Power companies almost quintupled profit during winter's utility price spike: U of C report

Power companies were drastically increasing their profit margins as many Albertans were struggling to keep up with skyrocketing utility bills, according to a new report from the University of Calgary. 

Data from the School of Public Policy shows some companies went from making about $9 per megawatt hour in 2020 to $44/MWh last year. 

That's a market markup of $35/MWh, says economist and report co-author Blake Shaffer. 

"We wanted to break down what really is behind this spike," he said. "What we (found) is two thirds of the change comes down to the way that power companies are offering their power into the market."

"Basically, they've increased their offer prices further above the cost to generate."

Last year, Alberta's wholesale power price rose from about $48/MWh to more than $105/MWh. 

Shaffer's study aimed to account for that doubling. 

He says many people were quick to blame the federal carbon tax -- something that "doesn't even apply to the electricity sector," according to Shaffer. The economist says increased demand and the provincial TIER program did raise costs, but only slightly. 

The largest driver was private profit. 

The 2021/22 winter season was the province's first under a new type of energy deregulation. A switch to a competition-based system 20 years ago allowed smaller companies to enter the business, but the market is still dominated by a few large players. 

Shaffer says thanks to low rates, some of those companies weren't making up part of their investment costs as recently as 2018. 

Now, they're hoping to get that money back. 

"Firms earning a margin above their variable cost is totally understandable and reasonable because they have to recoup those fixed costs they have," he said. 

But that's coming at the expense of Alberta rate-payers. Almost half are on a floating rate tied to the wholesale market -- something Shaffer is against. 

Most experts urge residents to choose fixed rates if the option is available. 

"Imagine the market for umbrellas when it's dry, and there's tons of umbrella sellers," he said.

"(Those sellers) are lucky to recoup their marginal costs and they're not making a dent on their fixed cost of their table or umbrella stand. But when it starts to rain, there's very little competition. That's where we're at now. But unlike the umbrella market, where a new seller can quickly come in and start taking advantage of some quick bucks to be made, we can't do that in power. It takes a long time to build plants."

PROVINCIAL AID... EVENTUALLY

The province has tried to step in with help, promising electricity and natural gas rebate programs to help consumers. 

The former is guaranteed to provide $150 in total electricity rebates for three months of payments. The province says that money should be expected this summer and will be applied directly to three consecutive bills. 

The latter, promised in February's budget, won't kick in until October. 

The province says it'll take hold if regulated natural gas rates exceed $6.50 per gigajoule between Oct. 1 and March 31, 2023.

Alberta's prices have risen above $7 per gigajoule this week.

Both the premier and finance minister have previously said the rebate could kick in sooner than autumn if prices spiked, but as of Wednesday, no commitments had been made.  

It's still unknown if it will be applied as a one time payment or could be pushed to consumers through multiple bills. 

On Wednesday, the government tabled the Utility Commodity Rebate Act. 

It will replace the existing Natural Gas Price Protection Act, which, according to the province, does not allow for rebates on electricity bills. 

Associate Minister of Natural Gas and Electricity Dale Nally says his government can't offer the natural gas rebate until that legislation is passed. 

He wouldn't promise natural gas relief for consumers through the summer months, saying only that long term help is important and will eventually happen with more companies entering the industry. 

"Market share isn't the issue," Nally said. "We need more competition for consumers."

Nally acknowledged company profit skyrocketing, but downplayed the causation. Instead, he blamed the pandemic, the Russian invasion of Ukraine and increasing demand for the high utilities prices. 

Shaffer's report says those only account for a few percentage points of the recent markup. 

RE-REGULATION NEEDED?

Many are calling for a system overhaul. 

Other provinces see regulated utility companies pass the entirety of their costs on to consumers through regulated rates. 

In Alberta, the open market allows prices to vary and company revenue to vary. 

According to Statistics Canada, headline inflation in the province went from 5.5% in February to 6.5% in March.

The last time the Consumer Price Index was this high was in February 1991.

"The cost of living is going up and the UCP is making a difficult situation worse by piling on additional costs," NDP leader Rachel Notley said. "Instead of helping Alberta families, the UCP is focused on supporting the bottom line of already profitable corporations."

Shaffer says he expects the high utility costs to stick around. 

"It takes a long time to build power plants, so it'll take a couple of years," he said.

"So as a result, I think we're going to see the situation persist for a little while here. In the meantime, to protect yourself, I'm still advocating folks to get on a fixed rate. The best time to do it was six months ago, but it's still a good choice right now."