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Competition and Deregulation


In the United States, wholesale competition already exists and retail competition is becoming a reality. This is resulting in downward pressure on rates, significant consolidation of regional electric utilities and fundamental management transformation. Open access is leading to increased market activity as options for customers are enhanced. Utilities are cutting their costs in an effort to become more competitive and competition is creating pressure to eliminate cross subsidies between, within and across rate classifications.

In Canada, there is uncertainty about the extent and timing of deregulation. Canada will likely respond to competition on a province-by-province basis depending on circumstances. NB Power is well-positioned in the transmission network, with access to Quebec, Nova Scotia, Prince Edward Island and Maine. However, NB Power also faces the following challenges:

  • Traditional operating reserve benefits obtained through interconnections could be at risk.
  • Large capacity interconnections will provide competitors with direct access to customers.
  • NB Power has a large fixed component in its costs.
  • Cross-subsidization still exists. This is for entire customer classes and for particular customer groupings within a class.

Open Access Evolution

Open access transmission is accepted as a necessary first step in the development of competition in the electric utility industry. Non-discriminatory transmission access is an integral component of all deregulated competitive electricity markets.

In 1992, the Energy Policy Act opened the United States to wholesale competition and recent US Federal Energy Regulatory Commission (FERC) orders have set detailed transmission access rules covering this competition.

Under open access transmission as defined by the FERC (and under discussion concerning Canadian Interprovincial Trade), transmission service would be functionally unbundled or separated from energy generation and marketing.

Interprovincial Trade Negotiations

Negotiation of an Energy Chapter of the Agreement on Interprovincial Trade (AIT) is continuing with a targeted conclusion of July, 1997, for implementation by January, 1998.

Through these negotiations, the following four components of open access have been identified:

  1. Wheeling out [internal non-utility generator (NUG) access to outside markets];
  2. Wheeling across (Province A through B to markets in C);
  3. Wheeling within (NUG access to internal market);
  4. Wheeling in (external access to internal market at either the wholesale or retail level).

The first two components have been the main focus of AIT discussions as they deal solely with transmission wheeling. The latter two components are more complex and raise a number of significant issues including the recovery of stranded costs. An overview of the levels of access and the related issues is provided in the table below.

Access Level Description Issues
Stage I
Wheeling out NUG to external customers Transmission tariff
Gas development
Wheeling across Cross territory (A through B to C) Transmission tariff
Operating agreements
Stage II
Wheeling within NUG to internal customers Transmission tariff
Stranded costs
Energy pool
Wheeling in (wholesale) External generators to internal
customers (purchase for resale)
Transmission tariff
Stranded costs
Energy pool
Cross-subsidization
Social policy
Wheeling in (retail) External generators to internal
customers
Transmission tariffs
Distribution tariffs
Stranded costs
Energy pool
Cross-subsidization
Social policy

Transmission Tariff

There are various methods of establishing transmission tariffs. FERC Order 888 defined principles and methods for the United States which most Canadian utilities are also applying. FERC principles include:
  • pricing based on full costs plus a reasonable rate of return; and
  • a user-pay philosophy.

The tariff has two component parts:

  • charges for access to the network; and
  • charges for services required to support the reliable transmission of electricity through the network.

The tariff is calculated using a simple formula:

Revenue Required / Usage

Natural Gas and Non-Utility Generation Projects

It appears probable that natural gas could be available to New Brunswick and the US east coast as early as November, 1999. Applications have been filed with appropriate regulatory boards for development of Sable Island gas fields and for competing pipeline projects to connect either to the US main pipeline system near Boston or to the Canadian system near Quebec City.

The development of either natural gas pipeline will allow gas-fired generation to be established to produce electricity for local consumption or for export. The structure of transmission tariffs and proposed gas pipeline tariffs will determine the viability of supply to the US market.

NB Power has signed a precedent agreement for gas transportation and is engaged in the overall evaluation of potential power plant projects which could be fired with natural gas.

Operating/Reserve Sharing

NB Power was developed as a fully integrated generation, transmission and distribution system with large generating units and interconnections. Its geographical location between Quebec and New England encouraged this development. The resulting system has produced economic benefits for New Brunswick, Quebec, New England and the other Maritime provinces.

NB Power's operating reserves, which are the backup supplies required to provide for the secure operation of the system, are large relative to its system size and are unique to NB Power. The interconnections and the opportunity to trade electricity with other utilities made it economically feasible for NB Power to build and operate the larger units. The interconnections support the system with direct and indirect contributions to operating reserves. The Corporation has traditionally used these interconnections to reduce reserve requirements. The results are lower operating costs.

It is essential that the operating reserve benefit associated with the interconnections be protected prior to unrestricted open access.

Stranded Costs

Stranded costs are past costs, incurred by a utility in meeting its obligation to serve all customers, which may not be recoverable in the future from customers in a competitive market. These costs are not new but are costs customers are currently paying.

Provision for stranded cost recovery is one of the most important deregulation issues facing the electric utility industry. The FERC, state regulators in the United States, and the model for deregulation in Alberta have allowed stranded costs to be recovered.

Energy Pool

Historically, electricity in New Brunswick has been supplied from the lowest incremental cost generation source available. A centrally controlled system of dispatch provides the least-cost means of matching supply and demand. However, in a competitive marketplace, the following approaches might emerge:
  • bilateral contracts between buyers and sellers;
  • an energy pool structure, which is a short-term spot market through which demands for electricity are met on the basis of hourly price and volume bids by generators and buyers;
  • a combination of the above.

The US FERC rules for transmission access provide for a bilateral contract model, which appears adequate for wholesale competition.

It is becoming evident that an energy pool structure, which provides a transparent hourly market price, is required to manage competition at the retail level. As well, the energy pool structure would provide a more efficient mechanism for resource use and for the preservation of system reliability.

It appears that a combination of the energy pool structure with bilateral contracts is inevitable if the utility industry is to move to full retail competition. At issue is the type of energy pool, including the identification of participants and the rules.

Reliability Concerns

Advocates of an open access system believe that deregulation and competition will have no negative impacts on the reliability of the electric power system. Two recent and consecutive major power outages in the western half of North America left millions of people without power. This has caused some observers to doubt that belief.

The Cambridge Energy Research Associates (CERA) has released a report outlining two possible trends for evolution of the electric power industry:

  • customers experience a slight reduction in rates with no reduction in reliability;
  • majority of customers experience no reduction in rates but a deterioration in reliability.

CERA argued that the second scenario is just as likely as the first and should not be dismissed. At issue is the degree of conflict between commercial market freedom and restrictive reliability limits. Reliability seems best preserved through a pool structure with an independent system operator (ISO). Detailed rules of interaction are yet to be determined. NB Power will continue to monitor various ISO developments and the proposed New England Power Pool (NEPOOL) structure in particular.

Cross-Subsidization

Cross-subsidization exists today in New Brunswick both within and across customer rate classifications. Within a customer class, NB Power supplies electricity at average rates which reflect subsidies from one customer to another, be it from a large customer to a small, from an urban customer to a rural customer, or from an off-peak user to an on-peak user.

Subsidization across customer classes can be estimated by comparing revenue-to-cost ratios as shown below.

Customer Class Revenue-to-Cost Ratio
Residential 0.86
General Service I 1.30
General Service II 1.15
Small Industrial 1.24
Large Industrial 1.02
Wholesale 1.14

Cross-subsidization is an issue that will be addressed as deregulation emerges.

Public Policy

In a regulated monopoly structure, social policy programs such as rural electrification, conservation, indigenous fuel requirements, and rate relief for the disadvantaged are often funded by rolling their costs into overall rate requirements. This results in a form of conscious cross-subsidization for the public good. In a competitive marketplace, programs of this type, deemed necessary by public policy makers, need to be explicitly recognized and funded.

Planned Initiatives

Initiatives in preparation for deregulation include:
  • developing a transmission tariff by July, 1997, for wheeling out and wheeling across the province. This will support AIT negotiations;
  • investigating the potential pool structure appropriate for New Brunswick;
  • participating in an Energy Policy Committee of government (representation from NB Power, Natural Resources and Energy, Environment, and Economic Development and Tourism);
  • developing a distribution tariff for "wheeling in" to allow retail access.


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