta has added 3,000 megawatts, or a 30-per- cent increase, to the province’s power supply.

“The biggest challenge we have is the expectation issue,” Bahry said. “Albertans have to appreciate that power rates would have gone up because we were running out of power in the 1990s. Demand was outstripping supply and the plants that we had built before had, in many respects, depreciated. So if you put in $3 billion of new investment that cost would have been reflected in your rates.”

* Next week, in Part 2 of our three-part look at deregulation and business, we look at how industry is coping.

Demystifying Deregulation

* What’s happening?
Electricity consumers using less than 250,000 kilowatt hours (kWh) per year went on the Regulated Rate Option (RRO) on January 1, 2001. On January 1, 2004, the RRO for non-residential consumers expires.

* Why?
Deregulation aims to create a competitive environment to attract private-sector investment in new generation – to meet the province’s growing power needs.

* How is it being done?
To introduce competition, the province split the electricity system into three. One transmission system remains – one set of wires with one common carrier – and it’s regulated. But anyone can use those wires to move power. The remaining portions, power production and selling it, become part of the open market.

* What are the options?:
Small commercial and industrial customers, those using less than 250,000 kWh per year, have two options – stay with their current provider and receive flow-through market prices (like a floating mortgage rate), also known as the Regulated Default Supply option, or sign a competitive contract at a predetermined rate from a retailer. Customers who
don’t sign a contract will automatically be moved to a flow-through rate with their current suppliers.

* Flow through vs. regulated rates:
RROs are set before a calendar year begins and include a hedge to factor in where prices would be 12 months later. Flow-throughs have no hedge and no deferral charges. They represent the actual market price.

* What you will pay for:
Businesses will only be contracting for kilowatt charges. All other charges remain unchanged.