EDITORIAL

Restructuring of the Alberta electrical power market, which began in the late 1990s, continues to evolve. In the lead article in this issue of Energy Regulation Quarterly, “A Tale of Two Market Designs: What’s New in Alberta”, Bob Heggie discusses the current initiative to reshape the role of market forces in the wholesale electricity market through the introduction of an administered capacity market, while the Alberta Utilities Commission is examining whether and how market forces can be brought to bear in the, traditionally monopolistic, distribution infrastructure function. Central to the exercise is the perennial question in economic regulation: which functional elements of the system can be turned over to competitive markets and which should be regarded as monopoly functions? Heggie concludes that, somewhat paradoxically, “the evolution in Alberta is moving to introduce more central control in what was once an inherently competitive function, while potentially introducing competitive forces into what was an inherently monopoly function.”

The challenge of getting government’s role right in the governance of the electricity sector is also the subject of Robert Warren’s article on “The Avista and East-West Tie Cases, and Their Implications for the Governance of the Electricity Sector in Ontario.” Warren suggests these two cases1 “have highlighted a serious weakness in the governance of the electricity sector in Ontario [and] illustrate not just the immediate adverse effects of Government interference in specific matters but the deeper damage the Government’s role does to governance of the sector as a whole.”

Meanwhile, the day-to-day regulation of the electricity sector continues. In “OEB Takes Steps Towards Implementing ‘Activity and Program Based Benchmarking”, David Stevens reviews the Ontario Energy Board’s recently-released Discussion Paper. He notes that, while the Discussion Paper itself is confined to the application of the APB approach to electricity distributors, the OEB plans to implement APB for all regulated utilities, including gas distributors.

In “Inconsistent with the Public Interest: FERC’s Three Decades of Deference to Electricity Consolidation”, Scott Hempling questions the Federal Energy Regulatory Commission’s approach to the approval of mergers and acquisitions of retail electric utilities in the U.S., noting that the number of independent retail electric utilities has been cut by more than half since the mid-1980s. While the FERC is required by statute to find consolidating transactions to be “consistent with the public interest”, FERC’s orders in fact require only “no harm”. Hempling questions whether this is the correct standard, suggesting that, consistent with the public interest standard, perhaps more emphasis should be placed on whether the relevant markets resulting from consolidating transactions are “effectively competitive markets.”

Ever since the closing decades of the last century, energy markets have been characterized by fundamental structural changes, technical innovation and other dynamic changes. In his article on “How Scalability is Transforming Energy Industries”, Adonis Yathcew observes that, for much of the 20th century, the dominant force shaping the structure of the energy industries was “increasing scale economies”. In the 21st century, the trend has been reversed, towards “scalability”. For example, in Yatchew’s view, OPEC’s ability to influence prices has been undermined, not so much because fracking has opened up new supplies, but because reductions in supply by OPEC members are met with reciprocal increases from shale sources – shale production can be scaled to offset reductions in supply from other sources. “In electricity industries, highly scalable distributed energy resources, such as wind, solar and storage continue to experience rapid declines in costs.” Yatchew identifies the regulatory, institutional and legal issues that arise, such as “the potential for impaired or stranded assets, supply reliability (e.g., through capacity markets), tariff evolution, and cost challenges.”

The significant shortfall in Canadian oil pipeline capacity continues to have immediate, serious and identifiable repercussions – for industry, government revenues and investor confidence, with implications for the longer term growth of the domestic oil industry. The obvious solution – adding capacity – will not be available in the short-term, as each of three major oil pipeline projects (Trans Mountain Expansion, Enbridge Line 3 Replacement and KXL) continue to face various legal, regulatory and permitting delays. In November, 2018 the Minister of Natural Resources asked the National Energy Board for advice on what might be done in the meantime to optimize the use of current pipeline capacity. In its report in March, titled “Optimizing Oil Pipeline and Rail Capacity out of Western Canada”, the Board noted that pipelines are currently operating “at full capacity [and that any] notable increase in throughput would have to come from new capacity additions.” The Board did, however, offer some suggestions for non-regulatory steps that might be taken in the meantime to improve the process for nominating for capacity. Rowland Harrison, one of our Co-Managing Editors comments.

The current constraints on oil pipeline capacity, and the direct implications for the current and future development of the Alberta oil sands, are of course the subject of almost daily news reports and commentary. Three books have resulted, the most recent of which, THE PATCH: The People, Pipelines, and Politics of the Oil Sands by Chris Turner, is reviewed by Rowland Harrison.2 Harrison concludes that THE PATCH, which won the 2018 National Business Book Award, “is an extremely valuable contribution to the existential debate that will almost certainly continue in Canada for the foreseeable future.”

  1. The Avista case was analyzed from a U.S. perspective by Scott Hempling in the last issue of Energy Regulation Quarterly, “Merger Rejected: Common Sense from Washingtom”, (March 2019) 7:1 Energy Regulation Quarterly, online: <http://www.energyregulationquarterly.ca/articles/merger-rejected-common-sense-from-washington#sthash.ZAZASioQ.dpbs>.
  2. See also McConaghy, “Dysfunction: Canada after Keystone XL”, reviewed (June 2017) 5:2 Energy Regulation Quarterly, online: <http://www.energyregulationquarterly.ca/book-reviews/dysfunction-canada-after-keystone-xl-dennis-mcconaghy-dundurn-toronto-2017#sthash.qzPJLaF0.dpbs>; and Poitras, “Pipe Dreams: The Fight for Canada’s Energy Future”, reviewed (December 2018) 6:4 Energy Regulation Quarterly, online: < http://www.energyregulationquarterly.ca/book-reviews/pipe-dreams-the-fight-for-canadas-energy-future#sthash.l0mQg50f.dpbs>.

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