The Fraser Institute

The Fraser Institute

March 03, 2009 09:01 ET

The Fraser Institute: Consumers Likely to Pay More for Electricity Without Changes to Alberta's Transmission Policy

CALGARY, ALBERTA--(Marketwire - March 3, 2009) - Alberta's electricity transmission policy needs to be revamped to ensure proper planning for new generation and to guard against unwarranted costs being passed on to electricity consumers, concludes a new report from independent research organization the Fraser Institute.

While electricity generation in Alberta was deregulated in 1995, regulations and policies pertaining to transmission - the delivery of power at high voltage from generators to substations - remain a mass of confusion with little incentive for proponents of new generation projects to consider their impact on transmission costs.

"Under the existing policy, there's virtually no incentive for investors in electricity generation facilities to consider the cost of delivering electricity from where it will be generated to where it's consumed. There's no incentive to encourage the building of new electricity generating facilities in areas where demand for electricity is high or rising," said Gerry Angevine, Fraser Institute senior economist and co-author of the report, Alberta Electricity Transmission Policy for the Next Generation. The complete report is available at www.fraserinstitute.org.

Alberta's electricity transmission system is also burdened with a government appointed organization, the Alberta Electric System Operator (AESO), which holds responsibility for transmission system planning. But the AESO is locked into a policy of "zero congestion" which requires it to expand the transmission system without considering more efficient alternatives.

"The zero congestion policy is flawed. It's like building a 20-lane highway to eliminate all traffic congestion. Constructing transmission lines to eliminate all congestion is uneconomic with the extra cost of eliminating all congestion greater than the benefit of doing so," Angevine said.

The report concludes that without policy changes, transmission costs are bound to become a much greater burden on Alberta's electricity consumers. It makes five main recommendations:

1. Allow owners of transmission facilities to plan expansion

Responsibility for planning the province's transmission system requirements should be transferred from the AESO to the transmission facility owners who have an intimate knowledge of the system. As in the United Kingdom, the private sector, not the government, should determine how the transmission network is developed. (The Alberta Utilities Commission could serve as arbitrator, ensuring that unnecessary capacity isn't added.)

2. Require competitive bidding for large contracts

Competitive bidding for the construction, ownership, and operation of transmission lines should be introduced to minimize costs.

3. Encourage alternative remedies to congestion

Provincial transmission policy should be revised to ensure that the most economic remedies to transmission congestion, including non-wire solutions when warranted, are considered.

4. Implement marginal loss pricing

Marginal loss pricing methodology should be introduced in order to assign the actual cost of electrical energy lost in the transmission process directly to the generation facilities that provide that energy to the transmission system. This would ensure that investors considering new generation facilities pay close attention to potential transmission losses when selecting plant location.

5. Eliminate system contribution payments

System contribution payments by electric generators, and transmission loss charges based on historical data, should be eliminated as there is no evidence that these factors are affecting investors' decisions with respect to the location of new generating stations.

"As the Alberta economy grows, demand for electricity will increase and so will the need for more generating and transmission capacity," Angevine said.

"Without changes to Alberta's current transmission policy, customers will pay more than necessary for electricity, and the province will be a less attractive place for overall investment and job creation."

The Fraser Institute is an independent research and educational organization with offices across North America and partnerships in more than 70 countries. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit www.fraserinstitute.org.

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