The Energy Regulation and Markets Review - Stikeman Elliott

Canada
Independent Electricity System Operator (‘IESO’), most customers are largely insulated
from the spot price through the aforementioned regulatory measures. Currently, there
are initiatives underway to enhance price fidelity and competition in the IESO market.
Alberta has fully functioning competitive wholesale and retail markets. The AESO
contracts with transmission facility owners to provide generators access to the electric
grid. All wholesale power must be sold through the power pool, which is operated by the
AESO, subject to a few exceptions such as ‘behind-the-fence’ generation or sales under
direct sales contracts or forward contracts. The AESO dispatches power through the
power pool based on relative economic merit. It is also important to note, however, that
much of the electricity traded in Alberta is not priced at the hourly pool price, rather
the price is set in a direct sales contracts or forward contracts pursuant to the exception
noted above. For example, forwards market trading organisations, such as the Alberta
Watt Exchange, provides wholesale power purchasers with the option to buy quantities
of power (one hour out, one day out, one month out, one quarter out and one year out).
Electricity retailers, in turn, buy large blocks of energy and then repackage it into offers
to end-use consumers, whether that is through the regulated rate or contracts. Alberta
has an ‘energy-only’ market, where generators are paid for their electricity output on an
hourly basis and do not receive any other out-of-market compensation, such as capacity
payments.
In other provinces that do not have competitive power markets there are some
government procurement opportunities for independent power producers. There is
also substantial trade between provincial utilities (e.g., Hydro-Québec, BC Hydro) and
neighbouring US markets. In particular, British Columbia, Manitoba and Quebec – all
of which have abundant hydro resources – export substantial amounts of power to the
United States. These exports have in the past produced outsized profits; however, the
advent of plentiful shale gas has recently depressed electricity prices in the United States
making exports to the US less lucrative.
Canada has a well-developed national natural gas market. Traditionally, gas has
been shipped from western Canadian producers to customers in eastern Canada and the
US northeast (although as noted above the recent proliferation of shale gas in North
America is fundamentally altering this). The Canadian and US natural gas markets
operate as one large integrated market. Canadian gas production is connected to the
North American gas market through a network of thousands of kilometres of pipelines
that allows buyers to purchase and transport natural gas from a number of supply sources
across the continent.
The natural gas price has three components: the cost of the natural gas itself
(known as the commodity cost), the pipeline transportation cost and the distribution
cost. Generally, the transportation and distribution costs are regulated by government
agencies and tend to change moderately over time. The commodity cost makes up most of
the final cost to consumers and will change in response to supply and demand conditions
and can be much more volatile. The Henry Hub, an intersection of numerous pipelines
in Louisiana, is the pricing point for natural gas traded on the New York Mercantile
Exchange (NYMEX). As such, many gas market transactions in North America are
based on the pricing at the Henry Hub. The AECO-C hub in south-east Alberta is the
main Canadian pricing point. The price of gas traded at these hubs is publicly available
and establishes a commodity cost of natural gas. Natural gas can be traded for physical
71