The rationale put forward by the Quebec government to offer electricity at the high-power rate of 4.5 cents/kWh to large industrial users rests on the false assumption that the implicit subsidies to energy-intensive firms create jobs. At first sight, when only the subsidized firms are considered, jobs are obviously created in the aluminum and electrotechnology sectors. More than 10% of the world’s aluminum is produced in Quebec, which accounts for 10 of the 11 Canadian plants.

          What this practice means however is that the province chooses to export aluminum rather than electricity at a great sacrifice in income lost.(6) Only considering the 2006 agreement with Alcan for the establishment of a new modern plant in the Saguenay region, the total cost to the government is estimated at a minimum of $250 millions per year.(7) This conservative estimate translates into $336,700 per year per job created with implications stretching over 30 years.

          To show how misplaced this practice is, imagine the contribution to job creations that would follow from selling more electricity to the American Northeast or to Ontario, even at the average export price of between 8 and 9 cents, and using the enormous profits thus generated to reduce income taxes to Quebecers. Defenders of direct or cross subsidies to firms never include the cost in jobs destroyed in disfavoured sectors by heavier tax burdens levied to finance the programs. All types of spending, including by individuals and private firms, generate economic spinoffs.

          Through taxation on all resources in private hands, a form of redistribution generally occurs. In that respect, conditions prevailing in the Quebec electricity market raise another fundamental question: Should rents from natural resources be also redistributed to the overall population in provinces rich in resources, such as oil in Alberta or hydroelectric power and mines and forests in Quebec?

          Conventional wisdom often assumes that natural resources are God given free goods. But to be brought to market, natural resources, like any other goods, always imply incurring investment and labour costs. Just because they are “natural” does not mean that they should belong to provincial governments and be shared with the population as a whole. If this statist principle were valid, it would apply to agricultural and urban land, to air, to incomes of talented stars, etc.

          Alberta levies high royalties on its energy resources. Until 2007, Quebec levied no royalty for the use of water.(8) Quebec’s strategy to spread the hydroelectric rent around is to charge less than cost to electricity users. In 2007, royalties to the provincial government will amount to $265 million, and then to $545 million in 2008, based on a rate of 0.328 cent/kWh adjusted yearly to the consumers’ price index.

          One further advantage would follow from protecting private property rights of resources against arbitrary redistribution. The conventional basis for instituting equalization payments is that it deters inefficient migration when the motive for migration is to acquire a share of a province’s resource revenue. But by a quirk of the equalization formula, payment calculations to receiving provinces rest solely on the monetary revenue of provincial governments, at the partial or total exclusion of the overall rent levied by a province on its resources. As shown above, Quebec (and Manitoba) devotes a large share of its resource rents to redistribution in underpricing its electricity. Yet while Hydro-Quebec profits are included in the Quebec government budget, this type of resource rent is only indirectly incorporated into the calculation(9) and with little impact on equalization payments. Canadian taxpayers subsidize Quebec’s (and Manitoba’s) cheap power policy.

          European directives increased competition all across Europe in the 1990s by unbundling generation, transmission and distribution. By one estimate, European real prices have declined by 30% for small business users, 15% for households and 10% for large users since 1997.(10) After restructuration in the U.S., “publicly-owned plants experienced the smallest efficiency gains, while investor-owned plants in states that restructured their wholesale electricity markets improved the most”(11). Rising investment in new supply in Alberta after the introduction of competition in the mid 1990s also created downward pressure on prices.

          Moving to competitive pricing of electricity with as many private producers as possible would obviously prove desirable. Less dissipation of water resource rents would occur and the Quebec government would share in those rents. But such a radical institutional change is not conceivable in Quebec where public ownership of electricity has become a sacred cow. Not only would a majority of voters resist the end of artificially cheap electricity(12), but nationalists and various anticapitalist activists would revolt at the thought of leaving a natural resource at the mercy of “greedy” entrepreneurs.

          Yet deregulation of the North American energy market has enormously increased Hydro-Quebec’s value. One estimate sets the value at some $130 billion, assuming that private companies would raise residential rates at the Toronto level, i. e. some 4 cents higher per kilowatt-hour. Annual profits would rise to about $7B from the 2006 level of $2.8B. Translated into income tax cuts for Quebecers, it would reduce the burden by a third.(13)

          Marginal cost pricing under public monopoly with greater integration to the North American market would be a second-best solution. Rather than using electricity as an inefficient tool of industrial and social policy, Quebec would gain enormously from market pricing and additional cross-border trade. Market integration could also mitigate market power by increasing the number of suppliers. But because Hydro-Quebec is a political institution, it can hardly be assumed that the price of its services cannot itself be political.

 

1. For a more comprehensive analysis of waste resulting from Hydro-Quebec practices, readers are referred to a specific writing on the subject by Gérard Bélanger, L’économie du Québec, mythes et réalité, Éditions Varia, Montreal, 2007, Chap. 6.
2. Jean-Thomas Bernard, “Compétition électricité/gaz naturel au Québec,” Energy Studies Review, vol. 4, no 2, 1992, p. 117-127.
3. Jean-Thomas Bernard, “Hydro Disconnect,” Financial Post, March 24, 2006, p. FP17.
4. Official Gazette, Parliamentary Commision, Quebec City, No. 103, March 11 1992, p. CET-4985.
5. Jack Mintz, "Powerful Reforms," Financial Post, August 24, 2006, p. FP17.
6. The CEO of Hydro-Quebec recognized as much in a candid admission relative to sales to large industrial users in the 1980s: “If profitability is measured against the supply cost of new installations at 8 cents/kWh, it is obviously negative. Relative to our average supply cost for the overall network, yes we make money. Relative to the export market, no we don’t.” S. Paradis, "Hydro ne perdrait pas d’argent avec les contrats à risques partagés," Le Soleil, November 2, 2006, p. 43.
7. J. T. Bernard and G. Bélanger, “336 000$ par emploi durant 30 ans," Le Soleil, January 15 2007, p. 17.
8. For a more comprehensive examination of present and proposed water rights in Quebec, see D. Katz & J.-F. Minardi, “Water Rights under Threat in Quebec,” The Fraser Forum, October 2008, pp. 29-31.
9. In the business income tax base as if a private corporation.
10. Tom Adams, “Privatization’s Power,” Financial Post, March 26, 2004, p. FP15.
11. K. Markiewicz, C. Wolfram and N. Rose, "Do Markets Reduce Costs?," NBER Working Paper No. 11001, Cambridge, MA, December 2004.
12. For a specific analysis of public choices in the field of electricity, see J.-T. Bernard and M. Roland, “Rent Dissipation through Electricity Prices of Publicly Owned Utilities,” Canadian Journal of Economics, Vol. XXX, November 1997, p. 1204-1219.
13. Claude Garcia, “Hydro-Québec is Worth $130B―So Sell It!,” Financial Post, September 19, 2007, p. FP 17.