Nov. 27 – Dec. 1 2023; started off the week with a guest lecturer on Monday morning from  Power Advisory LLC for PPOL699: Competitive Policy. The lecture provided us with a practical overview of Alberta's electricity market, focusing particularly on the transmission and distribution sectors. The transmission sector operates under a traditional cost of service model, while the distribution sector uses performance-based regulation. The lecturer connected theoretical material from Nov. 20 lecture to Alberta's specific context, highlighting the historical decisions that shaped the current electricity market and examining the strengths and weaknesses of these models.

Towards the end of our discussion we focused on the Government of Alberta Department of Affordability and Utilities' Transmission Policy Green Paper released on October 23, 2023. This paper created a stir in the industry due to its potential implications for Alberta’s energy market. The government is considering major changes like removing the prescribed maximum for Generating Unit Owner’s Contribution (GUOC) and altering transmission line loss calculations. These proposed changes, particularly in the calculation methodology of GUOC and line loss, could introduce significant uncertainty and affect development in congested areas.

We also touched upon broader policy considerations, such as amendments to the zero-congestion policy foundational to Alberta's energy-only market. This policy's potential modification could have far-reaching implications for the entire energy market, requiring a reevaluation of many existing market rules.

During our PPOL602: Markets and Public Policy lecture, we explored several key concepts related to inflation policy. The primary takeaway is that inflation occurs when the money supply grows faster than the economy, leading to "too many dollars chasing too few goods." The Bank of Canada plays a pivotal role in controlling inflation through the Bank Rate, which influences the money supply. By adjusting the Bank Rate, the Bank aims to synchronize the growth rate of the money supply with economic growth, thus stabilizing inflation.

The Bank of Canada targets an inflation rate of 2% ± 1%, a standard since 1990. To maintain this target, the Bank manipulates the interest rate charged to private banks. Increasing the Bank Rate curbs lending, contracts the money supply, and slows economic growth, thereby reducing inflation. Conversely, when inflation dips below the target, lowering the Bank Rate stimulates lending and economic growth.

The lecture also highlighted the federal government's role in managing inflation expectations, particularly through budget announcements that align with the Bank's targets. This approach helps in managing inflation with minimal cost. We also discussed governments' budget constraints and the balancing act between total spending and total revenue. This balance is sensitive to the economy's state, with components like taxes and social assistance fluctuating with economic cycles. The lecture emphasized the importance of understanding this dynamic, particularly in the context of unforeseen challenges like wars or economic downturns.

We concluded by talking about the relationship between inflation and unemployment which is a fundamental concept in economics, typically explained through the Phillips Curve. This curve, named after economist A.W. Phillips, depicts an inverse relationship between the rate of inflation and the rate of unemployment.

Historically, the Phillips Curve suggests that when unemployment is low, inflation tends to be high, and vice versa. This observation is based on the idea that low unemployment rates lead to a tight labor market, which can drive up wages as employers compete for workers. Rising wages can then lead to increased consumer spending, pushing up demand and prices, thereby leading to higher inflation. Conversely, high unemployment usually indicates a surplus of labor, leading to lower wage pressures and thus lower inflation.

  • Short-Term vs. Long-Term Dynamics: In the short term, the Phillips Curve can often be observed. However, in the long term, this relationship may not hold as consistently. The long-term Phillips Curve can be vertical, suggesting that there's no trade-off between inflation and unemployment. This shift is partly because expectations adjust; for instance, if people expect higher inflation, they will seek higher wages, which can neutralize the inflation-unemployment trade-off.
  • Role of Expectations: The concept of rational expectations plays a critical role in the modern understanding of the inflation-unemployment relationship. If businesses and consumers expect higher inflation, they will adjust their behavior accordingly (for example, by demanding higher wages or raising prices), which can lead to actual inflation. This expectation-adjustment can diminish the inverse relationship observed in the Phillips Curve.
  • Natural Rate of Unemployment: Economists argue that there's a natural rate of unemployment in the economy (sometimes referred to as the Non-Accelerating Inflation Rate of Unemployment, or NAIRU) where inflation does not accelerate. This rate incorporates structural and frictional unemployment. If unemployment falls below this natural rate, inflationary pressures may build up.
  • Policy Implications: For policymakers, the Phillips Curve presents a challenge. In the short term, they may face a trade-off between reducing inflation and lowering unemployment. However, in the long term, efforts to exploit this trade-off can lead to stagflation (a situation with high inflation and high unemployment), as seen in the 1970s.

*Photo: West Bragg Creek Provincial Recreation Area Aug/19 2023.

Summit photo