When the government of Alberta deregulated the electricity market in 1996 and introduced retail competition in 2001, it was supposed to create a free market that benefited retailers and consumers alike. And so far, according to the province, everything is going swimmingly. “Deregulation of the generation and retail electricity markets in Alberta has been strikingly successful,” says, Energy Minister Ken Hughes. The key, he says, is choice. Consumers now have the power to choose between any number of different retailers, between different plans and contracts. There’s just one small problem: the vast majority of consumers are choosing not to make a decision.
The market has been slower to develop than Hughes suggests or than anyone expected. While many more retail options exist than in the past, consumers aren’t flocking to them. In fact, 60 per cent of residential consumers aren’t buying their electricity through the retail market. Instead, they’re relying on the province’s so-called Regulated Rate Option (RRO), which is calculated based on the projected price of electricity in the following month. Consumers who don’t choose their own retailer purchase their electricity through their local distribution company at the default rate. And, despite its susceptibility to unpredictable price hikes like those that happened in August 2012 and again a year later, most Albertans remain on the default rate. The government commissioned a review of the electricity market, and in September 2012, the Retail Market Review Committee released its report and recommendations, stating, “A government- authorized default rate is an anomaly in a competitive market. A retail electricity market cannot be considered fully competitive until the default rate is phased out.”
The government has made some steps towards phasing out the RRO. Since 2006, it has gradually transitioned from being based on long-term projections to being based on month-ahead projections. In 2010, the default rate became 100 per cent based on these short-term prices, thus exposing consumers to the full brunt of market volatility. If this was intended to encourage Albertans to switch to retail electricity providers, though, it hasn’t been very successful. Approximately 10 per cent of residential consumers switched from the default rate to retail providers between 2010 and 2012.
Larry Peters, the vice-president of business development at NewGen Energy, one of the province’s smaller electricity retailers, says the government hasn’t done a good enough job of educating consumers. “We try to do that through our website and talking to people, but it’s one person at a time. There’s a great deal of confusion in the marketplace as to what options are available, why they should consider choosing, and so on.” The government of Alberta has set up a website, Utilities Consumer Advocate, to demystify deregulation and inform consumers of their choices, but it’s not an intensive education campaign. That means, Peters says, electricity remains “out of sight, out of mind.”
Retailers have tried to pick up the slack, coaxing reluctant consumers off the RRO with a variety of campaigns and options. Link Energy and Sponsor Energy promise to donate a portion of their profits to local charities. Others offer special discount rates for seniors. NewGen Energy and several others allow customers to sign up online in the hopes that will make consumers more likely to abandon the default rate, while others run extensive door-to-door and telephone campaigns.
Despite their efforts, consumers seem resistant to education about electricity and aren’t motivated to shop for alternatives to the RRO. Vittoria Bellissimo, the executive director of the Industrial Power Consumers Association of Alberta (IPCAA), says that even after 10 years in the industry she can’t get anyone to be enthusiastic about electricity. “It’s not like a cellphone, where you buy a plan and you understand minutes and you understand data and you try to find a plan that works for you,” she says. “In this case, it’s kilowatt hours and all you really know is what your total is for the month and you only know that by looking at your bill, and very few people look at their bills.” In fact, many consumers don’t understand what the RRO is. The Retail Market Review Committee report suggests that consumers may be interpreting the word “regulated” to mean “under government control,” rather than realizing that the rate is approved through a cost-of-service approach that’s reviewed by the Alberta Utilities Commission to ensure that utilities get a fair return on investment.
That so many consumers remain on the RRO is a problem, given that Alberta is such a relatively small market. As of August 2012, 60 per cent of residential sites, 74 per cent of farm sites and 47 per cent of small commercial sites were still on the default rate. That means retailers are looking at a lot of consumers who are completely unmotivated to buy their product. Gordon Smillie, an electricity consultant with Desiderata Energy Consulting, says the government’s refusal to step out of the retail market has hurt competition. “One of the best ways to encourage competition is to ensure that there’s a large enough market that can enable the retail providers to differentiate themselves, to offer unique products or services to different groups of people,” he says. “By not providing that market, I think the government is not creating the condition where you get the encouragement of that competition amongst the retail market providers.”
Still, Bellissimo is far from convinced that getting rid of the RRO is the answer.
“If you’re trying to get a retail market going for residential consumption just for the sake of having a market, you have the wrong objective,” she says. “You should be trying to do it to get fair pricing for consumers, and if you’re not, you’re doing it backwards.”
She’d rather see the government deal with transmission costs, which have increased since deregulation.
In its report, however, the Retail Market Review Committee was clear on its opinion of the default rate. “The committee’s key recommendation is to reduce uncertainty by stating, as soon as possible, that … the current RRO will be phased out, that a provider of last resort service will be created, and that the Alberta retail electricity market is open for business.”
Instead, a few months later, Hughes announced that the government was extending the program’s expiry date from June 30, 2014, to April 30, 2018. “We’re not going to tell Albertans they have to move off a default rate and go to a market option,” he says. “People have a choice. If they wish to reduce their costs or manage their costs, they can move off of the default rate whenever they want to, and what you’re seeing is an incremental increase in the take-up of competitive options over time.”
Smillie says the government may be hesitant to move away from the RRO due to consumers’ unrealistic expectations from the competitive market (see charts). Customers want stable prices for electricity, but have said they’re unwilling to pay for them. They’re also choosing, in large numbers, to remain with the default rate. “Two-thirds of the people don’t want to make a choice and have voiced their disinterest,” says Smillie. “The government maybe thought the status quo was a reasonable option to maintain. They can’t force the energy companies to give the people what they really want, which is low price at no risk.”
Hughes, meanwhile, won’t say whether the government plans to extend the RRO past 2018 or whether it plans to follow the committee’s recommendations to move away from the program. “I think what we have to do is get to 2017 or 2018 and assess where the market is and then respond and assess whether there should be any changes made at that time.
Government of Alberta list of electricity and natural gas providers.
The Expectation Gap
The Retail Market Review Committee discovered that while many consumers wanted prices that stayed the same every month, almost nobody was willing to pay for them. Meanwhile, 58 per cent of Albertans believe the government should maintain a regulated rate for electricity. Here’s what consumers said…