The risk of government sticking its fingers in the electric socket

With electricity bills in Alberta set to jump this summer — albeit from historic lows — the NDP government’s campaign promise to “smart regulate” electricity prices is back in the news. The government’s members, though, should think very carefully before making any changes to how Albertans get their electricity.

Compared to the rest of Canada, Alberta’s electricity market is unique. While the province has several city-owned utilities, most of the utilities that generate and deliver electricity in Alberta have been privately financed. In contrast, the energy markets of most provinces are dominated by publicly owned utilities.

Critics of the private electricity sector in Alberta have often pointed to fluctuating prices as a disadvantage. However, the province’s consumers have the option of choosing between fixed rates and floating rates. And price fluctuations can be a benefit for consumers, who can profit from falling prices. Furthermore, consumers can choose to “green” their energy bills. This wide range of options is typical of private markets, but when it comes to electricity, Alberta is unique within Canada.

Some have claimed that Albertans pay the highest electricity bills in the country. What is often overlooked, though, is Alberta’s geography, which doesn’t allow for cheap hydroelectricity.

A London Economics study comparing Canadian electricity prices took this factor into account. Although prices in Alberta in 2013 were 15 per cent higher than in the rest of Canada, when provinces getting more than 50 per cent of their electricity from hydro were excluded, Alberta was within one per cent of the average.

Furthermore, electricity prices seem to be trending downward in Alberta. In the first half of 2014, residential electricity prices had fallen 21 per cent below their 2013 levels. And according to Evan Bahry, executive director of the Independent Power Producers Society of Alberta, year-to-date pricing for 2015 is the lowest in the market’s history.

Part of the story behind this trend is that Alberta’s market-friendly model has attracted investment, dramatically increasing the homegrown power supply. Indeed, Alberta’s power supply has more than doubled since 1998.

Sensible regulations can reduce uncertainty, protect consumers, and help foster a level playing field where the private sector can prosper. But the “smart” regulations the government has promised could be the first step on a slippery slope. Most regulatory regimes end up going too far, pandering to special interests and sticking around after they’ve become obsolete.

Energy regulations are no different, especially when government can order public utilities around. Take Ontario, for example. The solar energy development program costs an estimated $1.2 billion a year, but provides only two per cent of Ontario’s total electricity needs. Most Ontarians are all for green energy programs, but since there’s no such thing as a free lunch, the real question is: How much more are you ready to pay? Judging from some strong reactions, many see solar energy as an expensive luxury. Hydro One being a public utility, everybody still has to pay, even those who would have preferred lower prices.

The same thing happened in Quebec, formerly renowned for its cheap hydro power. Though still relatively low, electricity rates are steadily climbing, picking some $700 million a year out of consumers’ pockets and giving it to wind farm developers. This subsidy does not even have any environmental benefit, since hydroelectricity is just as green as wind power. Successive Quebec governments have simply chosen to create expensive jobs in an impoverished region in order to win political support.

The cautionary tale is clear: Asking government for a little more regulation because of those irksome rates that are a bit too high or too volatile, might seem like a good idea at first glance, but a little more regulation is not such an easy thing to find.

Governments that control utilities usually end up using them to produce a different kind of power, as public utilities eventually morph into political utilities, and consumers and taxpayers are stuck holding the bill.

Youri Chassin est économiste et directeur de la recherche à l’Institut économique de Montréal. Bradley Doucet est réviseur et analyste de politiques à l’IEDM. Ils signent ce texte à titre personnel.