The Regulated-Rate Option Safety Net
Starting in 2001, customers gained access to retailer-provided electricity, thanks to the process of deregulation that began in 1996 with the passage of the Electric Utilities Act the previous year. In the past, businesses and residents were simply stuck with paying the going rate to whichever utility operated in their area. The passage of the EUA changed this. Customers gained the ability to choose their electricity retailer, based upon their personal preferences for price, price stability, service quality and other attributes.
However, it made sense to provide a safety net, to make sure there was a baseline price in place for businesses and residents to fall back on in the case of high retail electricity rates or other unanticipated problems. All areas of Alberta still have a designated energy provider for each geographic area that provides electricity at regulated rates. When someone chooses not to sign up with an electricity retailer, they automatically get their electricity from — and pay their bills to — that default utility company. Any business or residence that uses less than 250,000 kWh per year can choose to pay the regulated rate.
This regulated electricity rate is known as the RRO, or Regulated Rate Option. “Regulated” does not mean that the RRO price is set by the government of Alberta. Instead, the RRO rate is determined by an independent organization, the Alberta Utilities Commission (AUC), which functions completely independently from the government. The AUC’s mandate is to act impartially, treating both electricity suppliers and their customers fairly. The RRO price set by the AUC is meant to fairly compensate energy providers, while also ensuring that customers pay a fair and reasonable price.
The AUC calculates the RRO based on the current market price of electricity and how the price is expected to change. The RRO is also based on global market conditions (which can be affected by weather, supply and demand, and a host of other factors) and the cost of transmitting electricity to various parts of the province. The RRO is published by the AUC on the first of every month.
Predicting Unpredictable RRO Prices
In the past, RRO rates were calculated based on long-term projections, meaning that the price stayed relatively stable from month to month. In 2006, however, the AUC started incorporating data on short-term projections into the RRO calculations. In 2010, the default rate became entirely based upon price projections for the month ahead.
The consequence of recalculating the RRO on a month-to-month basis is that the price of electricity changes often, and sometimes by a great deal. This is good when sudden jumps in supply or decreases in demand quickly lower your electric bill. But market volatility can make it very difficult to plan out a budget. In May 2007, for instance, the RRO price of electricity for Direct Energy Regulated Services customers was 7.591 cents per kWh. The price then rose for the next four months, reaching a peak of 11.673 cents per kWh. This means that if a customer’s electricity bill was $100 in May, by September they were paying $153.77 for the exact same amount of electricity.
This increase may not have been dire for most residents of Alberta, but the RRO rate for businesses was nearly identical to that for residential customers. A business that used 200,000 kWh per year, if its usage was identical from month to month, would have gone from paying $1,283 in May, to $1,949.67. A change of a little less than $700 might not affected many businesses, but for an owner who was running a tight budget, the sudden increase might have proved a bit problematic. These sorts of concerns are why the competitive retail electricity market exists today.
It may well be that staying with your default regulated supplier of electricity is the optimal solution for you, but there’s no reason not to investigate the competitive retail alternatives to paying the RRO price for electricity. Everyone has the right to choose the solution that suits them best.