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Toma & Bouma/ Impacts- REAs 1

Alberta REA Strategic Review- Rural Economic Impacts

Prepared for

Alberta REAs

Submitted by:

Toma and Bouma Management Consultants #202, 10328-81 Ave, Edmonton T6E 1X2

Ph 780-413-9262; F 780-401-3044 January, 2013


Table of Contents

Executive Summary ....................................................................................... 3 Introduction and Background ......................................................................... 4

Introduction ................................................................................................. 4 Objectives ................................................................................................... 4

Alberta Rural Electricity Situation ................................................................... 5 REA- Rural Electrification Associations ....................................................... 5 IOUs- Investor Owned Utilities .................................................................. 13 Considerations- Policy and Agreements Affecting REAs .......................... 14 Considerations- Rural Alberta Situation Benefits from REAs .................... 15 Summary .................................................................................................. 22

REA Rural Alberta Impacts .......................................................................... 25 Rural Alberta Impacts ............................................................................... 25 Summary .................................................................................................. 28

Alberta Rural Community Policy Options ..................................................... 29 Option 1- Current Policy with Gaps ........................................................... 29 Option 2- Policy to Fully include REAs in Rural Alberta Growth ................ 30

Conclusions ................................................................................................. 32 Findings .................................................................................................... 32 Conclusions .............................................................................................. 32

Contacts and References ............................................................................ 33 Contacts ................................................................................................... 33 References ............................................................................................... 33


Executive Summary

Objectives A number of REAs (rural electrification associations) requested a review of the economic impacts and related issues. The assessment included interviews with these REA boards and Management, AFREA management and Alberta Government officials. The history of REAs, links to regulations and operating issues are reviewed as well as employment and economic impacts.

Findings Alberta has had REAs since 1947 and they interact with ATCO and Fortis primarily. Alberta has two types of REAs in the evolving electric power marketplace. Operating REAs (7) are still successfully managing their lines and infrastructure and delivering electricity to farmers and rural residents (explained below). Non-operating REAs are declining in numbers and have much smaller membership bases and infrastructure. Viability is a concern. Table E1-REAs in Alberta

REA Type Membership Comments

Operating-7- NPP, Battle River, Rocky, Wildrose, Lakeland, Central, South Alta

31,540 Actively operating a regional rural system for farmers, and in some cases, residents

Non-operating-31- see http://www.afrea.ab.ca/links

16,200 Contracting operations to a utility

Total REAs- 38 47,740

Using REA and industry data, the total annual direct rural Alberta impacts (2011) are:

• Electricity price savings- $19 million (at $600/ member); • Employment effects- $11.3 million; • Regional economic purchasing effects– $13.5 million; • System investments- $5.42 million; • Total = $49.22 million, annually (assuming similar patterns over time)

Benefits are similar to those reviewed in North Dakota and South Dakota studies completed for those regional electrical rural co-ops. In total REA, direct and indirect jobs total about 350 and economic impacts (direct and indirect) are about $57 million, annually. REAs in Alberta are a positive regional small business with volunteer boards and locally hired staff and suppliers. About 532 local suppliers and rural small businesses are also involved. Annual activities include: power system operations, repairs, weed and brush control for members, power pole replacements and related investments. Key policy issues include:

Rural Utilities Act/ regulations- limits governance, by-law processes and REA operations;

Energy policy and regulations- affects REAs and wire owner industry relationships;

REAs provide strong regional rural benefits. Industry change, awareness of REA services, farm definitions and potential Alberta growth opportunity needs to be addressed.


Introduction and Background

Introduction

Alberta has had a policy of supporting rural Alberta through rural electrification associations (REAs) since about 1947. Currently the REA industry is facing several challenges and is attempting to adapt with the changing economy and industry structure. This project was initiated by 4 REAs (self-operating) to review economic impacts in rural Alberta and the strategic policy ideas and options may need to be considered. The review included a literature review, interviews with REA boards and General Managers and with provincial government officials.

Objectives From the discussions, the objectives included:

The REAs require a consultant to serve as a strategic resource and facilitator in development of the review, impacts and policy advice.

The International Year of Cooperatives creates a window of review opportunity, and the Federal Government cut the annual budgeting support for all Canadian cooperatives falling under the federal Cooperatives Act (which Alberta does not fall under). A submission was sent in on behalf of at least 4 of the 7 Self Operating REAs.

Alberta REAs need a report for discussion on the current rural situation, possible options for enhancement to the system and advice in policy related areas.

The REAs need a review of economic impacts such as rural job creation and economic development impacts and advice on possible options. The review will include: interviews and data collection from 6 operating REAs, relevant departments (AARD, Energy) and others. Comment on the current policy situation, REA rural Alberta impacts, policy options in a written report.

The scope of the review entailed a review with the REAs interested in participating in the impact study, interviews with others and a review of related literature. The project was completed over September to December 2012.


Alberta Rural Electricity Situation

REA- Rural Electrification Associations Background Rural Electrification Associations (REAs) have existed in Alberta since about 1949. Alberta had been developing as a farm- based province, and in the early part of the century, was supplied with power by Calgary Power. This jurisdiction at the time was under Federal control. Calgary Power (a federally sanctioned monopoly) wanted to develop a site at Spray Lakes (1923) and the Alberta Government (farmer controlled) was not pleased. In 1930, jurisdiction over natural resources was transferred to the provinces. The site was built and rural power was starting to gain interest (Dolphin). The Alberta Government however did its first research into rural power with the former President of the University (Andrew Stewart) completed a study in 1943. He concluded that 54% of farms (30,000) within major power stations could be served by them. The balance of farms (40,000) would be served by smaller more expensive plants. Higher rates in the cities should not subsidize rural power (pg 26). Only .5% (less than one percent) of farms had main line power. However, the rural urban issue was developing on this issue of electric power. By the mid- 1940s, the province was providing power to cities and the Alberta Power Commission suggested public ownership while “the benefit of the natural resources should be shared by all” (pg 27). This caused Premier Manning to act. In 1947 the Premier ordered private power companies “To proceed to put into effect a rural electrification program for Alberta to provide such service to not less than 21,500 farms within areas presently served by their main transmission lines”. His plan called for adding 2,000 farms in 1948 and 1949 and thereafter annually to add 2,500 farms. Expansion of power was desired but private power companies were being challenged. In 1948 a plebiscite was held on public ownership of power and the very close vote supported private ownership. However, farmers were not served with electrical power and farmers wanted it to improve their operations and gain equal access as city citizens. Cost of installing power lines was a big hurdle in the late 1940s. Farm incomes were only about $5,000 and the costs were several thousand dollars (pg 38). Small rural farm co-ops were the answer to sharing the costs (and still do). To help defray costs, the Alberta Government changed the Co-operative Marketing Associations Guarantee Act (1946), allowing the province to guarantee 50% of borrowing costs for farm co-ops. Power costs were to provide power “at cost” and by September 1947, Calgary Power helped organize 35 rural electric co-ops. While the province demanded farmers to put up their own funds for power, they also encouraged formation of rural electrification associations (REAs) as the way to proceed. The process was:

Funding members agreed on a local plan;

Power companies provided maps to estimate local costs;

A meeting was held to collect money (50%+) and members;


Surplus funds went into a reserve fund for repairs (borne by all members);

By 1970, the province had power to all farmers and the province did not have to incur a large debt to implement a rural power policy.

The first REA was formed in Springbank (March 30, 1947) , followed by Gladys, Blackfalds, Big Bend, Gem, Rosemary and Lacombe. In 1948 about 34 more were incorporated. Within 30 years, Alberta had 416 REAs, with about 381 in active operation. REAs served their members and the power company got electricity to the REA site for distribution to their members. In the early times, the REAs and the power companies were highly tied together with a Master Agreement (Canadian Utilities) and a Tri-Party Agreement (Calgary Power). The agreements indicated terms and conditions and built the base for the rural farmers (co-ops) and larger power company relationships. These business and community relationships developed over time and differences were seen early on. REAs were non-profit and cost controlled and had their own reserve funds for repairs and local management. The investor owned utilities (IOUs) were allowed to earn a profit and had set out the master agreements which defined many terms. One of the most difficult items (still existing) was the ability to buy out lines of larger domestic or industrial customers (pg 99). These power companies and provincial system evolved:

Canadian Utilities into Alberta Power Ltd (1971);

Calgary Power into TransAlta Utilities (1981);

Electric Utility Planning Council (7 utilities). The 1950s was a tremendous growth period for electricity with labor saving appliances for women and households to make life easier and reduce many daily chores. However, this was mainly being used in cities and much awareness was carried out to build the idea of how to use household power. Why did electric power appeal to farmers? Some of the benefits included:

Ability to reduce labor with electrical equipment, tools, and household items;

Provision of running water and house, barn and yard lights;

Access to Invention of TV in 1954, Westinghouse refrigerators and other appliances;

Getting equal common services that many other Canadians were experiencing. Current Situation Alberta has two types of REAs in the evolving electric power marketplace. Operating REAs (7) are still successfully managing their lines and delivering electricity to members (explained below). Non-operating REAs (30) are declining in numbers with smaller membership bases and infrastructure. Table 1-REAs in Alberta REA Type Membership Base Comments

Operating-7- NPP, Battle River, Rocky, Wildrose, Lakeland, Central, South Alta

31,540 Actively operating a regional rural system for farmers, and in some cases, residents

Non-operating-30- see http://www.afrea.ab.ca/links

16,200 Contracting operations to a utility

Total REAs-37 47,740

http://www.afrea.ab.ca/links


Alberta also has a federation of REAs (32) which currently has two operating REAs and 30 non-operating REAs as its members. The Federation (AFREA) is located in Sherwood Park and operates as a voice to the provincial Government. It does not represent all REA concerns and many of the non-operating REAs are not members. The prior name for the AFREA was the AUREA (Alberta Union of REA), changed in 1987. A major gap now seen by self-operating REAs is the Federation does not represent their views or needs well. The Federation is seen by the Government as a voice and is invited to several policy development committees. This is an issue. The table below indicates the growth and changes in the REA industry compared with the Alberta farm numbers. From the table, REAs peaked in the 1970s and have declined greatly since then. Farm numbers have also been in decline and now the REAs appear to serve nearly all farmers. Table 2- REAs and Alberta Farm Numbers Year REAs Alberta Farms

1952 41-est Na

1961 Na 73,212

1976 416 63,000

1991 Na 59,000

2011 37 (7 self-operating) 43,234

Source: Dolphin, AA&RD statistics.

From 1974 onwards the number of REAs started to decline. Several driving factors came into play- aging leadership and members who did not understand how REAs developed/ their role, financial issues and very high interest rates (18% +) and a lack of system management. For these REAs, it was appealing to sell their system to a power company. In 1974, 4 REAs were sold and within 20 years, another 200 were sold (pg 109). A number of other REAs saw the trend occurring and decided to amalgamate several smaller REA operations into one larger REA for improved viability. The first one to do so was Landing (near Athabasca), which employed 19 linesmen. The Government initially provided transitional help in the form of grants and expertise to help REA members finance this positive change to access electrical power. This was done because power companies could not get financing for rural generation and transmission (AUC Decision, g 19). REA Reviews It appears that at least four reviews of REAs have been done to assist their continued developments in Alberta and to attempt to address key issues. These reviews are noted. 1971 Review- Several issues existed at that time and the Alberta Government responded:

Provincial policy of $2,500 per farmer, interest- free loans (1970, under Dr. Horner), interest free loans were provided from a revolving fund for REA use;

Aging of many local REA executives, and a lack of broad- based leadership;

Financing for REAs- on cost-shared projects which power companies did not like;

Reserve accounts were held by power companies for REAs (independence issue);

Master agreement- issues of non-farm customers- opposed by power companies;

Which lead to two cabinet committees for a review of policy (1977).


The recommendation of the committees was to provide emergency capital grants for REAs in rebuilding power lines which had aged prematurely. REA board members continued to voice concerns about the inability to borrow funds for lines (thereby having to operate on a cash basis), sale offers from TransAlta for some REAs and issues with the master agreement (pg 110). 1977 Caucus Review (Trynchy)- In 1977 a MLA committee completed a review of REAs to address their issues and completed a wide stakeholder input process with REAs, departments, industry and agencies. The review indicates several core problems of the REA Agreements:

Financial problems- for replacement of lines and poles as reserve accounts were too low;

Operating company- the power company (Calgary Power) acting as the operating company under the tri-party agreement. REAs did not see independence. A new REA control agency was advised;

Tendering- for local construction, REAs desired to have more local control in tendering with progress payments, and the power company only used prepayment terms (due to the agreement);

Transformer size- farms with greater electrical needs, required larger transformers. However, some REAs could not have equal access to meet the farm needs. This recommendation is important (pg iv)- it states if an REA member desires it and the association agrees, and if a member desires 3 phase power, no policy reason should prevent it;

Service area- a bona fide farmer has not been defined, even though REAs are to serve farmers. Also, where REAs have been bought, “a means be provided” to recover these sections;

Maintenance charges- there should be a policy of sharing costs for no REA customers accessing REA lines;

Regional amalgamation- insufficient REA financing was an issue. Government should provide financial assistance to REAs which have low reserves;

Amendments- the master and tri-party agreements be amended with the ideas stated above.

The review provided 13 recommendations for Alberta Government action to address the above problems. A total of 23 submissions were received (including from other provinces). 1984 Review- In 1984, following continued sale of many REAs in Alberta, the Minister of Utilities and Telecommunications (Bob Bogle) was concerned about the trend, and decided to act. He requested a new agreement be developed between the REAs and power companies:

To use a uniform contract, which can have special circumstances;

REAs to have the option to provide single and 3 phase power lines;

REAs could administer their own reserve funds;

REAs could hire their own contractors for system repairs. These four elements were eventually adopted into the next Master agreement. Another element was added- to allow for cost- sharing lines. This new agreement was adopted in 1986. This helped clear up a number of long standing issues for REAs. In 1984 the REAs incorporated a new organization- Rural Electric Co-operative to assist in


financing and buying or power. However, due to the legislation in place, the Co-op was disbanded. It did not allow for buying power at wholesale and selling it to REA member- customers. 1986 Rural Utilities Act Creation- In 1986, the Rural Utilities Act consolidated several Acts for member owned utilities, under the Department of Agriculture. In 1987, some REAs were faced with a system rebuild or sell out option and the Alberta Government provided interest free loans by the Capital Rebuild Program to help maintain and enhance the rural systems. Terms were for 25 years for up to 30% of the costs to rebuild and upgrade lines. In 1990 the program was extended. The 1991 revised contract agreement allowed for cost-sharing on operations and maintenance by REAs with the power companies. This gave REAs ability for rate setting and for power companies, clearer REA costing. The financing program was updated in 1991 to 7% interest rates (market rates were higher) and the province saw a need to help strengthen the Federation with a $100,000 grant over 4 years. The province also provided incentives to join the Federation with financing for brushing costs and support on lines to yard and house lights. About that time, a group of REAs in the north wanted to develop franchise rights – the right to serve all customers in a geographic area. This idea would be parallel with natural gas co-ops. Arguments against it indicated that REAs were meant to be financing vehicles for enhancing feasibility of providing lines to farms (pg 126). Opponents indicate customers are intermingled in an area. This issue continues and has to be dealt with in energy policy. The history of REAs in Alberta shows rural communities and farmers were (and are) well served by these organizations to bring power to many areas which did not have any service. The REA industry has changed dramatically and is seen to be fragmented and at risk because of policy and market forces. The original reasons for REAs does not seem to be at odds with what still is needed- a community-based cooperative serving local farms and citizens. Positive comments followed were made about REAs: “The benefits of electric power as predicted by the founders of this association has been realized beyond their most ambitious dreams. …” ”Through new ideas, new organizational structures and a renewed dedication to the pioneering spirit that made rural electrification possible, the REAs will move confidently into the next century.” (pg 135) 2002 Review- In 2002, another REA review was completed by an MLA committee (Knight and Rathgerber). This was a broader review than others noted above. They see the REA industry changes and how two REA groups have emerged: operating and non-operating REAs. Recommendations from the Task Force (TF) included:

REAs buying another REA- no support was noted for having two categories of REA. However, importantly the TF supported the idea of amalgamation between REAs presuming all members are treated equally;

Regulation- the TF recommended staying as non-profit cooperatives for member services. If REAs wish to pursue other business, a for profit corporation is needed;

Grants- the TF continued financial assistance for farm electric services. However, a program review is needed under AA&RD;


Amalgamation- the TF did not support cross- border amalgamations;

Safety issues- this was not seen to be demonstrated as a problem. The Task Force received input from the REAs and utilities and other stakeholders. A table on farm numbers is reported in the brief. Table 3- Farms Served by IOUs and REAs (2002) Item ATCO UNC Total

Company farm 17,000 41,000 58,000

REA (Contract) 11,200 8,000 19,200

REA (Operating) 630 24,000 24,630

Total 28,830 73,000 101,830

Source: Task Force Brief, 2002. REAs provided service to 43,830 members.

In the review, a number of issues were noted and some were in progress with arbitration. IOUs (investor owned utilities) indicated the grants and government support provided an advantage to REAs in providing power lines to farmer members. They also note the issue of REAs offering service to non-members and their different REA cost structure. Many REAs also indicated issues of a competitive nature and 16 presentations were received. The issue of REAs as competitive entities (tax- free status) was deemed a moot point, given REAs only serve their members (pg 13). Membership has been defined since 1948 (pg 24) but has seen continued difficulties between the IOUs and REAs. Interestingly, Aquila recommended a provincial definition of an REA as serving bona fide farmers. ATCO indicated REAs only serve those engaged in farm operations. 2012- Current Issues- A series of meeting was held with the current operating REAs (6) who agreed to participate in this impact study. One REA has declined (Central). Their concerns and needs are grouped into themes and also highlight individual comments where needed. The REAs (6) interviewed included:

Battle River;

Lakeland;

North Parkland Power;

Rocky;

South Alta;

Wild Rose. Together these operating REAs have about 31,540 members spread throughout the province (Note: Musselmann indicates in 2010 these REAs served 25,055 members. This shows an increase of 6,485 for a 26% increase in 2 years). A short profile is given for each REA interviewed.

Battle River – has 8,300 members, is located in Camrose, has been growing and has assets of about $50 million. They started with one employee in 1997 and now have 41 employees. Central is about the same size (was not interviewed);

Lakeland- has 1,430 members, serves another 1400 REA members, is located in Vegreville and assets of $12 million;

North Parkland Power- has 3,000 members, is located in Thorhild and assets of $15 million;


Rocky- has 3,500 members, is located in Rocky Mountain House, assets of $10 million;

South Alta- has 2,700 members, is located in Claresholm and assets of $12 million;

Wild Rose- has 3,000, is located in Westlock and assets of $12 million;

Members served total about 31,540 with assets under management of about $180 million. These REAs operate as rural utility cooperatives.

A map of all REAs service areas (orange) is noted in the map below. A good history of the Battle River REA is shown on youtube- see – Battle River REA, 60 Years in the Making, Celebrating Community, The Cooperative Way and Tomorrows REA.

Three Main Issues -From the series of meetings and calls with the Boards and General Managers of these REAs, three main issues appear as- industry-wide, energy policy and governance issues:

- REA Industry- wide issues

How to maintain and build the relationships in the integrated electricity supply and distribution marketplace given the many players and evolving conditions? This means understanding roles, positive relationships and communicating the benefits and ways REAs support members (very low tariff) and rural Alberta developments. REAs now offer 1 and 3 phase power and have fully credentialed employees for their lines;

Fragmented REA industry – currently the total REAs number 34 (7 operating) from a historic high of 418 (1950s). The operating REAs feel their requirements are not being represented by the Federation. In addition, the non-operating REAs are in decline. There are 15 non-operating REAs with less than 200 members and the likely future choice is to be sold to an IOU (if they wish), which diminishes the role of some REAs in rural Alberta;

Viability is a concern. Some REAs are amalgamating or considering self-operating status- Battle River REA was formed by 4 associations (2003) and the Peace REA voted (2012) on self-operating status. A viable self-operating REA appears to be over 1400 members;

Due to the above industry changes, the Federation (AFREA) does not fully represent operating REA issues. The historical committees and agreements need to recognize this new growing consortium of self-operating REAs that are viable and successful small rural businesses;


- Energy Policy Issues

Creating a viable future and framework for operating REAs and non-operating REAs within the Alberta energy policy. Rural Alberta often only has two service choices- an REA or an IOU, and IOUs operate in separate regions. Deregulation has created many more power generators and more marketers. Further, urban Alberta has a major influence on the REA role when policy is made, and the role of the Federation (AFREA) as the industry representative has lessened greatly;

Regulatory and Policy gaps limiting Growth- REAs operate as regulated cooperatives with members under the Rural Utilities Act. The Act is administered by Alberta Agriculture and Rural Development, which also administers natural gas co-ops and water co-ops. An inconsistency exists with these entities and how they operate in a regulated market. REAs are operating as co-ops but are not fully participating in the Alberta economic growth. Alberta is growing at a rate of 3.9% (RBC Economics) and all sectors are expanding. However, REAs are limited in growth due to the historical regulations and agreements they have to operate within, and energy policy issues, which continue to evolve;

IOU master agreements are not standard and need to be current relative to operating conditions. This is a continuing and broad- based issue causing uncertainty. Relationships are not collaborative. IOUs may charge REAs for pole replacements at say $5,000 each but with no paper trail (whereas REA pole costs are much lower- industry comment). Another historical anomaly, is that for some non-operating REAs, the IOU will hold their reserve funds for potential expenses incurred by the REA. This is not a truly independent relationship. In other cases, IOU and REA field crews work well together (collaborate) and lines may be swapped or shared between the two parties, for mutual benefit;

IOU Competition to Buy Market Share (IOU Investment Policy) - currently IOUs (ATCO and Fortis) are buying up smaller REAs which do not wish to self-operate, and due to policy cannot merge into an operating REA (from another IOU region). This is causing the rural electrical marketplace to further consolidate with offer prices for selling a rural farm service is in the order of $18,000 to $20,000. This sale can be added to the IOU’s cost base and they receive a utility rate increase after a review process. The REA lines were originally paid for by farmers- members;

A response to this policy gap, for example, is the Central REA approach which is creating its own “investment policy” and offering to serve potential customers in the region. CAREA (July 2012) applied to the Alberta Utilities Commission to supply anyone in their area and the application was denied. CAREA has also removed a pole from a member who switched to Fortis. The AUC decision indicates agreement on the REA history, and member definition as being geographic and gaining membership in the REA. The service area is therefore defined by the members’ location (pg 13). This action by CAREA indicates a further need to review the REA role, operating authorities, current and future customers and related governance and operating issues, within GOA energy policy;

-Governance Issues

Identity may be Low- REAs are not well understood. Customers may be confused where the REA invoices through a marketer (eg. Direct Energy) instead of directly. Independence and roles may not be clear and REA identity may not be strong in some regions. In contrast, the AAMD&C, rural communities and others recognize REAs for their roles;


REA By-laws- REAs are regulated under the Rural Utilities Act which has some deficiencies for organizational and management purposes. Under the Act, a sale (or other significant motion) can be passed by 2/3 people (low quorum) attending that meeting. In addition, by-laws have not been allowed to be changed without consent of the Director. An REA recently requested a change in the quorum needed for an extraordinary vote to at least 66% of all members and was denied by the Director. So for an organization worth say $4 million and say 200 members, if 20 people show up (per RUA by-law s 6.1, for 10%), only 11 have to vote in favor of a sale, which can affect all 200 members. Even worse, a smaller quorum can exist, depending on the Chairman (s 6.3.b). This is a major by-law (and revision process) deficiency relative to all non-profits, cooperatives and even incorporated business (by-law or shareholder) decision vote requirements;

Service area and Future Customers- this is noted as a definitional problem in that REAs provide rural service to farmers (members). However, farm numbers are limited in all areas and farm numbers are declining over time. Member definition is a problem in the agreements, and members are expected to be voluntary. The member definition has been noted historically since 1948 as farmers, for farm and domestic services. In a recent ATCO agreement, it has been allowed to include subdivisions and rural residents. It is noted that the population density is lower in rural Alberta and was the original driver for REA establishment and growth. These definitional areas need clarity in a joint interpretation document.

IOUs- Investor Owned Utilities

ATCO- ATCO is a very large utility in Alberta which is one of the IOUs with agreements with REAs. It has a market capitalization of $4.3 billion, share price of $75.18 (Sept 2012), dividend yield of 1.74%, a one year return of 24% and a five year return of 50% (Moneysense, November 2012). It has about 213,000 customers, manages and owns 72,000 km of line and has about 2,000 employees in the province. See http://www.atcoelectric.com . ATCO also operates 12,100 km of line for REAs in Alberta. They recently offered to buy a Peace REA for about $20,000 per service and were successful. A map of the ATCO service area is noted below.

http://www.atcoelectric.com/


Fortis- Fortis is a larger utility in the province which is an IOU also working in rural Alberta and having agreement with REAs. Fortis can be traced from TransAlta, Utilicor and finally Aquila. It has a market capitalization of $6.8 billion, a share price of $32.82, dividend yield of 3.66%, a one year return of 5.3% and a five year return of 50% (Moneysense, November 2012). It has about 112,000 km of lines and about 1,000 employees. The priorities of Fortis are: Safety, customer Service, employee Success, reliability, productivity, community involvement, earnings and environment. See http://www.fortisalberta.com/home.aspx A map of the Fortis service area is noted below.

A few comments are noted about the economic relationship we see from this information. The two IOUs dwarf the REAs in terms of market share, assets and long term sustainability. The annual returns shown are remarkable given the stock market volatility and financial markets. The province is clearly split with two markets and the REAs are working in two differing agreements with the IOUs. Each IOU has different approaches, protocols but similar obligations within the electricity regulations. The future will not see any new market entrants in this space, but may see more generation opportunities, depending on markets and costs. However, REA consolidation needs some thought within the energy policy framework and regulations. ATCO holds a two day annual meeting for their REAs in December to update and discuss issues. Fortis is more business driven.

Considerations- Policy and Agreements Affecting REAs

Several considerations are noted for REAs in Alberta which are at odds with a well- functioning system for rural electrical services and need to be address. These considerations have come up repeatedly over 6 decades and need to be addressed for meeting future rural Alberta growth needs. The main considerations are:

REAs are treated differently than natural gas co-ops, which are under the same Division and Act, but are allowed to operate differently. Natural gas co-ops have a specified

http://www.fortisalberta.com/home.aspx

http://www.fortisalberta.com/data/1/rec_docs/669_ServiceTerritory2009.gif


franchise area, but REAs do not. While REAs are operated as co-ops, they are restricted from truly operating as a co-op entity. This is a deficiency;

IOUs in the energy system (especially Fortis) are targeting non-operating REAs and systems to buy and add to their current assets under management. In 10 years or even less, these REAs may be gone, creating a patch work of rural Alberta REAs, with two major utilities. Is this a desired public goal for the system? IOUs do this by offering $20,000 per service to a member, adding to the IOU cost base and effectively spreading costs over their system. Sales have reportedly occurred at $7,000/ tap (Wild Wood) and $18,000/ tap (Elk Point). Currently operating REAs cannot buy these systems, and the competitive field is seen as uneven;

Innovation- The Rural Utilities Act limits innovation in the REA system. Alberta has de-regulated the electrical system to encourage more generation, competition in retail pricing and services and Is focusing on becoming an energy superpower through many energy supply types. The Act has a customer definition which limits REAs to agriculture (farms) but this is an out of date concept. Master agreements follow this guidance and while rural Alberta growth may occur, and REAs may be asked to provide rural services, they are limited. What other innovations in service delivery could occur with changes to the definition or REA business model?;

REAs are operating entities and considered as co-ops and could also be placed under the Co-operatives Act. This would reduce many issues by allowing for clearer business status in offering more services and also allow for diversification growth opportunities to help sustain REAs. If an REA was under the Cooperatives Act, perhaps they could even move to become New Gen Co-ops and source local capital from community investors as well as members. It was noted that financing is a gap for rural systems. Alberta has some very strong and well operated cooperatives including Calgary Co-op, Servus, UFA and many other examples. This is the international year of the co-op model and many world- wide co-op examples exist to show positive results in both urban and rural regions;

Results-based budgeting- the Government is implementing results- based budgeting across departments. REAs could help develop and deliver more services to rural Alberta for better results under a revised policy framework and clarification of operating status, visions and mandates. Under the current framework, results may be less than optimal and issues will re-emerge. To date at least 4 REA reviews have occurred because of a regulated business status in a competitive and dynamic electrical marketplace. The rural energy policy lags the marketplace.

Considerations- Rural Alberta Situation Benefits from REAs

A main consideration for the province and REAs is the role in the development and sustainability of rural communities and rural farms and businesses. It is clearly demonstrated that the REA model works well in Alberta and in the USA. In fact, in the USA nearly 94 million people are served by these types of organizations as a co-operative business model.


Positive impacts are seen in other ways to help build rural Alberta capacity and leadership. One of the gaps which is growing is the rural – urban links to policy development, volunteer development and social enterprise and related business continuity. REAs offer another way to develop rural leaders in the energy marketplace and in maintaining that capacity. Some literature noted below provides a base for much related knowledge in this area. Positive Impacts In the USA and other countries, rural electrification cooperatives and associations are very strong and is a recognized way to develop rural remote regions effectively and with community engagement. Haiven (2011) researched delivery of utilities by non-profits in the USA and Canada. They note the in the rural US. Electrical services are delivered by almost 1,000 co‐operatives, serving 42 million people (12 percent of the population) in 47 states and 18 million institutions. Many of the electrical co‐ops also provide natural gas services. Telephone co‐operatives numbering 260 serve 1.2 million

people in 31 states. There are around 3,300 water co‐operatives. The state of their industry is relatively healthy. “By the end of the 1950s, most of Alberta farmers were members of co‐operatives called Rural Electrification Associations (REAs), with the government providing low‐interest loans for the extension of power lines and other infrastructure. The REAs paid half of the cost of their systems through member contributions and the rest through ten‐year loans guaranteed by the government. There were two major weaknesses in the REA system. First, as a result of lobbying by IOUs, the electrical co‐ops were not granted exclusive franchise areas (meaning that they did not have a geographic monopoly in their area, lending themselves to growing encroachment of IOUs.)Another weakness was the fact that the REAs relied upon the IOUs to install delivery systems and often to operate the utility. Thus, in many cases, REAs were utilities on paper only.” The authors compare REAs with natural gas co-ops. “Recalls [the (Alberta) deputy minister of the

utilities division] “Co‐ops had been able to put in systems more cheaply than utilities by using their own labour. The engineering may not have been as good, but the systems worked. Plus a community of interest had developed. People were willing to work together…. The two weaknesses of the Rural Electrification Associations (the lack of exclusive franchise areas and the involvement of IOUs in the building and running of the utilities) were corrected for the gas co‐ops. The

government established a series of distinct gas co‐op franchise areas.” (pg 22) They also note Premier Lougheed’s development of the gas co-op industry in Alberta, which is instructive. “The Rural Gas Program was initiated in 1973. (Orr 1989, 30‐31.) Orr (1989, 34) explains the political maneuvering of the government among three alternatives: a) continue with rural gas policy inherited from the [previous Social Credit government]; b) promote the continued development of membership‐owned coops with more financial assistance and the establishment of a rural utilities branch [of government]; or, c) form one giant rural gas cooperative or crown agency. [Two University of Alberta business professors] recommended alternative c, but [the Minister of

Utilities and Telephones] disagreed. Forming a quasi‐crown agency would be too costly, time‐consuming, and contrary to the government’s free enterprise ethic. Furthermore, a strong,


independent co‐op movement had already developed and [the Minister] reasoned that the government should tap into its enthusiasm and demonstrated ability to get the job done.” The comments above are confirmed in the meetings we held with REAs and are consistent with the prior government reviews. Performance of the Alberta natural gas co-ops was reviewed against the 7 guiding principles of co-ops (world-wide) with some comments. The OECD completed a study (2010) on rural electrification which is seen to be a big issue in assisting rural regions in many countries to grow, diversify and provide essential services to citizens. The review was for four countries- Brazil, China, India and South Africa and provides principles for successful developments:

Preconditions for rural electrification policies- data, government support, policy, independence, rural community involvement;

Stand- alone systems- good management and maintenance, sufficient funding, sense of ownership;

Grid extension- to keep costs under control, reduce loss of electricity, use low cost technology;

Rural electrification boosters- social fairness, minimize trial and error, co-operation and support in policy formulation.

South Dakota (2003) had a review of the economic impacts from rural electrification by 31 cooperatives. These co-ops employ about 832 full time people and 123 part-time people and a total of 2,053 related jobs (employment multiplier of 2.1). Directly they generated about $46 million in wages and rebates to households and a total of $71 million in income (multiplier of 1.4). Economic activity is strong too. In total the $172 in expenditures from the 31 co-ops generate an additional $72 million (multiplier of 1.4). South Dakota’s member-owned and controlled electric cooperatives are incorporated under South Dakota law as non- profit cooperative business corporations with the basic responsibility of delivering electricity and other vital services. They are very successful and help develop rural capacity and community viability. Coon (2005) reviewed North Dakota cooperatives for their impact in the state. His findings indicate a very big impact. Cooperatives are a popular business organization in North Dakota with over 400 cooperatives operating in the state in 2004. Cooperatives exist to enhance sale price, reduce costs, or provide a service or product for their member-owners. They also contribute significantly to the state’s economy. Direct expenditures by cooperatives result in higher levels of business activity, tax revenues, and employment. Cooperatives’ expenditures in 2004 were nearly $2.0 billion. These outlays resulted in higher levels of personal income ($2.2 billion), retail trade ($1.5 billion), and total business activity ($6.1 billion). Direct employment at cooperatives was 11,162 in 2004. This represents 2.8 percent of the North Dakota total with many of these jobs in rural parts of the state. Secondary, or indirect and induced, jobs resulting from cooperative business activity amounted to 53,676 jobs. Nearly $110.6 million in tax revenues to the state was attributed to cooperative business activity. Peace REA Sale Was Viable Very recently the Peace Country REA (2012) completed a feasibility study to from non-operating status to become an operating REA. The results were very compelling and indicate that a self-


operating model is very profitable for members to own. ATCO presented an offer to all 3,186 members to buy each member’s share out at $20,742. In April, 2012 three options were chosen to be explored:

Option 1: Continue with operations, which contracts ATCO for most operations, maintenance, and new construction.

Option 2: Change to a self-operating business model, which is defined by PCREA as managing all aspects of the REA operations in-house or on a contract basis.

Option 3: Selling assets to ATCO and being under the ATCO electric tariffs. The financial analysis and results showed:

Option 1: This is in complete opposition to the principles of the REA, which are to offer continuous, quality service at a minimal or competitive cost to the REA membership;

Option 2: after financing charges and loan payments, PCREA is achieving a positive cash flow of more than $280,000 per year to be used for member distribution rate reduction, deposit reserve growth or equipment replacement;

Option 3: ATCO offered each member of PCREA $20,742 for their share of the REA distribution system, an asset that is increasing in value. The general rule is don’t sell assets that are increasing in value. ATCO is guaranteed up to 9% return on any investment they make. ATCO can then recover their investments through rate increase which cover their investment and return.

Not surprisingly the recommendation was not to sell the REA. This decision was asked in November and members voted for a sale to ATCO. A discussion of a transition to a self-operating REA and financial analysis shows a positive margin, and is based on current REA models. The sale shows a weakness (by-laws) with the low number of votes required for major decisions. Alberta Population and Economy is Growing Alberta has a growing population to 2041 (5m to 7m) and it is clear the urban and rural areas will grow. In contrast the numbers of farms will decline and continue to get larger. If REAs are limited to only serving agriculture -farms (home sites, per agreements), how will they be able to sustain and also grow?

Source: Alberta Treasury Board.


Table 4- Alberta CDs in 2041

Source: Alberta Treasury Board.

As is shown in the table above, the CDs are not all growing equally either. Most growth will be in the urban corridor of Edmonton – Red Deer- Calgary and Fort McMurray. Rural areas will be challenged for rural community viability, services and resources compared with these urban areas. IOU Agreements with REAs The initial wire owner agreement was developed in 1949 and did not change until 1986 as discussed earlier above. Terms were 10 years in length and have been shortened to 5 years and currently terms are unknown. This is a continued problem as it provides uncertainty for the REAs. Initial Wire Owner Contract- 1949 The initial wire owner contract (Tri-party Agreement) between these emerging REAs and the power company of the time (Farm Electric Power and Calgary Power) is reproduced in Musselmann (2010, pg 136). There are several points worth noting:

• The power company is to supply power to the REA;


• The company is willing to supply “said power and energy as is used exclusively for farm purposes”;

• “The Association shall admit to membership only bona fide farmers”;(1) • The power company shall hold deposit amounts for the operating company for their

costs and expenses;(6) • The power company agreed in assisting in agriculture development, “the express

condition that the power and energy is to be used only for the members of the Association and on bona fide farms for farming operations pertaining solely to their respective farms, including the domestic purposes in the farmsteads thereof.” (14);

• This Agreement shall be for a term of ten (10) years and shall be automatically renewed for further successive terms of ten years unless one party has given to each of the other six months’ notice.”(17)

This contract remained intact until 1986. We note the original farm definition included both farm operations and farm household domestic uses of power for the REA to supply. The drafters did not foresee the very diverse farm income sources, farm intensification and many off-farm revenue sources derived from within the modern farm gate for current farms. One of the inconsistent areas is in regards to the definition of agriculture activity. When REAs were originally designed, farmers had a small land size (160 acres) and used all crop and livestock on their mixed farms to sustain domestic and off-farm sales as their enterprise and income. At that time very little public supports existed in grants and programs. In that context, any and all income sources were needed to sustain the farm. This inconsistency in farm definition was also noted by Knight in his review (2002) but was not answered, and is still an issue. Current Agreements Under the Roles, Relationships and Responsibilities Regulations (2003) IOUs must work with REAs for services. Under the regulations, the REAs and IOUs are defined as in an integrated system. “Before the expiry of the term or any renewal term of an integrated operation agreement, the parties to that agreement must agree on the terms of a new integrated operation agreement or agree that the terms of the then existing agreement are to continue, with or without amendment, or (b) conduct themselves so as to ensure that, before the expiry of the term of the then existing agreement, arbitration proceedings are commenced and a hearing is held and concluded in order to permit an award to be issued establishing the terms of a new integrated operation agreement between the owners.” (s 9.1). If this does not occur within 6 months of expiring, it must go to arbitration. We understand this integrated operation agreement is not completed yet and several versions are in place. This area of integrated system operations needs to be strengthened or monitored to help reduce potential or real conflicts. This is a deficiency. The current operating agreement between Fortis and several REAs is referred to as the 2005 version. There is also a 1997 agreement, to which only South Alta and Central REA are signatories. Although technically expired as of December 2010 (5 year deal), the operating


agreement remains in force month to month until one or the other parties notifies of an intent to re-negotiate or negotiate a new arrangement. This 2005 version applies to BRREA, NPP, Wildrose and Rocky REAs. Lakeland has their own slightly different contract in place with ATCO. 1997 Agreement Highlights- Service Area and Customer Issue The agreement term was for five years and has been extended for use with some REAs as noted above. Some of the key terms we note: 1.03 “Agricultural Activity” means the use and development of land with the intent to derive revenue through the growing of agricultural crops, the raising of livestock, or the production of agricultural or livestock products, including specific activities agreed to by policy of the Contract Policy Committee and the Company.” 1.09 “Contract Policy Committee” means the representatives elected under paragraph 6.01 of the Association and other Rural Electrification Associations who have entered into contracts with the Company.” 3.01 “…the Association will provide Electric Service to a consumer who:

(a) Is approved as a member of the Association by the Board of Directors; and (b) Has an interest in land where:

(i) The consumer uses or rents, or within two years intends to use or rent, the land for Agricultural Activity, or

(ii) The land is 10 acres in size and the consumer or tenant occupies, or within 2 years intends to erect and occupy, a residence on the land.

Comments We are not aware of other terms in the agreement, which are suggested as not working. However, the REAs (operating) are not represented by the Federation (AFREA) although two are still members. The AFREA has a contract committee to negotiate contracts but now does not meet the needs of all REAs. Given the GOA recognizes the AFREA as the industry contact, this is another policy gap. Also, as noted above, the definition of agricultural activity is very much a point to question. We note that a “natural market” service area is alluded to in the wire owner agreement. Currently the GOA and its agencies are working to diversify agriculture into agriculture and food, bio-products, value added activities and many other revenue streams from a base agriculture crop or livestock products. See http://www.agric.gov.ab.ca/app52/programsservices for a broad listing of many services and programs designed to help farmers create new sources of revenue. Modern farms are now about 1,200 acres in size (or more), more specialized, have $1 million to $5 million in capital investments (or more) and may be involved in many value added activities and farm products. These sources of revenue accrue back to the farm household for sustaining the farm operations. So the original REA customer, the same farmer, is creating new revenue streams and need electricity and other inputs. Why is it that some more intensive farms (feedlots, greenhouses, dairies, etc.) are not allowed to be served by REAs? Further as noted before, farm

http://www.agric.gov.ab.ca/app52/programsservices


numbers are declining over time, how can REAs simply exist on farm site services, as is mandated in the agreements? The original agreement clearly indicated both farm and domestic power needs within the farm gate were the mandate of the REA; over time the definition has become blurred and now it is a major policy and agreement gap if the mandate of REAs is to continue to fill a future rural Alberta service role to all Alberta farms the definition will need clarity. This is one reason for current issues arising. 2005 Agreement Changes- Including Subdivisions A change to the 2005 agreement with Fortis is noted in members and rural customers. 3.01 “(a) the REA has the right to provide Electricity Services within the Service Area …for the purpose of residential use and Agricultural Activity…examples of these services include but are not limited to:

(i) irrigation/ pumping water for growing crops, application of pesticides and herbicides, watering animals, rural pumping station, sod farms or other agricultural related services; (ii) addition of small workshops ie welding, woodworking, or machine shop on the farm for diversifying and/ or subsidizing the agricultural income;”

It is noted that the commercial agricultural activity of grain elevation, storage, feed mills and non-agricultural activity is excluded (s.3.01, (c)). This addition has provided some REAs with a potential growth area for rural subdivisions and residents. Comments We note that in Alberta, the rural to urban migration will continue and from 2 to 4 towns may annually revert to hamlet status as the citizens age and fewer people exist to support local services. In addition, the province is attracting in more people and the population will continue to grow. Some of these people will seek a rural residence and the ability to serve a rural residence by REAs throughout Alberta should be an option for all consumers. This 2005 agreement opened up the customer definition to rural subdivisions as well as farm members.

Summary

From the review with REAs and the documents noted above, Alberta REAs provide an economic service as small businesses providing a service to members while operating in a regulated market under authority of several Acts. The Acts/ regulations however, limit the growth and operating potential of these REAs and are not consistent with natural gas and water co-ops. Also the current actions of IOUs seeking to increase their market share by offering to buy non-operating REAs from members at very high values, are a threat to other REAs. REAs operate in a regulated market under the Rural Utilities Act, the Fair Trading Act, and the energy policy and legislation of the province. These regulations are to be reviewed in the next few months and have not kept pace with the market deregulation changes, rural Alberta trends, farm definitions and REA operating conditions (co-op model but constrained from other services). In other cases, prior reviews have noted regulation issues which have been ignored.


Several policy issues are noted for review and updating for a modern set of regulations affecting REA governance and rural economic impacts within the energy policy of Alberta:

Rural Utilities Act and Regulations- sets the by-law and objects framework for these REAs but is deficient in several areas. There are obvious shortcomings with effects on REA operations in key and major decisions (quorum), service areas, the future of REA roles and consolidation driven in part from sales to IOUs. These areas cause significant concerns for REAs. Legal opinion provided to REAs agrees with these concerns. No process is set for a review yet; the regulations are to expire in August 2013;

Cooperatives Act and Fair Trading Act (FTA)- relates to REAs in the areas of electricity contracts, and while REAs are considered co-ops, are not permitted under the Act. However, when they offer contracts they must comply with the FTA. The co-op framework and by-law process appears to provide more independence than the RU Act. These FTA regulations are to be reviewed by April 2013;

Energy Roles, Relationships and Responsibilities Regulations provide direction on operating agreements between IOUs and REAs, but the scope of REA members and farm gate service areas needs to addressed. Interpretation is too vague and needs direction. The original agreements set the original farm member definition / scope / intent (1949) and farms and rural Alberta have changed dramatically. The energy regulations also include distribution, billing and regulated rate options (RRO) links for REAs. The relationships linkage is not working well as agreements vary widely, are not standard, have definition differences and wire owner to wire owner issues continue to exist (just as noted in the many prior GOA reviews). By April 2013, 9 energy regulations are to expire (4- gas, 5- electricity) and an REA review may be very useful, pending the energy rate review committee report (to be released in 2013);

Given trends, with 3-4 REAs being sold annually, in say, 10 years or even less, the non-operating REAs will be gone. IOUs will likely continue to grow at current high rates (50% in last 5 years) given the provincial growth expectations and yet the operating REAs (7) will only see modest growth. Can the REAs be given some additional opportunity in assisting non-operating REA members and also in accessing the Alberta rural growth?

Following from the regulations are the wire owner operating agreements. This issue relates to the IOU Master contracts which deliberately can limit REA service in a rural community. While a geographic service area is agreed to (defined by member locations), the issue of rural customers- farm, agri-industry and other subdivision customers in a member service area needs clarity. The recent Fortis agreement used (2005) has allowed for some REAs to also serve rural residents and subdivisions. Other products/ services which can help sustain and increase REA growth are also needed. A number of prior GOA reviews have also noted these same issues. Several options for change are noted following the review of economic impacts of REAs in rural Alberta.


REA Rural Alberta Impacts

Rural Alberta Impacts Rural Alberta is defined in two ways- relative to community basis (urban or rural) and on a policy and program basis. Because REAs operate under authority of the Rural Utilities Act, the discussion will follow the rural and agriculture community defined with the policy in mind. Alberta is unique with having rural electrification co-ops operating to deliver power to their customers. Some research has been done on REAs. A number of projects have defined the benefits of co-ops and several studies are reviewed below. Several direct Alberta economic impacts are seen from this review of REAs including:

Lower electricity prices to members;

Direct rural employment;

Direct purchases from regional small businesses;

Local control and responsibility to manage a rural regional power system;

Sustained development and involvement of volunteers.

Lower Rural Alberta Electricity Prices One of the biggest economic benefits for an operating REA in a region (and their key role) is the provision of lower pricing to members on electricity. The table below shows differences for all operating REAs compared with the much larger IOUs. It shows REAs deliver lower prices to members which is their core business function. Table 5- REA Rates Comparison Offered Monthly Distribution Charges - 2012

ATCO FORTIS Battle CAREA Rocky Lakeland N P P SouthAlta Average Average % Savings

ELECTRIC ALBERTA River REA REA REA REA I.O.U. REA

5 KVA 61.39$ 60.20$ 46.45$ 50.27$ 41.38$ 85.03$ 59.71$ 47.20$ 60.80$ 55.01$ 9.5%

7.5 KVA 81.57$ 85.20$ 54.45$ 62.40$ 48.15$ 91.12$ 72.01$ 55.30$ 83.39$ 63.91$ 23.4%

10 KVA 102.00$ 110.21$ 62.45$ 71.95$ 54.12$ 97.39$ 84.32$ 62.13$ 106.11$ 72.06$ 32.1%

15 KVA 141.68$ 160.22$ 78.45$ 91.76$ 65.69$ 104.00$ 108.95$ 76.31$ 150.95$ 87.53$ 42.0%

25 KVA 223.42$ 260.24$ 110.45$ 128.68$ 89.68$ 112.05$ 155.18$ 102.33$ 241.83$ 116.40$ 51.9% Source: REAs and IOU information.

From the REAs specific region annual savings are estimated (from 10% to 52% annually) as:

Battle River- $4.98 million ($600 x 8,300 members);


CAREA- $5.1 million ($600 x 8,500-est);

Rocky- $2.1 million ($600 x 3,500);

Lakeland- $1.7 ($600 x 1,430, plus serves another 1,400 members in another REA);

NPP- $1.8 million ($600 x 2,980);

South Alta- $1.6 million ($600 x 2,730);

Wild Rose- $1.6 million ($600 x 2,700);

Total estimated annual- $19 million annually for 31,540 members ($600, average) Based on the services provided to the operating-REA members (31,540), the estimated annual savings are about $19 million for regional rural Alberta members or $600 each. The savings will vary for each service depending on the KVA, timing and actual demand, and $600 may be low. However, these funds stay in hands of the members in the region and allow them more purchasing of other items. A study (Musselmann, 2010) of the Battle River REA showed five years savings (nominal) of about $3,280 per member. One of the conclusions (from above to increase rural economy local impacts) is to have REAs serve more rural Alberta members. Savings are significant over a large number of people. However, member numbers and power volumes are constrained (farm and type of services) and is a key limiting factor for REA sustainability and growth (due to legal entity status and the Acts and regulations). We note the Peace Region REA was considering moving to operating status and had a recent feasibility study completed, indicating strong viability as an operating REA. If so, this would increase the operating REA annual impact in the province by potentially another $1.6 million (for about 3,186 members). Apparently 6 REAs sold in 2011 and 4 in 2012. None of these REAs are allowed to be sold to operating REAs however and ATCO and Fortis are the only possible buyers. However, policy also does not allow for REAs served by one IOU to be moved to another IOU region. One report shows since the 1940s, 381 REAs were incorporated, 243 were sold and 88 were amalgamated, with 50 left by 2010 (Musselmann). Sales means a transaction to ATCO or Fortis (buying the power lines and customer accounts). An analysis of rate impacts from a PCREA sale was done for the Alberta Federation of REAs by Bell and is reported in the Peace region feasibility study (2012). The estimated purchase price of $66 million (by ATCO) was reported and two rate scenarios were assessed – a farm rate and a general rate. If the $66 million was allocated across all classes, a farm rate would rise by 2.1% and a general rate rise also results. If the investment was made and applied only to farm eservices class, other rates will decline and ATCO farm rates will rise by about 82% (pg 31). This further supports a benefit of a self-operating REA. The reports notes ATCO has applied in a recent hearing to “directly flow REA purchases to ATCO’s rate base immediately upon closing any REA sale” (pg 31). Note: REA rates are set by the regional REA Board based on actual costs with a small return included. The study concluded that the Peace REA would be highly viable in a self-operating status. The sale did go through to ATCO. Direct rural employment is a second economic benefit provided by REAs. Similarly the employment of people by the REA is region specific and helps sustain rural Alberta communities. It is estimated the REAs serve over 50% of the Counties (34) in the province. Direct rural Alberta employment by operating REAs is estimated as:


Battle River- 41 employees, $3 million payroll;

CAREA- 40 employees- est. $3 million payroll-est;

Rocky- 24 employees, payroll $1.75 million

Lakeland- 9 employees, $623,700 payroll;

NPP- 13 employees, $1.208 million;

South Alta- 18 employees, $735,000 payroll;

Wild Rose- 12 employees, $1 million payroll;

Total estimated- 157 employees, $11.3 million annually. Direct purchases from regional small businesses also can occur in the region and each operating REA can source services and supplies as they decide. This does help small rural Alberta businesses and these business purchases are noted below as:

Battle River- $4.85 million on 95 businesses;

CAREA- $5 million on 100 businesses-est;

Rocky- $1 million with 20-est suppliers;

Lakeland- $800,000 spent with 20 suppliers;

NPP- $506,000 spent with 140 suppliers;

South Alta- $315,000 with 117 businesses;

Wild Rose- $1 million with 40 business-est;

Total estimated annual- $13.47 million with 532 local suppliers. Assets of the operating REAs are sound and although not on the same scale of the IOUs, they do show well managed small rural Alberta businesses. Assets include the power lines under management, the operating business brand and authority under the Act, vehicles and equipment, deposit reserves and investments and buildings owned by the members. Annual system investment and capital in rebuild costs are noted for the same period as: • Battle River- $816,313; • CAREA- $800,000-est; • Rocky- $337,302; • Lakeland- $396,202 • NPP- $956,565; • South Alta- $1.016 million; • Wild Rose- $1.1 million; • Total estimated annual- $5.42 million. Table 6- REA Assets and Liabilities (2011, Million) Item Battle

River CAREA Rocky Lakeland NPP SouthAlta Wild

Rose

Assets $49.9 $50-est $20.4 $12.0 $15.3 $20.9 $10

Debt $3.02 $1.03 $1.58 $0.65 $1.63 $.48

Reserves $5.70 $6.73 $0.756 $1.83 $1.87 $3.7

Source: Annual Reports. Note- BR- debt includes futures contracts, but will be offset by revenues.


Based on the above data and our interviews with REA General Managers, it appears REAs have an annual direct economic impact of over $49 million and directly employ about 157 people. Assets are estimated to be worth $179 million (book value), with an estimated debt in the order of $8.4 million. Reserves (deposit) are healthy at more than $20.6 million, excluding other unrestricted and other reserves. Some REAs have high unrestricted reserves. Using industry data, the total annual direct rural Alberta impacts are:

Electricity price savings- $19 million (at $600/ member);

Employment effects- $11.3 million;

Regional economic purchasing effects– $13.5 million;

System investments- $5.42 million;

Total = $49.22 million, annually (assuming similar patterns over time) The multipliers used are similar to those reviewed in North Dakota and South Dakota studies completed for those regional electrical rural co-ops and are consistent with those positive conclusions. Using GOA multipliers (2005):

Economic impacts are estimated at over $56.89 million annually;

Direct and indirect employment is estimated at 347 jobs in rural Alberta.

Summary

The REA industry has evolved over the last 62 years in the province under authority of the Rural Utility Act (administered by Agriculture and Rural Development). It must also operate with contracts with the investor owned utilities (ATCO, Fortis). REAs in Alberta are a positive regional small business with volunteer boards and locally hired staff and suppliers. About 532 local suppliers and small businesses are also involved in REA businesses. Annual activities include: power system operations, repairs, weed and brush control for members, power pole replacements and related building and equipment investments. REAs annually contribute about $57 million in rural Alberta economic activity and create about 350 direct and indirect jobs to the province. A challenge exists for REAs sustainability as non-operating REAs are being purchased by IOUs and 7 operating REAs remain. One Peace region REA sold recently to ATCO, possibly indicating a weakness in the sale process, and in rural policy. Policy limits many REA growth potentials, including buying these non-operating REAs, while ATCO and Fortis are not restricted. A number of REA policy issues have been reviewed by prior GOA committees and Ministers. The next section deals with some policy options for rural Alberta and need attention.

Alberta has adopted a policy and strategy (A Place to Grow) to support rural Alberta and organizations which can build capacity and deliver services. For example, the province supports agricultural societies in all communities in spite of size and service differences (from very large to very small societies). Similarly, REAs need to be considered in the modern energy policy framework including a role definition given modern agriculture, farms and rural Alberta are changing. AFREA indicates the same issue for its members in a forward looking strategic vision.


Alberta Rural Community Policy Options

Option 1- Current Policy with Gaps

Under a scenario of continuing with the current policy framework, continued decline of REAs (mainly non-operating ones) will continue until all are sold to IOUs (ATCO or Fortis). Currently about 30 non-operating REAs exist. Operating REAs (7) face some uncertainty. Deficiencies are noted:

Consolidation in Industry- Under current regulations, IOUs can offer to buy out these groups if the members agree. Only two very large IOUs operate in Alberta. IOUs are actively targeting non-operating REAs and offering $20,000 per service. These power lines were built and paid for by farmers in rural Alberta because power companies would not serve them. Operating REAs are not allowed to buy these groups (RU Act), and amalgamations may occur but this overall consolidation process is difficult.

Governance -The original policy encouraged these self-reliant co-op models to develop and operate. Over time, the volunteer capacity and rural development potentials will be reduced if this continues. A possible governance enhancement would be to allow for non-members to be considered as independent Board members (RU Regs s 8 (1), this trend is well under way with other organizations.

Policy Representation- The Federation (AFREA) is seen as the policy advice for industry representation RU Regs s 19 (1), but it is now not seen to be representing 5 of the 7 REAs, with over 31,000 members- consumers;

Quorum- By-laws specify a very low quorum and are a difficulty and risk to REA operations. For example, a sale of any REA can occur with only 2/3 of people attending a duly called meeting. A meeting does not have a minimum quorum specified relative to the total membership. This is a major deficiency, given any corporation will need a majority of shares and a non-profit will need a minimum of all members concurring, depending on the by-laws. By-laws for a quorum can be modified as supplementary by-laws under the RU Regulations s 6 (1). Recently the Battle River REA duly held a properly notified meeting, passed a by-law to amend this deficiency and the RUA Director denied the amendment under the RU Act s 9 (6). So a well- run REA with over $50 million in assets cannot even have members manage their own by-laws. This shows a governance weakness inferring in a well operated rural business;

Energy policy and regulations – energy policy affects REAs and should consider the current deregulated electricity market place. Alberta desires more competition and transparency in retail markets and a RRO review report is pending. Compared with natural gas co-ops with franchise areas, REAs face uncertainty in IOU agreements and declining farm numbers. The current Retail Market Review Committee received several submissions from REAs, AFREA, AAMD&C indicating a clear and strong role for REAs in rural Alberta;


Collaboration- safety and obligations to serve in an area are concerns of the IOUs, when REAs are not seen to have the internal system training. ATCO and Fortis have different procedures and communication and collaboration with local REA field staff is not always harmonious, which causes concern to provincial system administrators. However, this appears to be more of a protocol issue and not a legitimate safety issue; therefore is an area for energy relationship guidance;

Industry Change- The REA industry is fragmented and self-operating REAs are attempting to compete and survive given the policy gaps. Central REA has requested a Cooperatives Act amendment for a rolling 4 year contract (with consumers) to provide certainty for their members and the REA. The Peace REA recently decided on its future status. The REA industry is consolidating and supportive regulations within a results-based plan for rural Alberta benefit are needed.

Option 2- Policy to Fully include REAs in Rural Alberta Growth

Several ideas can be considered for operating REAs to grow and to reduce risks of failure which are imposed by the current industry conditions, policy and Acts/ regulations. These regulations are to be updated for current electricity market conditions and Alberta needs. The ideas include:

Energy policy integration- the REA history shows these rural Alberta service delivery businesses perform well and have worked with the members, IOUs, the departments to provide their rural member’s electricity services. However, the issue of IOU master agreements moving to no defined terms, (has gone from 10 yr to 5 yr and now no term) has increased the uncertainty for REAs. The Roles regulation provides for a commercial 6 month arbitration clause with no agreement, but monitoring appears lacking. Contributing to uncertainty is the issue of IOUs actively increasing their market share. Energy policy for rural Alberta needs to inform and enhance the role of REAs which are now part of the integrated system but lack substantial market power. This area of energy policy, Acts, regulations and the operating framework is under Alberta Energy;

Governance change for REAs under the Rural Utilities Act- REAs operate under this Act and several historical deficiencies are now clearly being exposed. The Act must allow for REAs to amend by-laws (as needed) and to address quorum for major decisions such as a sale, etc. As REAs continue under this Act and regulations, by-laws and other operating policies need to be changed to allow for true modern business- like governance within the Alberta electricity policy framework. The energy framework has been in review by the Provincial Government and has received input from several REAs, AFREA, ATCO, Fortis and others (see retail market review committee, http://www.rmrc.ca/Default.asp ). The impact of such changes may help REAs operate more effectively. This area of REA operations is under Agriculture and Rural Development;

Advocacy to include REAs in Alberta rural market growth- Alberta will have a population of 4.1 million or more by 2020 and rural Alberta is seeing more growth too. REAs may miss this growth if they are constrained to only members with domestic farm services. If REAs

http://www.rmrc.ca/Default.asp


remain in the Rural Utilities Act, a discussion of the role of REAs and future growth opportunities is clearly needed. REAs also need to review their capacity and systems if they wish to provide services to larger member- customer demands (most have 8 KVA, for 3 phase need 14 KVA and segments may need mutual upgrading). If rural Alberta industry has a larger demand, then power distribution is needed. If REAs are allowed to participate in the next trend of Alberta growth, they may see many new growth opportunities. Ideas can also include the ability to expand and applying mapping technology for pole ownership, higher safety standards and other emergent industry practices. REAs are discussing these potential opportunities;

Clearer “farm” and member definition in a current and future rural context is needed in agreements. The definition of agriculture activity within the farm gate has evolved and is evolving to include many new product areas. The original definition and policy of power services to agriculture allowed historical REAs to provide farm and domestic electricity services. Now IOUs are constraining REAs to domestic farm services mainly with some minor exceptions in the agreements (See earlier contract review). Why shouldn’t all “within farm gate energy needs” be served by REAs given the policy for more value added, farm direct sales and so on? AA&RD has an electricity grant program to (for farms with up to $15,000 available if a farm has a farm fuel benefit number). In future, fewer farms will exist but will be larger and have more product lines and value added activities, and why should REA offerings be constrained by this sub-optimal policy definition? Alberta rural growth considerations should include REAs given their successful history of bringing power to rural farms and helping sustain these communities since1949;

Farm consumers who are also REA members, want choice and a competitive market. Service Alberta manages the Fair Trading Act and regulations. REAs must operate within this Act/ regulations if they offer term contracts (several do, for their members). The Cooperatives Act (s 7-2) prohibits any cooperative incorporated under the Rural Utilities Act from being managed under this Act. If REA were under this Cooperatives Act (they previously were), it is suggested REAs may have more flexibility for many innovations and other services for rural Alberta. Some may even consider a New Gen co-op model too if that was the structure. That may stimulate more business ideas for offerings like: remote wireless, related energy power management, energy related devices and may encourage a stronger REA growth approach. However, if changes were made to the Rural Utilities Act on governance/ quorum/ by-law acceptance, and the Alberta energy policy supported REA growth, this RU Act may achieve the same end point of enabling growth.

The regulations for the electricity marketplace and its various supply chain partners, including REAs will be under review. The regulations are likely due for review in 2013. This impact study indicates about 350 jobs are created by these operating REAs in rural Alberta communities and provide power safely at lower cost that otherwise would likely be offered. Other impacts include generating over $57 million annually into the Alberta rural economy through direct and indirect employment, purchasing of goods and services, and building and re-building of power lines. REAs have a strong positive and local community effect.


Conclusions This review of the REAs (rural electrification associations) in Alberta was completed to assess impacts to rural Alberta and the industry issues. It relied on prior documents, Acts/ regulations, data from the operating REAs, interviews and an analysis of economic and employment impacts.

Findings

REAs have increased dramatically in the province from none in 1947 to a high of 481 and since then a consolidation into about 37 REAs (non-operating and operating). Non-operating REAs contract to ATCO or Fortis for all services. Currently these operating REAs manage to serve over 31,000 members and non-operating REAs serve another 16,000 members. REAs (operating) manage over $179 million in wire system assets, create nearly 350 rural Alberta jobs and contribute about $57 million annually in economic effects to the rural economy. This rural small business and volunteer capacity is another benefit. REAs are effective, low-cost and member driven co-ops which provide a very valuable energy service to rural Alberta. These organizations started because power companies would not provide farm services. Several limitations or barriers to their growth and operations exist:

Energy policy- can and does affect REAs (Roles, responsibilities, IOUs relations);

Governance via the Rural Utilities Act- is limiting for modern governance of a legal operating rural business (by-laws, quorum, sale process);

IOU agreements, interpretation and actions- are proving to be a concern to REAs in rural Alberta whether they are operating or non-operating models.

Conclusions

Alberta has developed and employed a unique electricity farm member co-op model since 1947 to provide electricity when others would not. Since then a number of reviews have been done to deal with the REA industry issues and current regulations and market players are causing concerns to the rural system. Several options for modernizing the relevant regulations are suggested to allow for better REA governance, and growth. In addition, energy policy needs to more fully consider REAs and their future role as part of the integrated rural Alberta delivery system. Original delivery to farms must consider rural, farm and domestic services as well as other services within the farm gate as was originally envisioned in 1949. REAs can provide many other rural Alberta innovations, including services such as ICT, other energy devices and products which their members may desire. Currently, it appears REAs are concerned about the system and being able to fully participate in rural Alberta growth. A number of policy and regulatory changes are needed.


Contacts and References

Contacts

Al Nagel, GM, Merv Rockel, Chairman, Alberta Federation of REAs, Sherwood Park Battle River REA, Board and Management, Camrose Lakeland REA, Board and Management, Vegreville North Parkland REA, Board and Management, Thorhild Rocky REA, Board and Management, Rocky Mountain House Wild Rose REA, Management, Westlock South Alta REA, Management, Claresholm Jamie Curran, ADM, Food Safety and Technology Sector, AA&RD, Edmonton Terry Holmes, Rural Utilities Director, AA&RD, Edmonton Scott Hood, Director of Fair Trading, Consumer Programs Service Alberta, Edmonton Kathryn Wood, Executive Director, Electricity Markets Branch, Alberta Energy, Edmonton

References

AFREA, The REA Advantage, 2011 AFREA, The REA Advantage, Implementing Cooperative Sustainability, 2012 Plan Alberta Government, A Place to Grow: Alberta’s Rural Development Strategy, February 2005 Alberta Government, Cooperatives Act, and Regulations, RSA, 2011 Alberta Government, Electric Utilities Act Roles, Relationships And Responsibilities Regulation, 2003 Alberta Government, Fair Trading Act, 1999 Alberta Government, Rural Utilities Act, and Regulations, RSA, 2000 Alberta Treasury Board, Alberta Population Projection, 2012-2041, June 27, 2012 Alberta Utilities Commission, Central Alberta Rural Electrification Association Limited, Application for a Declaration under the Hydro and Electric Energy Act, July 2012 Coon R et al., Economic Contribution North Dakota Cooperatives Make to the State Economy, 2005 Dolphin Frank and John Dolphin, Country Power, 1993


EUB, Battle River Rural Electrification Association, Application to Operate the Electric Distribution Systems of Battle River, Central Community, Fenn and Fort Rural EA Ltd, as a Single Electric Distribution System Designated as BRREA, June 17, 2003 Haiven L. and Haiven J., Non-profit Cooperatives: An Alternative to State or Profit-Making Private Sector for Delivery of Public Utilities, 2011 Musselmann, C. Challenges Facing Cooperatives Balancing Corporate Vision with Membership Commitment: A Case Study of the Battle River REA, September 2010 OECD, Comparative Study on Rural Electrification Policies in Emerging Economics, Keys to Successful Policies, 2010 Pathfinders Profit Consultants CA, Peace Country REA: A Feasibility Study to Become A Self-operating REA, September 2012 South Dakota Rural Electric Association and National Rural Electric Cooperative Association, South Dakota Electric Cooperatives’ Contribution To the State’s Economy, March 2003 1997 Agreement Between Rural Electrification Associations and TransAlta Utilities Corporation, June 6. 1997 2005 Agreement, Wire Owners Agreement between North Parkland Power Rural Electrification Association and Fortis Alberta Inc., August 19, 2005 E&OE January 2013

prepared for alberta reas - wordpress.com · alberta had 416 reas, with about 381 in active...

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