Tuesday 6 March 2001 Power prices continue to shock

Rates will stay high until 2004

Chris Varcoe with file from Howard May

Alberta electricity prices shot up Monday as a new study delivered more bleak news to frazzled consumers: power rates should remain high for several more years.

In a new study on wholesale electricity rates, Calgary investment firm FirstEnergy Capital predicts power prices will remain high until 2004, although they should start to moderate next year.

"It appears that the current tight supply-demand situation in Alberta will persist for the next several years," said the report.

"Although our forecast calls for prices to decline from these very high levels, we predict long-term prices will stabilize well above the historical average."

The forecast comes as Albertans face a turbulent market for electricity, a commodity which once drew scant attention from most consumers.

Electricity prices have soared recently as cold weather, tight supplies and high natural gas prices have pushed rates to unprecedented levels.

Natural gas is considered the fuel of choice for new power generators and higher prices for that commodity have profoundly affected continental electricity markets.

"As long as natural gas prices stay high, Alberta power prices will remain high," said Dennis Lawrence, the report's author.

Alberta has faced an electricity supply crunch as well, as a booming economy caused consumption to grow by 16 per cent since 1996, while generation supply increased by half that amount, the study found.

Power prices jumped last fall as the province prepared to deregulate the electricity market on Jan. 1.

With a provincial election approaching, the Klein government capped rates for residential users and small businesses for one year at $110 per megawatt hour -- as well as providing $2.3 billion in rebates to shield consumers from price shocks.

However, larger industrial users are paying higher market rates.

The FirstEnergy Capital report predicts wholesale electricity prices will average $109 per megawatt hour this year, before dipping to $86 next year and $73 in 2003.

By 2004, rates should drop to $67 per megawatt hour -- about half the price witnessed so far this year, but more than double the rates seen in 1998.

When the province initiated plans to deregulate the power sector in 1996, the average price was $14.42.

For businesses hurting from supercharged power bills, the mid-term outlook is negative. Industrial consumers using large amount of power say five years of high prices could put them out of business.

"I don't doubt their forecast for a minute. We're doomed in this province for the next few years," said John Davies, owner of Lethbridge Iron Works and a vocal critic of electrical deregulation.

"Businesses can't handle uncertainty. . . . the uncertainty is killing people."

The new report came as near-term electricity prices on the Alberta Power Pool jumped Monday from $35 to $413 per megawatt hour by mid-day, but abated throughout the evening.

Analysts blamed the shutdown of an electricity generator at the Battle River power plant north of Calgary for

causing the sudden spike.

Power prices in Alberta have averaged about $130 per megawatt hour this year. Wholesale power is sold hourly on the Alberta Power Pool, an electronic exchange of output that is not already committed to long-term contracts.

Rob Spragins, an electrical economist with the Canadian Energy Research Institute, said a critical evaluation needs to be done on how electrical markets are operating in the new deregulated environment.

"There's enough concern in the market that we need to take a look at this thing to make sure everything is working the way it should be," Spragins said.

Liberal Leader Nancy MacBeth said the price spikes prove deregulation is failing Albertans.

"There are price spikes because the model that the Klein administration put forward allows . . . power to be sold at peak prices, which is causing those spikes to be created," MacBeth said.

Ralph Klein could not be reached for comment.

http://www.calgaryherald.com/news/stories/010306/5049531.html

-- Martin Thompson (mthom1927@aol.com), March 06, 2001