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Jurisdictions worldwide can expect to encounter a multitude of energy-related challenges and opportunities over the next 10 years. The following sections present the path which New Brunswick will take to meet these challenges and opportunities in the areas of electricity, natural gas, refined petroleum products, energy efficiency, alternative energy and environmental concerns. The provincial government acknowledges that legislative authority may be required in order to enact the policy described in this document. The inter-connected nature of the electric industry in North America is such that restructuring in one region of the continent will profoundly influence the industry in surrounding regions. New Brunswick has examined, and will continue to observe, experiences in other markets to determine the most advantageous route for the province to take. This section describes New Brunswick market restructuring at the wholesale and retail levels, as well as examines the role of non-utility generation in the competitive market. A second stage process will consider the future of the Crown utility, within the framework provided by the energy policy. In the past two and a half years there have been a series of reports that have evaluated the electricity issues that confront New Brunswick. The first was a discussion paper entitled Electricity in New Brunswick Beyond 2000 (February 1998). The second was the report of the Hay-Savoie Task Force, issued in July 1998, entitled Electricity in New Brunswick and Options for its Future. Most recently, the Select Committee on Energy ("Select Committee") issued a report in May 1999 entitled Electricity Restructuring in New Brunswick ("Select Committee Report"). The Select Committee recommended that the Province adopt a policy of a managed transition. It was recommended that this policy consist of: (1) a gradual introduction of wholesale competition and re-evaluation of the benefits of retail competition after five years; (2) incentives for improving the efficiency in the delivery of regulated transmission and distribution functions; (3) improved regulatory oversight; and (4) assurance that all citizens have access to safe, reliable, affordable, and uniformly priced electricity supplies. The Select Committee also recommended the formation of a Stakeholder Group to develop policies and make policy recommendations. The strategy outlined in this White Paper is consistent with a policy of managed transition and establishment of a Stakeholder Group, with the addition of some refinements. The electric utility
industry is being restructured in many places throughout the world.
The most significant changes are occurring in the wholesale and
retail electric markets. In the Northeast United States, wholesale markets operate with a combination of bilateral contracts and bid-based pools where participating generators are paid the market-clearing price. Most states in this area have implemented full retail competition. Throughout the United States, more than 25 states have implemented or begun to implement electric industry reforms, and the U.S. Congress is considering legislation that would establish a national program for wholesale and retail competition. Globally, a number of other countries have implemented market reforms including the European Union countries, Australia, New Zealand, much of South America, and a number of countries in Asia. The Select Committee Report reviewed the status of electricity market restructuring efforts in many of these jurisdictions to provide a framework for possible electric restructuring in New Brunswick. The experiences in restructured and restructuring markets have varied. Most notable is the experience during summer 2000 in California, where prolonged periods of hot weather led to record electric demands and threatened the reliability of supply. Reflecting the lack of available uncommitted supply, market prices increased dramatically, with total electricity bills to many San Diego Gas & Electric ("SDG&E") customers in July 2000 being more than double the July 1999 levels. California’s experience can be explained by a number of factors, two of the most significant being: (1) the market was restructuring during a period when there was growing demand and little surplus capacity; and (2) the hourly bid spot market was used to set electricity commodity prices for customers that did not select a competitive retailer. For the period during which stranded costs were being collected, increases in customer commodity prices from the spot market were offset by decreases in the stranded cost charges so that the customers’ total charge for both items was unchanged. However, once SDG&E’s stranded costs were paid off, the customers’ commodity prices varied with the spot market leading to a more than doubling of customer electricity bills when prices on the California power exchange skyrocketed. Alberta is another market that recently experienced a dramatic increase in wholesale electricity prices. The more than doubling in Alberta’s wholesale prices in the last year can be attributed to a series of factors: (1) a shortage of generating capacity; (2) a doubling of natural gas prices in a market where natural gas was the marginal fuel for electric generation; and (3) the indirect effects of higher electricity prices in interconnected markets, i.e., the Pacific Northwest and ultimately California, flowing through to Alberta. Other markets have had more favourable restructuring experiences. One of the most successful has been Argentina, where electric utilities were disaggregated and privatized in 1992. Argentina has experienced a 40% reduction in wholesale market prices since market opening. These price reductions are due, in part, to the introduction of greater efficiencies. The England and Wales pool was one of the first wholesale markets to be reformed. When initially established, the market had two dominant generators that had a market share of more than 75%. While the market shares of these two generators have declined dramatically, the market continues to be plagued by the exercise of market power by the incumbents. Nonetheless, residential customers have experienced a 30% real decline in electricity prices in the 10 years since the market opened. This reduction in electricity prices reflects greater efficiencies in the distribution and transmission of electricity and the displacement of higher cost coal units with new, more efficient natural gas-fired combined cycle projects. Restructuring was successfully achieved in the State of Victoria market in Australia. After climbing 15% the year after market opening in 1995, wholesale prices have since fallen below 1994 levels. For the four-year period from 1996 through 1999, prices were 30 to 50% below 1994 prices and have only recently increased to a level where they are just below 1994 levels. The reduction in Victoria power prices reflects reduced fixed operating costs from greater generating plant operating efficiencies, a surplus of capacity in the market and enhancements to the competitiveness of the market through increased integration with nearby power markets. The experience to date with retail competition in most markets has been mixed due mainly to weakness in the market design and abuse of market power. In general, the customer switching rates and savings offered have been low and the costs to acquire customers and implement the systems necessary to support retail competition are high. One exception appears to be markets for large customers that have experienced higher switching rates and as such have been able to realize benefits from retail competition. These large customers do not require the same level of investment relative to their load size to support retail competition as do smaller customers. The Select Committee recommended that the province pursue a "deliberate and controlled" restructuring policy that would allow for the gradual transition of the electric industry from its current monopoly structure. Such a "managed transition" approach of wholesale competition and large retail access is appropriate for three reasons. First, it is the most prudent course of action given the experiences in some power markets, such as California, where restructuring has had the unintended consequences of dramatically increased prices and price volatility. Second, other markets have experienced delays in the implementation of wholesale and retail competition, which suggest that a more realistic schedule for the implementation of reforms is prudent. Third, a significant amount of time is needed to achieve the conditions required to realize a fully competitive market. For these reasons, the Province accepts the Select Committee recommendation and will proceed with a deliberate and controlled approach by introducing wholesale competition and allowing non-utility generation and retail competition for large industrial customers, while waiting until conditions prove more favourable before permitting full retail competition. This will allow New Brunswick to participate in a competitive market, gather experience, learn from other jurisdictions and set the stage for full retail competition, while allowing time for the market to evolve. In addition, the Province will establish a market design committee to address development of the electricity market including its design, structure and rules, and make recommendations to the Province by April, 2002. Also included will be recommendations on all codes and operating protocols. In keeping with recommendations by the Select Committee, the market design committee will be composed of a broad stakeholder group. Policy issues associated with wholesale competition, non-utility generation and retail competition are discussed in the following sections. The electric industry
restructuring taking place in New Brunswick’s major export markets
to the Northeast United States has a significant impact on New
Brunswick’s market and its policy decisions. First, the Northeast United States is a major export market for the Crown utility, representing 18% of its revenues from power sales. Exports to New England are the largest single source of the Crown utility’s out-of-province margins. New Brunswick’s transmission network and electricity generation facilities were built to capitalize on opportunities in its interconnected markets. Transmission links to other markets reduce New Brunswick’s electricity rates as surplus electricity from New Brunswick generating stations is profitably sold into export markets. Without these out-of-province sales New Brunswick’s electricity prices would be approximately 10% higher. However, New Brunswick’s
access to the Northeast markets has been limited since the Crown
utility does not provide wholesale access and its transmission
tariff is not subject to regulatory review. As a result, transmission
service in New Brunswick does not satisfy the U.S. Federal Energy
Regulatory Commission’s ("FERC") reciprocity requirements
(FERC Order No. 888). Second, New Brunswick
industries today enjoy a competitive advantage with respect to
the Northeast markets. This is attributable to New Brunswick cost-based
Crown utility rates being below Northeast market price, and rates
in the Northeast being above the market price while stranded costs
in that area are being paid down. However, the competitors to
New Brunswick’s industries located in its major export markets
in the Northeast U.S. are likely to benefit in the long run from
reductions in the cost of electricity. Creating a competitive wholesale market in New Brunswick will ensure that major capital investments are subjected to a market test and will allow the market to drive decisions regarding the need for additional electric generating facilities and strategies for reducing generation costs. This suggests that investors, not customers, would be penalized for bad investment decisions. Under a regulated market model, such as the one that exists now in New Brunswick, customers share in the costs of any bad decisions. Therefore, poor investment decisions are the primary risk to maintaining New Brunswick’s electricity price advantage. However, restructuring New Brunswick’s wholesale market could link New Brunswick’s prices with those in the greater Northeast power market and could result in increases in electricity prices in the short run as New Brunswick prices migrate to the average of its interconnected markets. The framework being proposed, which allows participation in the wholesale market, will help to ensure that New Brunswick’s low electricity prices are maintained for the benefit of existing customers. In order to enable New Brunswick to fully participate in export markets by ensuring full compliance with wholesale market requirements, the Province will target implementation of wholesale competition by April, 2003. In order to eliminate the potential for shifting of costs from the wholesale competitor to customers remaining with the Crown utility, the Province will require wholesale participants that reduce their firm load on the Crown utility’s system to levels that are below their calendar year 1999 load, to be assessed an exit fee or other equivalent charge, approved by the Board. A significant challenge
to achieving a workably competitive wholesale power market is
the limited size of the New Brunswick market. Various studies
have suggested that the minimum efficient scale of the electric
generation sector ranges from 3,400 to 8,000MW. While these economies
of scale are required within a generation company and do not demand
that generation assets be located entirely in one location, the
size of the New Brunswick market, with a peak load of approximately
3,000 MW, presents a challenge to achieve a minimum efficient
scale. Economic theory and recent experience suggest that, at
a minimum, approximately five equally sized firms are required
to achieve a workably competitive market. The Province will direct the market design committee to make recommendations regarding requirements for market surveillance and issues related to establishing a workably competitive electricity market. One of the most significant
conditions of achieving a competitive market is the enhancement
of New Brunswick’s interconnections with adjacent markets. New
Brunswick participation in the Northeast market is significantly
limited by physical constraints on the existing transmission system.
A critical aspect in establishing a competitive market is the
construction of additional transmission to interconnect with New
England. Evidence suggests that without more tie lines New Brunswick’s
ability to open its wholesale and retail markets is limited An important aspect of enhancing these interconnections is New Brunswick’s possible involvement in an RTO. If such an RTO were not established, the New Brunswick power market would need to be integrated more closely with the Northeast power market. Therefore, the Province will direct the Crown utility to continue to pursue discussions with neighbouring jurisdictions regarding the formation of a regional transmission organization or other mechanisms that enhance the overall level of access among these systems. An element of the managed transition advocated by the Select Committee was that the Crown utility "undergo a structural separation into three distinct Crown Corporations: NB Generation, NB Transmission, and NB Distribution." This was to ensure that accounting safeguards are in place so that competitive businesses such as generation and energy services are financially separated from regulated businesses to prevent cross-subsidization. Government will consider the details of such a separation in the subsequent stage of the process, as the future of the Crown utility is resolved and the energy policy implemented. Until such time, FERC requires, at a minimum, functional separation of transmission and generation functions and a code of conduct for an open access transmission tariff as specified in FERC Order No. 889. It is believed that the Crown utility satisfies FERC Order No. 889 requirements for functional unbundling, which is currently the minimum requirement in the U.S. for workable bilateral competition. Given the importance of electricity export sales to New Brunswick, it appears that any structural solutions for the Crown utility should allow it to be included as a full participant in the U.S. market. Functional unbundling accomplishes this objective without restricting future options for restructuring of the Crown utility. The economic advantage of retaining any economies of scale afforded to the relatively small Crown utility make functional unbundling a preferred option over structural separation. As such it is not necessary to form three distinct Crown Corporations. In its Order No. 2000 on RTOs, FERC has required passive ownership whereby the RTO board is fully independent of any market participants that have a vested interest in a particular market outcome. Given the potential for FERC Order No. 2000 requirements to evolve and the uncertainties regarding how they will be applied to Canadian entities, the Province will continue to carefully monitor emerging market compliancy issues, particularly as they relate to Federal Energy Regulatory Commission ("FERC") requirements. An issue that could
represent a barrier to entry in the wholesale power market is
whether the Crown utility is perceived to have an inherent competitive
advantage relative to new entrants. The Crown utility has a significant
competitive advantage relative to "for-profit" entities
because it is exempt from federal and provincial corporate income
and capital taxes, excused from some property and all water use
taxes, and has its debt guaranteed by the Province. Traditionally, the reliability standards employed in the planning and operation of electric power systems have been specified through the North American Electric Reliability Council ("NERC") and its regional councils. Today, operators of power systems are obliged to meet NERC standards but there is debate concerning the need for rules to govern generation supply adequacy. The more conservative approach is to develop a capacity requirement that ensures suppliers provide sufficient capacity to guarantee that a reliability target is satisfied. Alternatively, market participants can be allowed to make individual decisions regarding the appropriate levels of contract coverage and hence volatility, and have suppliers respond by building capacity to support these contractual commitments. In theory, market participants should be better able to make these decisions for themselves rather than have the market rules stipulate a capacity requirement. However, there is considerable evidence indicating that capacity shortfalls can be extremely costly in terms of higher power prices due to prolonged periods of shortage pricing. Therefore, it is more appropriate to establish a capacity requirement if there are concerns that other elements of the market structure might not provide suppliers with sufficient incentives to build new capacity. The Province will direct the market design committee to consider reliability of supply for New Brunswick in its market design recommendations. Currently, power is provided to customers through the distribution business unit of the Crown utility and through the three existing municipal utilities (Saint John, Edmundston and Perth-Andover). In keeping with New Brunswick’s approach to restructuring, the Province will introduce wholesale competition by permitting the distribution electric utilities to procure power in the competitive market by a target date of April, 2003. This will serve to satisfy FERC requirements for wholesale competition while following a prudent approach toward gaining experience in a competitive market. As a result of allowing the wholesale power price paid by the municipal electric utilities to be determined by the competitive market, there will be no means to assess whether the rates charged to customers are reasonable. In addition, with power purchased in the competitive market, these distribution utilities will be subject to market risks. To address these issues, the Province will require distribution electric utilities to file their rates and all long-term contracts with the Board. The Board may initiate an investigation of these rates or long-term contracts based on a complaint from a customer or of its own accord. It should be recognized that reviewing long-term contracts alone will not protect the distribution electric utilities from all market risks. This would require a formal supply plan review, which is likely to be overly intrusive. The three municipal electric utilities in New Brunswick serve a relatively dense, urban market with a higher proportion of General Service (commercial and small industrial) customers which have rates that are higher than their cost-of-service. Conversely, the Crown utility serves a diverse market comprised of both urban areas and low-density rural areas. The creation of additional urban distribution electric utilities is likely to result in higher costs for the remaining Crown utility customers since the cost of serving urban customers is generally less than the cost of serving rural customers. There are several reasons for this. First, customer concentration usually results in lower distribution costs to serve urban customers than those for rural customers, and the differentiation in the Crown utility’s urban and rural rates does not fully reflect the higher costs of serving rural customers. Second, urban areas have a higher proportion of commercial and small industrial customers. The Select Committee Report noted that some committee members believed that there was an inequity in the existing franchise rights of the three municipal electric utilities "arising from the fact that these three municipalities may not provide direct support towards ensuring the affordability of electricity to rural New Brunswick." Given the different cost structures, other municipalities in New Brunswick could consider establishing their own distribution utilities in an effort to participate in a competitive wholesale market. However, establishing additional distribution electric utilities is likely to create added costs, as the economies of scale offered by the Crown utility are lost. The creation of additional distribution electric utilities would promote higher overall costs to the province and a shifting of costs from the customers of new distribution electric utilities to the Crown utility’s remaining customers. Therefore, as is consistent with Select Committee recommendations, the Province will allow no new distribution electric utilities in New Brunswick at this time and will limit existing distribution utilities to their current service territory. Private, non-utility generation projects, particularly combined cycle and cogeneration projects, are likely to represent the lowest cost generating capacity additions in New Brunswick given their high energy conversion efficiency, relatively low capital costs, and the availability of natural gas. However, the Electric Power Act requires Order in Council approval of generation facilities over 500 hp (0.4 MW). In the long run, constraints on the development of these projects will impede the development of a competitive wholesale power market in New Brunswick. To promote the development of a more competitive wholesale market in New Brunswick, the Province will table amendments to the Electric Power Act which will include removal of current restrictions on the construction of generation facilities. Historically, non-utility generation projects have either contracted their output to the incumbent utility or supplied it as self-generation "inside the fence" to industry. More recently, where competitive markets exist, generation projects are being constructed to supply energy directly into the market place. Such projects are required to meet interconnection standards to assure reliable operation of the power system and deliver energy through the transmission system under an open access tariff. The development of a more competitive wholesale market in New Brunswick could be enhanced through construction of merchant generation projects. The Province will empower the Board to approve merchant plant transmission system interconnection requirements and transmission system use under a regulated, open access tariff. Self-generation projects can offer efficiency and environmental benefits. In the near-term, development of self-generation projects could create stranded costs in New Brunswick due to displaced sales from the Crown utility combined with transmission limitations to New England. These lost sales cannot be made up by increased sales in New Brunswick’s export markets given transmission constraints that limit access to New England markets during some periods. Therefore, until New Brunswick needs additional generating capacity or the tie line capacity with New England is expanded, an exit fee or comparable fee must be charged when customer load is lost by the Crown utility so that remaining customers are kept cost neutral. For this purpose, the Province will require self-generators that reduce their firm load on the Crown utility’s system to levels that are below their calendar year 1999 load to be assessed an exit fee or other equivalent charge, approved by the Board. This is in keeping with Select Committee recommendations on self-generation and is intended to eliminate the potential for the shifting of costs from the self-generator to remaining customers. In addition, the Province will empower the Board to approve charges for ancillary services, transmission charges and, until there is workable competition, standard offer backup service. The key factor in establishing these charges is the Government’s desire to avoid cost shifting from self-generators to remaining Crown utility customers. With respect to ancillary services, transmission charges and backup service, the intent of Government is to treat all self-generators equally, without causing rate shock for existing facilities. For this reason, it may be necessary to gradually increase rates for existing self-generators until their rates for ancillary services, transmission charges and, if applicable, standard offer backup service, match those of new self-generation projects. All self-generators will be treated equally and, in consideration for existing facilities, the Province will direct the market design committee to examine means by which rate shock to existing self-generators can be avoided. Another element of introducing competition in the electric utility industry is in the retail sales of electricity directly to end-use customers. Retail choice allows customers to select from a range of bundled services and products, allowing them to choose the offering that best satisfies their requirements, thereby encouraging product and service innovation. Retail choice would also allow customers to purchase electricity generated from renewable resources, thereby promoting environmentally-friendly generation, and has the potential to provide customer savings, market innovation, synergies with the wholesale market and cost-reflective pricing for customers. By definition, a competitive market requires a diversity of suppliers and buyers. In most electricity markets, the local distributor represents the sole purchaser of power. Retail market competition increases the number of wholesale buyers and helps support development of a more competitive market. Retailers also represent an important opportunity for longer-term bilateral contracts that assist developers of generation facilities in financing their projects, hence reducing a potential barrier to entry. With the exception of customers on interruptible/curtailable, time-of-use or "real-time" rates, most electricity customers are not exposed to the true volatility of wholesale electricity prices. Thus, in a market without retail competition few, if any, customers are provided with fully cost-reflective price signals and as a result, few customers modify their consumption patterns to minimize overall market costs. As a precursor to full retail competition, the Province will direct the distribution utilities to make customers more aware of actual prices and conditions in the market place.
The policy responses to these questions are outlined in the following sections.
Some jurisdictions have introduced retail competition to all customer classes simultaneously, whereas others have introduced retail competition for the largest customers first, followed at various intervals by successive tranches of smaller customers. Where retail competition has been available, the migration rate or proportion of customers switching from the incumbent supplier to a competitive retailer has been highest among large industrial customers and lowest among small customers. There are a number of reasons why switching decreases with customer size. Generally, large customers have the knowledge and capability to independently procure other energy-related products and services since these customers do not usually need or want products and services bundled with the commodity. In addition, the settlement systems and market rules for these large industrial customers are similar to those for wholesale market participants, which minimizes the incremental costs of introducing retail competition for large industrial customers. Also, there is less competitive activity for smaller customers and the savings realized by smaller customers are lower in both absolute and percentage terms. Given the time and effort required to solicit for and then decide among several competing offers from retailers (and to understand the relevant market rules to make a fully informed decision), many smaller customers likely find that it is not worth their time and effort to switch. In New Brunswick, the largest group of industrial customers account for less than 1% of the customer base, but represent more than 40% of the market’s electricity consumption. This situation would result in substantially lower retail market costs (on a $/MWh basis) for large industrial customers than for smaller commercial and residential customers. In many instances, a large portion of the savings realized by any customers that switch can be attributed to the introduction of more cost-reflective tariffs and increased wholesale competition, not the introduction of retail competition. This suggests that staging the introduction of retail competition, starting with large industrial customers and then with smaller customers in one or more tranches, would be most appropriate for the New Brunswick market. Staging the introduction of retail competition also provides more opportunity for New Brunswick policy-makers to learn from experiences in other markets and allows time for the expected advances in metering technology and settlement systems to reduce the costs associated with retail competition for these smaller customers. Therefore, the Province will allow large industrial customers, i.e., all industrial customers with a minimum contract demand of 750 kW that are connected to the transmission system, to select a competitive retail supplier, with the target date for implementation of large industrial competition being April, 2003. To eliminate the potential for cost shifting from the large industrial customer to remaining customers, the Province will require large industrial customers that reduce their firm load on the Crown utility system to levels that are below their calendar year 1999 load, to be assessed an exit fee or other equivalent charge, approved by the Board. In addition, the Province will direct the market design committee to make recommendations for mitigation of market power in the context of the wholesale and large industrial retail electricity market such that the target implementation date can be achieved. The benefits to be realized for small business and residential customers from the introduction of retail competition are uncertain in the near term, given New Brunswick’s limited market size and cross-subsidies in the current rate structures. Retail competition for small business and residential customers in the near term is unlikely to result in a vibrant retail market since few retailers would be expected to participate in the market. Smaller customers are less able to adjust to market price volatility than are larger customers. Other causes of dissatisfaction experienced by small business and residential customers in competitive retail markets include: (1) insufficient savings compared to the time and effort necessary to solicit and choose a competitive supplier; (2) difficulty comparing retailers’ offers on an "apples to apples" basis; and (3) billing and metering problems after switching. Finally, in New Brunswick, introduction of retail competition for small business and residential customers in the near term would require the elimination of the current cross-subsidy in a relatively compressed timeframe, which could create rate shock for some customers. For these reasons, the Province will not move directly to full retail competition but will revisit the merits of introducing retail competition for smaller customers every two years or following pre-specified trigger points or events. To the degree appropriate based on net societal benefits, New Brunswick will consider further phasing of retail competition to progressively smaller customers. Electricity prices
in New Brunswick are lower than those in most other nearby power
markets. Furthermore, a significant
implication of retail competition has been the increased exposure
to greater wholesale market price volatility. While wholesale
market price volatility can be managed, it may also be necessary
to manage the risk for customers who have not selected a competitive
retailer. Standard Offer Service
("SOS") is the service that is provided to all customers
that are not served by a competitive retailer. To ensure that the benefits of lower power market prices are maintained for New Brunswick consumers and that they are offered some protection from price volatility, the Province will entitle all customers that do not select a competitive supplier to standard offer service under regulated prices and terms that are consistent with the service they now obtain. Initially, this service would be provided to wholesale and large industrial customers through entitlement contracts from the Crown utility. Given the desire to preserve the benefits of low costs for New Brunswick customers, it is likely that the standard offer price available to New Brunswick customers would result in low switching rates and therefore, higher costs per customer that switches. This reinforces the need to proceed cautiously before embarking on the wide scale application of retail competition in the near term. Competitive retail markets for residential and commercial customers require sophisticated settlement systems and processes to allocate costs and charges between the various market participants (generators, transmitters, distributors, retailers and customers). The complexity of these systems will influence the overall costs of retail competition and the number of retailers willing to enter the market. In general, simpler systems are less costly but can result in inequitable distribution of cost and/or risk between customer classes or between market participants. Although the New Brunswick approach is to defer introducing full retail competition at this time, there are a number of issues surrounding full retail competition that can best be resolved in advance. A competitive retail market requires the use of interval meters, such as those currently employed by most large industrial customers. Interval meters measure consumption every 15 minutes or half-hour and so allow billing that accurately reflects the volatile wholesale market costs and that customer’s usage in each interval. Other customers have meters that simply measure consumption on a continuous basis. These meters are read monthly or bi-monthly and do not provide any information that would result in consumption pattern adjustments. The cost of interval metering is relatively high for smaller customers although these costs are declining as demand increases and more advanced technology becomes available. Given its small size, New Brunswick is unlikely to attract a large number of retailers unless the costs of operating in the market are relatively low. This points to the need to: (1) replicate the settlement rules from other jurisdictions; and/or (2) work with neighbouring jurisdictions to establish a larger market with uniform rules so that retailers will face minimal incremental costs to serve the New Brunswick market. The Province will evaluate alternatives for reducing the costs of introducing full retail competition in New Brunswick.
There are a number of cross cutting electricity issues that apply whether wholesale competition, self-generation or full retail competition is being considered. These include: (1) refinements to the regulatory regime; (2) stranded costs and entitlements; and (3) reciprocity. Each of these issues is reviewed below. As a result of restructuring of the electricity sector, the responsibilities of the Board will be expanded to include new functions. Adequate technical expertise and resources will be required for duties such as controlling the competitiveness of the generation and retail services markets and regulating the transmission and distribution businesses (the "wires" businesses). Most importantly, with respect to the generation business, the Province will give the Board the authority to monitor the competitiveness of the wholesale market and ensure that the Crown utility is unable to exercise market power. This role is likely to be in coordination with the Competition Bureau and the system operator who will have the real-time data necessary to oversee the behaviour of market participants. The "wires" businesses will continue to be natural monopolies. However, with the increased competition in the wholesale market and the prospect of competition in the retail market, it is essential that the "wires" businesses be operated in a manner that is fair to all market participants and prevents incumbents from securing any undue competitive advantage or from cross-subsidizing competitive operations. Therefore, as part of the increased separation of generation and transmission functions, there will be a need for independent regulation of the transmission system. The Province will direct the Board to regulate the open access transmission tariff. Rate caps, which are based on the consumer price index minus a productivity offset, have proven to be effective in other jurisdictions in driving efficiency improvements and providing significant reductions in transmission and distribution rates over time. Service quality standards will be incorporated into the performance based regulatory framework. The regulatory focus will be one of increasing the administrative efficiencies of regulation such as making greater use of paper hearings and other administrative processes that reduce the costs of regulation to all parties. The Province will direct the Board to adopt a light-handed, performance-based method of regulation. The Province will mandate the Board with administrative oversight regarding reported abuses of the Crown utility’s code of conduct and administration of its real time information system and violations of its open access tariff. Furthermore, the Province will empower the Board with the responsibility of approving ancillary services charges and making determinations regarding stranded costs. Finally, with the opening of the wholesale market, the municipal electric utilities will be able to procure power from a wide range of potential suppliers. This will provide them with the opportunity to secure power at a cost that may be lower than the cost they can obtain from the Crown utility. To ensure that such savings flow through to their customers, the distribution electric utilities will be required to file their rates and any long-term power purchase agreements with the Board. In addition, the Province will empower the Board with the authority to initiate a distribution utility rate review upon the complaint of a customer or under its own initiative. Moreover, the Province will require that distribution rates automatically be subject to Board review when rate increases in any customer class exceed an amount set by regulation. Under some conditions,
the introduction of wholesale and retail competition could create
stranded costs for the Crown utility. Reductions in the Crown
utility’s sales can create stranded costs because the lost sales
contributed to the recovery of fixed costs. The issue of stranded cost recovery addresses the question of who pays for these stranded costs. At one extreme, a full "user-pays" policy would require the customer or customers that caused the stranded costs to pay these stranded costs through some form of "exit fee" so that other customers who do not benefit will not have to pay. At the other extreme, all customers would pay for the stranded costs, regardless of whether they benefit directly. An appropriate policy for deciding who should pay under these conditions is one that states when one specific customer or class of customer benefits from a decision then they should be responsible for the recovery of the stranded costs that stem from such a decision. Therefore, the Province will impose a policy of user-pay with respect to recovery of stranded costs associated with the introduction of wholesale competition, non-utility generation and retail competition wherever feasible and in a way that does not unnecessarily impede the development of a vibrant wholesale and retail market. The market design committee will assess the method of cost recovery as part of their recommendations on market structure. Fees will be determined for customers who impose stranded costs on other customers, as approved by the Board. Once the market is formally restructured, competition transition charges may be assessed on all customers on an equitable basis, if the Board determines that restructuring the New Brunswick market will create stranded costs. The competitive workability of adjacent market areas is enhanced when each market offers the other reciprocal and non-discriminatory market access. Reciprocal access effectively makes the markets more efficient by increasing the market size. Should some jurisdictions not offer reciprocity, requiring it may adversely affect the competitiveness of the New Brunswick wholesale and retail markets by limiting the number of potential competitors to those offering reciprocity. The issue of reciprocity is also closely related to stranded cost recovery. Reciprocity would provide the Crown utility with an opportunity to recover some stranded costs caused by the import of electricity from other markets by providing equivalent access to these other markets. For example, under full reciprocity, in order for an external supplier to sell electricity into the New Brunswick wholesale market, all New Brunswick suppliers would have to have equivalent access to similar markets in that jurisdiction. Whether or not the supplier would be able to take advantage of this reciprocal access would depend on its own generation cost structure relative to the cost of wholesale power in its jurisdiction. For these reasons, the Province will direct the market design committee to examine and make recommendations regarding the need for reciprocity requirements in its design of the New Brunswick market. The Province will take the following steps in order to move forward with policy objectives relating to wholesale and retail competition:
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