McGill School of Environment - Regulation Reform in the Electricity Industry






Executive Summary

Research Question

Case Sudies





The Group


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Final Report

I) The preceding analysis of the selected case regions leads us to conclude that regulation reform in the electricity industry has an uncertain impact on energy efficiency. We are unable to arrive at a universal model for deregulation. The evidence from our case studies is non transferable, our findings place specific. For example, in oil rich Alberta, we saw that an abundance of resources acts as a deterrent to the development of energy efficiency programs. The preferred course of action in Alberta has been to simply produce more energy. Furthermore, current political debate over the ratification of the Kyoto protocol leads us to suspect that energy efficiency initiatives in this province are the result of public pressure for government action on climate change and not the result of energy deregulation. In addition, the sharp rise in natural gas prices experienced in Alberta could not have predicted and so does not represent a necessary consideration for other provinces contemplating reform. Climate has played a significant role in determining the impact of regulation reform in all three of our selected regions. For example, record breaking heat in California and severe drought in Argentina affected the price, supply and demand for electricity in ways that no one could have ever imagined.

II) We have experienced difficulties in quantifying energy efficiency. There is a need for clearer categorization of data. For example, energy data for the United States of America as well as for Alberta is collected on a national level. Many utilities have holdings in more than one state and so prefer to report their activities as a collective entity. This renders it difficult to obtain data on a specific region. Furthermore, data on energy efficiency is rarely segregated into categories such as residential. Finally, in the cases of Alberta and California, we hesitate to draw definite conclusions, for regulation reform in these regions is of a relatively recent nature. In California, data pertaining to energy efficiency is available under the guise of demand side management; however, this data does not extend past 1997 and so the comprehensiveness of our analysis is somewhat limited.

III) Our third set of conclusions relates to the particularities of the electricity industry. Electricity possesses a plethora of linkages, both forward and backward, which affect various sectors of our society. The uses for electricity are countless and so the effects of its regulation are widespread. For example, a fluctuation in energy prices affects the quality of education and health care as a greater a greater proportion of their budgets go towards assuring an adequate supply of electricity. Backward links include industries involved in resource sighting, extraction, processing and transportation. Of course, residential consumers, especially low-income consumers, are also affected as an increasing portion of their monthly income is dedicated to paying electricity bills. Even in Argentina, a country still regarded by many as largely underdeveloped, 95% of the population has access to electricity. We assume that Argentinean access to say, air travel, is not as high.

IV) Our fourth and final set of conclusions emphasizes the importance of strong public policy in assuring energy efficiency. To best explain this point, let us first re-examine the case of California, which although heavily criticized for the failure of its regulation reforms to assure stability in both price and supply, has through time managed to assure the persistence of its energy efficiency programs. Regulation reform in California has seen the onus for such programs fall on the consumer. Energy efficiency programs in California are now funded by means of public goods charge and administered through government agencies such as the California Public Utilities Commission and the California Energy Commission. California’s failure to deregulate the distribution end as well as its implementation of rate freezes on the amount utilities could charge consumers for electricity resulted in price increases being absorbed at the wholesale level. This led to the bankruptcy of two of the major investor owned utilities (IOU). As rates are unfrozen in response to the financial difficulties encountered by the utilities, significant increases in electricity prices are expected for the upcoming years.

Further Discussions

Prices should be allowed to reach a natural equilibrium. This point was also made evident in our study of Argentina. The electricity industry in this country was fully deregulated, helping to stabilize once oscillatory energy prices. Unfortunately, Argentina’s sweeping reforms did little to help advance the cause of energy efficiency. In our analysis, energy consumption in Argentina was shown to enjoy significant returns to scale. In fact, low range consumers (those consuming in the range of 60 kwh/month or less) pay more than do mid range consumers (those consuming between 60-120 kwh/month). The logical conclusion is that such pricing structures encourage indiscriminate consumption. It should be noted that although it has done little to curtail overall consumption, deregulation of Argentina’s electricity industry has encouraged overall efficiency in generation and transportation. Improvements in transmission and distribution helped cut losses from an all time high of 27% to below 10% for the period 1992-1997 (ENRE, 1998). Still, little has been done to improve end-use efficiency amongst residential consumers – this despite the fact that the efficient use of energy is stated in the Energy Act of 1992.

While re-emphasizing the virtues of full deregulation, the Argentinean example also leads us to conclude that the free market cannot be relied on to address questions of social and environmental concern. How then, do we foster the efficient use of energy in a deregulated market, while assuring that consumers are not made to bear an unreasonable financial burden? Whereas governments have typically opted for reactive measures such as price caps in California or the millions of dollars in energy rebates handed out in Alberta, we recommend that governments demonstrate foresight and implement practical energy efficiency programs prior to regulation reform. To better illustrate, we offer the following hypothetical scenario:

If deregulation were slated for January 2003, the government should offer home retrofits to residential consumers, who would then have till January first to apply for such retrofits. Consumers meeting this deadline would be exempt from any rate increase that might result from regulation reforms. Once the retrofits were completed, homes would be more energy efficient, thus reducing overall consumption and lowering associated bills, compensating for the increase in electricity prices. Further provisions might also be made which would exempt low-income, residential consumers from sudden rate increases, thus helping avoid undue hardship. Such is the case in California where households with earnings below a pre-set amount qualify for a program called California Alternate Rates for Energy (CARE). CARE participants receive a 20% discount on their energy bills and are exempt from any potential rate increases. Such policy options should be of special interest to our client, a consumer advocacy group with a particular inclination towards low-income residential consumers.

While the recent trend in energy regulation has been towards a laissez faire, free market approach, our research suggests that public policy, if not more so, is equally crucial in promoting energy efficiency. On the point of public versus economic policy, the World Bank states that “Public Benefits do not flow automatically from a financially solvent and efficient electricity sector. Public benefits require explicit attention and there is greater likelihood they can be enhanced if they are considered when reforms are implemented”. And so, all things considered, we recommend that our client continue to advocate for strong public policy regarding the efficient use of energy and its associated economic savings, this regardless of the present regulatory structure in its jurisdiction of interest.

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