In his Fredeen Scholarship seminar, Eric Neudorf outlined how Alberta’s private power companies in the 1940s were able to change the regulatory landscape in a way that profoundly disadvantaged the rural electrical associations, with the result that today they are having difficulty surviving. How did this happen?
To understand this story, it is necessary to go back to the 1940s and recall the demand that was emerging in both the United States and Canada for rural electrification. Although electrical power had been provided to large urban areas and to rural areas close to the main power lines, most rural areas were not being served. The cost to provide this service was significant. The question facing governments of the day was, “Who would provide and pay for this service?”
In Alberta, the Alberta Power Commission suggested public ownership and proposed that the assets of the investor-owned utilities (IOUs) be combined to create a provincial utility that would supply the province. The fees from the private and municipal power authorities would be used to offset the costs of rural electrification.
The IOUs did not want a publicly owned utility, and they were not interested in distributing power to farms — the low population density in rural areas meant delivery costs were large and revenue potential was small.
As a result of a trip to the United States, where rural electric co-ops had been introduced and appeared to be working, the IOUs became advocates for a co-operative solution to rural electrification in Alberta. They knew it would benefit them if they encouraged farmers to invest in, build, and own their own lines. Since the farmers desired immediate electricity for their homes, they agreed that co-ops seemed to be the best option and began to form Rural Electrification Associations (REAs).
While REAs were being built, the Alberta government (the Social Credit Party) was still struggling with the key policy decision — should power generation and transmission be publicly owned, as the Power Commission had suggested, or should it be privately owned? This question was put to a plebiscite in 1948, and Alberta residents narrowly voted in favour of the private option. With the question settled, the government continued what the private electric companies had already been promoting — encouraging the formation of REAs.
The first Rural Electrical Association was formed in 1947, and by 1951, there were 356 REAs operating. They were, and still are, governed under the Rural Utilities Act. When the Act was created, the government gave the private power companies the opportunity to help draft it, which allowed them to structure the Act in their favour. The following four regulatory conditions have made it difficult for the REAs to compete:
- The Act prevents Alberta electricity co-operatives from expanding outside of their specified sphere. This means they are unable to serve nonfarm customers. In particular, the REAs have not been able to service the oilfields that developed in rural areas. In addition, the customer definition in the Act refers to agriculture farms, which prevents the REAs from servicing some of their original customers when farmers expanded or diversified. For example, REAs are not allowed to provide power for more intensive farming operations such as feedlots, greenhouses, and dairies.
- The Act enables private electric companies to rent REA grids at cost to provide electricity to towns and industrial sites — grids that were built and are owned by the REA members.
- REAs are required to maintain a large reserve fund financed by monthly member fees. The fund covers the cost of upgrades and maintenance, which are decided on by the IOUs. The need to sustain this reserve fund makes it challenging for REAs to raise the capital required to grow and expand.
- REAs cannot make changes to bylaws without the approval of the Act’s director, who is appointed by the Minister of Agriculture and Rural Development. This requirement means political factors often play a role in the approvals — e.g., it gives interest groups such as the IOUs the ability to influence bylaw changes that inhibit the REAs’ strategic options. REAs have been stopped from restructuring their shares to capitalize new projects, and they have been prevented from enacting bylaws that would protect their organizations against demutualization.
Demutualization is the conversion of a co-operative, credit union, or mutual into an alternative organizational form. It typically involves the transfer to private investors of the assets that have been built up over the years in the co-operative (click here for a recent report on demutualization by Murray Fulton and Jean-Pierre Girard). Current REA members face two significant incentives to demutualize: they will receive a substantial payout from the sale of their assets; and the regulatory landscape has profound disadvantages for their co-operatives.
This is the key reason for the disappearance of rural electric co-operatives in Alberta. Even though they played a critical role in establishing the provincial electricity grid, the REAs have experienced a long, slow decline. As of January 2016, out of the 398 original REAs, 255 have sold their assets to private electric companies, while the remaining 143 have amalgamated to the point that only 38 REAs remain. Of these, two more have voted to demutualize and sell their assets.
Unless changes are made to the regulatory environment, more REAs will decide to demutualize. While such changes are not impossible, they are unlikely, given the substantial power and influence the IOUs have exerted historically in the Alberta power sector.
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