Create a system, and someone will find a way to game it.
Regulators in Alberta issued a ruling this week that found TransAlta, one of the province's major private electricity providers, guilty of deliberately timing the shut-downs of some of its coal-fired generators during high-demand periods. That effectively manipulated system-wide pricing, hitting consumers with premium "super-peak" rates.
The company did this, the Alberta Utilities Commission concluded, on a half-dozen occasions between November of 2010 and February of 2011. Supply was artificially throttled to deliver a tidy profit. TransAlta has contested the charges, and there is a suggestion it may challenge the findings in court.
Even if TransAlta succeeds – the company argues the rules allow it to cut production for portfolio-enhancing purposes – the episode highlights the challenge of privatizing electrical utilities.
Canada's grid is a hodgepodge of provincial regulatory regimes and structures, ranging from a government-owned monopoly in Quebec to Alberta's privatized system. As Ontario's government prepares to partially privatize Hydro One, a monopoly utility that controls much of the province's transmission grid, the AUC's ruling should be required reading. That's especially true given that Queen's Park, rather than strengthening oversight of Hydro One, is instead removing it from the purview of independent watchdogs, such as the province's auditor-general.
The obvious lesson from Alberta is that while many markets are self-regulating, some are not. The particular dynamics of electricity – often marked by such elements as high barriers to entry and a limited number of competitors – can give a large generator the market power to increase its income by strategically manipulating supply. That's why the market has to be carefully regulated. In the case of Hydro One, it's not just some dominant player in electricity transmission we're talking about: It's a monopoly.
It is absolutely possible to have private inputs in markets formerly dominated by public players; in most cases, it's strongly desirable. But there's a reason why electricity markets have traditionally been highly regulated. We use science to produce electricity. We shouldn't use blind faith to design electricity markets.