Hydro-Quebec focuses on U.S. market

It should be obvious by now that Hydro-Quebec's export policy is focused squarely on the big market south of the border, especially the tens of millions of customers in the U.S. northeast.

But this north-south bias has a cost. Quebecers miss out on potential benefits that could come from greater interprovincial trade in electricity, says Jan Carr, former chairman of the Ontario Power Authority.

Carr said in an interview that there could be interesting opportunities to trade power between neighbouring provinces.

"I'm not advocating a national grid." What's missing is adequate inter-ties between neighbouring systems, he said.

Many provinces have built monopolies that effectively discourage other sources of supply, said Carr in a paper published by the C.D. Howe Institute.

He noted a striking discrepancy between exports delivered south of the border and power sold on an east-west basis. In 2008, nearly 50 per cent more Canadian electricity was exported to the U.S. than was sold to customers in other provinces.

"The Churchill Falls generating station in Labrador, which primarily supplies the Quebec electricity system, alone accounts for 60 per cent of Canada's interprovincial electricity trade."

Exclude Churchill Falls, and those interprovincial trade figures looks even weaker.

At first glance, it might seem like market forces would account for this discrepancy. After all, electricity generation and transmission systems are extremely expensive to build and the potential market in Canada is undeniably smaller than in the U.S.

But Carr says interprovincial links have been limited by the rules in place and there are many potential transmission ties that could be economically justifiable.

"The main reason that the American market looks more attractive to Hydro-Quebec than other Canadian markets is because, frankly, by one set of standards, Canadian electricity prices are subsidized," he said in the interview.

Hydro-Quebec doesn't pay taxes and doesn't have to pay a competitive rate of return to private investors. That gives it a cost advantage in the U.S. market.

"If we were organized on commercial lines, there would be no significant difference between the cost of electricity in Canada and in the United States."

On average, with full-cost accounting, prices would be the same in both countries, although hydroelectric power does have an edge because it is a long-term and inflation-free source of energy once the high costs of construction are paid off.

Provinces have the right to run their own systems the way they want, he concedes, but "the real issue for Canadians is that these systems don't mesh when they meet at the provincial borders."

Carr argues that while it makes no economic sense to sell Quebec power in Saskatchewan, there are efficiency gains to be earned from closer electricity trade between neighbours. Different forms of generation and time-zone diversity could provide a more diversified energy mix.

One explanation for the current barriers to interprovincial trade is that most Canadian provinces have organized their electricity systems to comply with U.S. rules, without considering how to encourage domestic competition.

If Hydro-Quebec wants to export to the U.S., it must meet rules set by the Federal Energy Regulatory Commission requiring Quebec to maintain an open-access market if it wants reciprocal access to the U.S.

The rules work fine in the U.S., where there's a totally competitive and commercial system. But they make little sense in Quebec, where there's an effective monopoly at Hydro-Quebec that discourages any real competition, Carr argues.

"In Quebec, the policy is that there's no choice. So there's no point having open access."

A commercially competitive system would open big markets to Canadian suppliers in both provinces, Carr says.

"Toronto is not that far from Montreal. It's certainly just as close as New York City."

Canadians might be better off with a diversified portfolio of energy assets that can be traded freely based on provincial needs.

Such a made-in-Canada system might result in a NAFTA challenge from the U.S., Carr says, but the federal government could step in to defend provinces against any trade challenge.