One of the options a third-party energy review has suggested for the City of Medicine Hat is establishing a rate-setting board and a cost-plus model for power sales. City crews repair a broken power pole in this file photo.--NEWS FILE PHOTO
@@CollinGallant
Medicine Hat could set its power rate for local customers on a cost-plus model through a rate-setting board, according to an independent report on the city’s energy division.
But that would make it unique in Alberta – where top division officials have said it must operate in the spirit of a free market when setting power prices – and require a major shift in philosophy, according to recent statements from administrators.
A call for cost-plus power drove public demands for a rate review during extreme price spikes in mid-2023, and this week, consultant group KPMG stated that could exist within layers between Medicine Hat’s fully integrated business as a generator, marketer and distributor of power.
KPMG’s Tim Swanson told council Monday that a rate-setting board created by council could act as a de facto regulator within Medicine Hat, where the city has a lot of latitude to determine operation as a grandfathered municipal franchise area.
“Regulated rates are based on costs allowed by a regulator, an allowable cost on capital and return on investment commiserate with the risk of the business unit,” he told council.
An independent regulator, the Alberta Utilities Commission, approves distribution rates throughout the province, including Medicine Hat, and default rates for commodities outside Medicine Hat for distributors through the regulated rate option, now known as the “Rate of Last Resort.”
“In Alberta there’s a deregulated market, and in the broader market prices are set based on supply and demand on an hourly basis,” he continued. “The ‘rate of last resort’ is basically reflective of the cost of the electricity provided.”
On Monday, council voted 8-1 for energy division staff to provide their analysis of the report at a special council meeting on Dec. 9.
A utilities board – independent of council but in an advisory role to it – is one of three main recommendations from the report, along with creating a municipally controlled corporation and quickening the shutdown of natural gas wells.
A local utility board could essentially act as a local AUC, approving the division’s submissions on power prices, recuperating capital costs and a regulated rate of return or profit margin. The AUC’s process also includes a “true-up” calculation that adds or subtracts to account for low or high forecasts in a previous month’s rate.
“(Crown corporations) SaskPower or B.C. Hydro are regulated integrated utilities, and they’re earning a regulated rate of return (on commodity sales),” said Swanson.
Medicine Hat has remained the only power generator in Alberta directly under control of a city council, which over the years has wrestled with criticism of provincial averages determining local rates.
Administrators have not yet commented on the report, but division head Rochelle Pancoast told the News this fall that the city’s exemption exists at the pleasure of the provincial government. As such, the city, although independent of the market, attempts to mimic best practice in relation to province’s view of the power market.
Staffers have also outlined the division’s philosophical mandate from successive councils, which has been to drive comparable results to competitors in the Alberta market.
From 2012 to 2023 that was judged as the local profit margin while charging the average of default rates in the province – i.e. Medicine Hat remained cost competitive and profitable at what others were charging as their cost-plus rate.
That system became the focus of intense criticism when provincial prices skyrocketed, pushing up the local default price, and customers also widely panned a new system of contract pricing.
The city has also been reluctant to advertise profit margins on local sales, for fear of revealing export profits and potentially raising the ire of private-sector generators in Alberta which compete for sales against tax-exempt city division.
Even offering local power at low cost however, may not be advantageous for ratepayers, the KPMG report concludes.
“We anticipate power prices will be significantly lower than in the past few years – for the city it may be cheaper to purchase power from the electricity market more often than it has in the past,” said Swanson, citing higher fuel and carbon compliance and lower export profits.
KPMG also said the city should also consider charging rate riders on power bills to recover any losses from month to month, a practice that has never happened in the Hat.
The city already bases its natural gas commodity rate on its cost to purchase gas off the Alberta system, plus a small markup. The city purchases up to 90 per cent of the gas it uses for customers and the city’s gas-fired power plant.
That change took effect in late 2023, alongside an interim power rate-setting formula.
