| Deregulation began in the US after the energy crisis of 1973 with somewhat mixed results. In the Northeast for example, developers greatly overbuilt generation capacity and, quite appropriately, assumed the risks and impacts associated with these decisions. Here, and elsewhere throughout the US, the deregulation model has worked quite well. Unfortunately, the example that is often pointed to is the California experience, which was a spectacular failure due to a lack of available capacity and the manner in which the market was managed. In fact, the concept of a deregulated market transfers capacity development risk from the consumers to where it should be, with the generators, as has happened in New York state.
Today, major investment is now required to keep the available and forecast capacity on track with demand forecasts and – more importantly – to bring the neglected transmission system on track with current supply. Cost estimates to achieve the required improvements are in the US $50-100 billion range. Canadian regulators have carefully tracked US developments in an effort to avoid the deregulation problems that plagued the California market. In Ontario, implementation of these changes has presented significant challenges resulting in changes in the market rules that have worked against open competition, and efforts to decontrol and avoid market power problems. Today, the deregulation experiment in Ontario appears to have halted with the Ontario electricity market being re-regulated.
Market maturity
In Canada, capacity energy, reserve and ancillary products cannot typically be pieced out and optimized as they are in the US. These commodities are bundled and sold as a package, usually to the same buyer. Another key difference is the fact that the US is dominated by investor-owned generation, utility-owned transmission and franchised distribution which, in some cases, is controlled by municipalities. In the US, this important difference means that investors take the risk and gain the rewards on new generation – rather than the ratepayer or the taxpayer.
Infrastructure and organization
The US has many physical paths between the markets. In Canada, this is generally not feasible because of geography, population distribution and physical limitations of the system’s design. This means that the energy can’t easily move from Ontario into Saskatchewan, for instance. For this reason, the US regional markets are much more fluid by comparison. They are allowed to operate with market players receiving consistent and predictable right price signals with the market risks transferred to the market participants. Under this framework, US politicians generally let the market work out the problems that are encountered. In Canada, policy makers are reluctant to allow the development of a true market.
The regulatory process
In Canada, the markets are dominated by large provincial utilities that own generation, while transmission and distribution are also effectively under government ownership and control. Governments are also typically the regulators. In this situation, conflict is unavoidable and market inefficiencies develop.
It’s a myth that the US power industry is less regulated than Canada’s. There are actually more rules and regulations in the US, but they are generally clear, allowing the market players to plan and budget for the regulatory requirements. In Canada, hydroelectric power environmental requirements are typically handled by separate regulations, complicating and often delaying the processes with rules changing depending on the regulatory authorities and sometimes the individuals involved. In the US, there are typically more statutory requirements to obtain a FERC license however, all stakeholders (e.g., whitewater rafters, canoeists, municipalities, state and federal environmental agencies) are involved under one all-encompassing process, simplifying the process needed to obtain a FERC license.
The politics of business
Business protocol is generally the same between the US and Canada, but the political and social differences are interesting. Like so many businesses in the US, electricity is highly politicized; however, free-enterprise thinking prevails to a much greater extent in the US than in Canada. As a result, the business lobby has a much more powerful influence on political entities there. In Canada, negotiations typically depend on bureaucrats and have less political involvement. The importance of politics in the US can therefore not be underestimated and represents a reality that must be faced by any operator in this market.
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Brascan Power is a Canadian company with a 100-year history in hydroelectric generation in Brazil, Canada and, most recently, in the US – where it has experienced significant growth since entering the highly competitive market just 15 years ago. Company assets include nearly 130 hydro generating stations and three cogeneration plants. It generates more than 11 TWh of electricity each year with over 3,300 MW of installed capacity in about 330 units. Through its wholly owned subsidiary Great Lakes Power in Ontario, Brascan has 359 MW of hydro generating capacity, 725 km of transmission lines and more than 11,000 distribution customers. |
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