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dam-l Quebec bill proposes to gut regulatory control over Hydro-Québec
Attached is an article of mine that appeared in yesterday's
Montreal Gazette concerning draft legislation that will almost certainly
become law within the next month. Its effect will be to turn
Hydro-Québec back into an unregulated monopoly, allowing it to develop
new large hydro projects for export to the U.S. without any regulatory
oversight. (The environmental legislation allows for hearings under
some circumstances, but the final decision is always up to the discretion
of the Minister.) The generation component of rates for captive
consumers is also fixed without hearing by the government, and is set at
a level that ensure that exports from existing facilities are subsidized
by Quebec consumers.
Montreal Gazette, May 24, 2000
Power from the people: Quebec bill would gut Régie and give
authority back to government and Hydro
Philip Raphals
In introducing Bill 116, An Act to amend the Act respecting the Régie
de l’énergie, on May 11, Natural Resources Minister Jacques Brassard
signaled the end of an era in Québec energy policy. More precisely,
he indicated that the new era promised by the Bouchard government’s 1996
energy policy was not to be.
The 1996 energy policy called for a dramatic change in how Hydro-Québec
operates. Formerly, it was up to the government to approve HQ’s new
hydro projects, its rate proposals, its long-term plan and its
exports. But, as it would eventually acknowledge, the government
was not only technically incapable of regulating the massive utility but
was in a conflict of interest as well. In the aftermath of the
embarrassing cancellation of the controversial Great Whale project in
1994, the new PQ government launched a massive Public Debate on Energy,
to find a better way.
Nearly a year and half and dozens of public hearings later, a unanimous
report recommended that these powers be vested in a neutral and
transparent energy board, whose mandate would be based on the principles
of sustainable development. In 1996, the Bouchard government set up
just such a Régie.
Paralysis
The Régie has existed for three years now, but it has yet to review
Hydro-Québec’s rates, approve (or reject) a project, require an energy
efficiency program or examine a long-term plan. In fact, since its
creation, the Régie’s exercise of its jurisdiction over Hydro-Québec has
been largely paralyzed by rumours of impending legislative amendments
sought by the utility.
The Régie did hold one lengthy hearing in 1998, on a Hydro-Québec
proposal for a complex ratemaking mechanism designed to avoid scrutiny of
its generation activities. After hearing many of North America’s
top energy experts advise against it, the Régie came down strongly
against HQ’s proposal. Indeed, in its landmark 72-page
decision, the Régie warned that accepting Hydro-Québec’s proposal would
make critical review impossible, would create an appearance (at least) of
conflict of interest, and could force Quebec customers to unwittingly
subsidize the utility’s exports.
The government hesitated almost two years before acting on the Régie’s
recommendation. Despite unanimous support for the Régie by Quebec’s
consumer, environmental, industrial and labour leaders, despite numerous
resolutions of support from the PQ’s own National Council, the government
sided with Hydro-Québec. In introducing Bill 116, the Minister
moved to implement by legislative fiat the ratemaking mechanism
Hydro-Québec had unsuccessfully proposed to the Régie in 1998.
Subsidies for exports
The traditional approach to setting rates for a vertically integrated
monopoly utility like Hydro-Québec is based on its cost of service plus a
reasonable return on equity. But under Bill 116, Hydro-Québec’s
generation would be handled differently. Instead of paying a
cost-based rate, Quebeckers would pay a fixed price 2.79¢ per kWh,
up to a limit of 165 terawatthours (TWh). According to a study
carried out for the Minister by Merrill Lynch, this price is high enough
to generate a generous return of 18%.
Quebeckers only use some 150 TWh of that energy, but, at this price,
revenues from those sales will cover the cost of producing it all,
including a healthy return of 10%. The remaining 15 TWh will be
exported; since the costs are already paid for by Quebeckers, the
revenues go straight into utility profits, resulting in precisely the
type of subsidy the Régie warned against.
Shielding Hydro-Québec from public scrutiny
The Minister claims his amendments are necessary to prevent the Régie
from imposing residential rate increases. In fact, Bill 116 would
eliminate all public scrutiny of Hydro-Québec’s generation rates, its dam
projects and of its exports.
Under current legislation, Hydro-Québec would have to prove to the Régie
that its generation projects are the best option from an economic,
environmental and social point of view. It would also have to
ensure that HQ’s exports are not subsidized by Québec consumers and don’t
draw reservoirs down to dangerously low levels. Indeed, according
to American experts hired by the Régie, in recent years they have come
dangerously close to doing so.
Under Bill 116, all these powers will be removed from the Régie. In
their place, all decisions about generation are returned to the
government, where they were before the Public Debate began, five years
ago.
Competition
In defence of his bill, Minister Brassard argues that we are doing
nothing but joining the worldwide trend toward “deregulation.”
There is indeed a worldwide trend, but its focus is on competition, not
deregulation; it is only when there are vigorous competitive markets that
the need for regulation diminishes. Obviously, there is no such
competition in Québec. Bill 116 does open a narrow door to
competition for new resources, but, compared to HQ’s 36,825 MW, they will
be just a drop in the bucket for decades to come.
Testifying in the 1998 hearing, Peter Bradford, former chair of the New
York Public Service Commission and one of the most respected figures in
the American regulatory community, stated: “In my experience, … the
combination of a high degree of secrecy with a high degree of monopoly is
very likely to lead to significant abuses, not necessarily today or
tomorrow, but over time. And the reason is that there is so little
accountability in such an arrangement.”
At the 1998 hearing, a HQ VP stated that, “the goal of the current
exercise is precisely to not have to divulge that sort of information
[about generation].” But according to Bradford, that wouldn’t fly
in the U.S.: “Only when the generation sector is deemed competitive is
any U.S. regulator likely to permit the utility to reduce or eliminate
the filing of generation cost data.”
This week, Quebec plays host to the First World Forum on Energy
Regulation, organized by the Régie together with associations of American
and Canadian regulators. It is ironic that Québec should choose
this moment to abandon its attempts to regulate Hydro-Québec
properly.
Philip Raphals is associate director of the Helios Centre for
Sustainable Energy Strategies, an independent, non-profit energy research
and consulting group.
Philip Raphals
Directeur adjoint
Le Centre Hélios
326, boul. St-Joseph, suite 100
Montréal (Quebec)
Canada
H2T 1J2
(514) 849-7091 (téléphone)
(514) 849-6357 (fax)
raphals@centrehelios.org