On June 7, 2017, Bill 16, titled “An Act to Cap Regulated Electricity Rates” (Bill 16), received royal assent and is now law. Bill 16 will impose a maximum rate of 6.8 cents per kilowatt hour (kWh) for electricity consumers on the regulated rate option or RRO (a government-regulated rate that fluctuates monthly). The price cap comes on the back of the Alberta government’s initiative to transition from the province’s current energy-only market in favour of a capacity market system that is seen by some as more capable of promoting renewable generation investment. However, the introduction of a capacity market as well as the procurement of renewable electricity may result in a material increase in electricity prices. Bill 16’s maximum rate is aimed at protecting consumers against such an increase.

SUMMARY OF BILL 16

Bill 16 applies to the approximately one million RRO customers in Alberta, which include residential and small business customers consuming less than 250,000 kWh per year.

Bill 16 prescribes the maximum rate electricity retailers can charge RRO customers. From June 1, 2017, until May 31, 2021, RRO customers will be charged the applicable RRO rate or 6.8 cents per kWh —whichever is lower. Bill 16 applies to the electricity charge only; it does not cover other electricity-related fees, such as transmission and distribution charges.

Electricity prices for RRO customers are established by energy price-setting plans approved by the Alberta Utilities Commission (other than for rural electrification associations and the City of Medicine Hat, which have different approval procedures). When market conditions make it more expensive to procure electricity, the RRO rate is increased accordingly. However, with the imposed maximum rate under Bill 16, if the price increases beyond 6.8 cents per kWh, the RRO rate will not increase to account for the increased cost. Instead, Bill 16 amends the Climate Leadership Act to allow for the carbon levy to cover the RRO providers’ costs in excess of 6.8 cents per kWh, which as a result of Bill 16 are no longer recoverable from the consumer. The specific procedure for reimbursement to RRO providers will be addressed in regulations that the government has not yet issued.

Bill 16 also amends the Alberta Utilities Commission Act by expanding the mandate of the Market Surveillance Administrator (MSA) to include investigative matters, compliance and action regarding contravention of Bill 16.

DISCUSSION

In 2010, the Ontario power market began its electricity market transition from primarily coal to renewable energy sources, following which electricity prices increased significantly. In connection with this transition, Ontario implemented a cap-and-trade model — a critical component of Ontario’s Climate Change Action Plan, which was enabled by the Climate Change Mitigation and Low-carbon Economy Act. Among other things, the cap-and-trade model generates revenue for the Ontario government by enabling it to sell emissions credits. Ontario has introduced legislation that, if passed, will offset the increased rates charged to consumers on their electricity bills by approximately 25 per cent and will be financed by the revenue generated from the cap-and-trade model. However, recent projections show that such revenues may not be sufficient to cover the increased costs borne by the consumers as a result of the rising electricity prices. In the future, the Ontario government may need to seek additional funding if their objective is to insulate consumers from further increases in electricity prices.

The pending changes to the power market in Alberta may result in similar increases to electricity prices as the Ontario power market experienced in recent years. The maximum rate imposed by Bill 16 functions as a pre-emptive measure to protect Albertans from a similar electricity price increase during the next four years. In parallel, the government is awaiting a report from the MSA identifying options for reform of the RRO more broadly, which may lead to additional changes to the RRO in Alberta. The shift away from an energy-only market was a recommendation by the Alberta Electric System Operator that was adopted by the government to support Alberta’s Climate Leadership Plan, as discussed in our May 1, 2017 Blakes Bulletin: Alberta’s Power Reform: Implications for Electricity Providers and Consumers.

Competitive electricity retailers are not contemplated or addressed in Bill 16, despite the direct effect of the legislation on the competitive retail market. To date, electricity retailers have offered competitive fixed rate contracts, which provide protection from electricity price volatility to electricity consumers who are not on the RRO. Although Bill 16’s maximum rate for RRO customers protects buyers, a more balanced approach would have considered the electricity retailers. Bill 16 may affect the functioning of the competitive retail market and ultimately reduce consumer demand for fixed-rate contracts.