The North American electricity industry is undergoing sweeping changes in the way it delivers electricity to millions of households and businesses nationwide. The $300 billion industry, the last great government-sanctioned monopoly, is slowly being deregulated and opened to competition, giving consumers the power to choose their electricity provider in much the same way they choose telephone carriers.

Advocates of deregulation say reducing government control of the industry will benefit consumers – lowering prices while expanding services and giving consumers the choice in who supplies the power that runs their industrial equipment, lighting or household appliances. But among the various states and provinces that have enacted electricity deregulation plans, results are mixed. Rising prices, skyrocketing demand, and limited supply in some areas have raised questions about the viability of deregulation.

Whether or not electricity deregulation delivers the benefits touted by its supporters – including lower prices and more services – is an open question. Jurisdictions such as Pennsylvania and Alberta have been cited as successful examples of deregulation, albeit with much work remaining to be done before the markets are truly functioning in a competitive manner. Other states such as California have been examples of how not to deregulate, with skyrocketing prices, dwindling public support, and a poor investment climate.

For decades, the Alberta electricity industry has been operated as an oligopoly. The three incumbent utilities produced roughly 90% of the province's energy and were involved in transmission and distribution to consumers. Each utility had a monopoly right and obligation to serve a particular geographical area. In addition to the utilities, there were a few municipalities that managed their own distribution systems.

These players were responsible for building and operating an electrical infrastructure that would meet Alberta's needs at the time and in the future. The Government of Alberta balanced the companies' need to recover costs and make a reasonable return with consumers' need to pay fair prices. This balance was met through regulation. The Alberta Energy and Utilities Board (AEUB) reviewed and approved new investment and set reasonable prices. Municipal councils set the rates for municipal utilities.

This system could not be fully responsive to forces for change underway throughout North America. Other jurisdictions were in the process of developing more responsive, efficient, flexible systems - and Alberta risked falling behind. In addition, regulatory costs in Alberta were high for both government and industry and were reflected in the rates that consumers paid. The long hearing process also hindered the industry's ability to be responsive to market changes.

Starting in 1990, these concerns were the subject of intense discussions involving government, utilities, consumer groups and industry. The first step to mitigate the monopoly power of the incumbent utilities came in 1995 as the need for regulatory approval for new generation additions ended following the implementation of the Electric Utilities Act ("EUA"). As a result, the development of a competitive generation market has created incentives for efficient capital investments and new technologies that benefit consumers.

Since this time, the amended Electric Utilities Act and associated Regulations have evolved.

Generation - Since the advent of the EUA, all new generation in the province has been built based on competition in an open market. From 1998 - 2003 more than 3,000 MW of new generation capacity has been added to the Alberta Electricity Market.

In August 2000, an auction was conducted for all existing generation assets in the province of Alberta. During that auction, more than 4000 MW of generation assets were sold under long term Power Purchase Arrangements to 5 successful bidders. The auction proceeds of more than one billion dollars were deposited with the Balancing Pool of Alberta to be refunded to Alberta consumers.

Transmission - To ensure all transmission charges to generators, industrial, commercial or residential customers are fair, the Alberta Energy and Utilities Board (EUB) continues to regulate Alberta's transmission system, as it always has. Power will continue to be delivered to consumers at a local level on lines owned by municipalities, utilities and rural electrification associations. Any retailer can use the distribution wires to provide electricity to consumers anywhere in Alberta.

In late 2003, government approved a new transmission development policy to encourage timely, cost-efficient investment in transmission infrastructure, the backbone of the electricity system.

Customers - Alberta's new system is also designed to provide customer choice. It replaces a system in which customers could only take service from a particular utility, depending on where they were located. January 1, 2001 marked the advent of retail competition in Alberta’s electricity industry when larger consumers with greater than 250,000 kWh of annual electricity usage were first presented with the opportunity to receive electricity from the electricity retailer that offered them the best services, prices and features. The majority of these industrial and commercial customers have chosen an alternative retailer or elected to act as their own retailer (self-retail).

The Alberta Electric System Operator (AESO) brings together two former entities, the Power Pool of Alberta and the Transmission Administrator of Alberta, which were created with the evolution of Alberta's competitive electricity marketplace. The AESO is the independent system operator that leads the safe, reliable and economic operation and planning of Alberta’s interconnected power system. The AESO also facilitates Alberta ’s hourly wholesale electricity market, which has more than 200 participants and $5 billion in annual energy transactions, and is accountable for the overall coordination of provincial load settlement.

The AESO provides fair and open transmission access to the Alberta Interconnected Electric System (AIES) for generation and distribution companies and large industrial consumers of electricity. To provide these services, the AESO contracts with transmission facility owners such as Altalink, EPCOR, and ATCO to acquire transmission services.

The Balancing Pool was established in 1999 by the Government of Alberta to help manage the certain assets, revenues and expenses arising from the transition to competition in Alberta 's electric industry. The Balancing Pool’s obligations and responsibilities are governed by the Electric Utilities Act and the Balancing Pool Regulation. The Balancing Pool has two primary roles: to manage the financial accounts arising from the transition to a competitive generation market on behalf of electricity consumers, and to meet any obligations and responsibilities associated with both sold and unsold Power Purchase Arrangements (PPAs).

Unsold PPAs are managed by the Balancing Pool. Currently, the Balancing Pool is the holder of long-term power purchase arrangements ("PPA's") for the Clover Bar (628 MW gas-fired), Sheerness (756 MW coal-fired) and Genesee (762 MW coal-fired) generating stations in Alberta. These unsold PPA's give the Balancing Pool the right to dispatch and sell the energy, capacity and ancillary services associated with these stations.

With the Market Achievement Plan process ("MAP I and MAP II"), the Balancing Pool has transferred about 2,000 megawatts (MW) of the electricity capacity related to the unsold PPAs to market participants through a variety of different contracts. The Balancing Pool is currently considering a third auction ("MAP III") of the unsold asset beginning in the summer of 2005.

The Market Surveillance Administrator (“MSA”) is an independent body created under the Electric Utilities Act to help ensure the fair, efficient and openly competitive operation of Alberta's electricity markets. The Code of Conduct Regulation governs aspects of the retail electricity market, including the conduct of owners of electric distribution systems and affiliated retailers. Any person who feels that a contravention of this Regulation has occurred may submit a complaint to the MSA, by following the process set out in section 51 of the Act. Copies of this Act and Regulation may be obtained through the Queen’s Printer ( Alberta ). The MSA can be reached by telephone at (403) 705-3181. For additional information with regard to the MSA, please visit their web site at www.albertamsa.ca.

Because Valeo Power is an affiliated retailer of Enmax Power Corporation, our company is required to file a Compliance Plan as dictated by the Code of Conduct Regulation.