Privatizing Hydro-Québec would give $10 billion more a year to Quebecers

Montreal, February 3, 2009 – By privatizing Hydro-Québec, Quebecers would get $10 billion more out of it per year through improved productivity, higher electricity rates and an end to costly subsidy programs for aluminum smelters, according to a Research Paper published by the Montreal Economic Institute. The new private company would be required to pay substantial annual royalties to the government, says the study, prepared by Claude Garcia, member of the board of directors of several corporations and former president of the Canadian operations of Standard Life.

“This strategy,” he explains, “is aimed at obtaining from Hydro-Québec a performance that measures up to what Quebec companies are capable of doing best and enabling it to play its role as the main engine of wealth creation for the Quebec economy.” It is largely because Hydro-Québec gets poor financial results that the author suggests privatizing it, drawing in particular on the success of the British example.

Questionable efficiency

In comparing Hydro-Québec to North American energy companies of comparable size, it can be seen that its efficiency is questionable, based on a number of criteria. Its customer-to-employee ratio is below average, its operating costs in transmission and distribution are two-thirds higher, and power plant construction costs averages 26% above the forecast budget for each project.

Hydro-Québec could save at least $1 billion a year if it made its operating costs comparable to those of the most efficient private companies, and it could reduce the expenses incurred each year for debt service and amortization of its investments by an additional $1 billion through better management of its investment projects.

It is also striking to note that Hydro-Québec’s annual profit would be quite low if the company had to pay market price for the electricity it gets from Churchill Falls, in the province of Newfoundland-and-Labrador.

Improving efficiency and saving $2 billion by halting future subsidies to the aluminum industry could boost Hydro-Québec’s profits to $7 billion without even raising the low electricity rates that prevail in Quebec.

Privatization together with advantageous public royalties

The situation of Quebec’s electricity industry presents a number of similarities with the British experience prior to privatization of the electricity sector there, which suggests that government is not in the best position to manage a monopoly business: excess staff, an unnecessarily high cost and investment structure, and an absence of competition. Australia, New Zealand and the European Community have also moved toward reforms in this sector.

Accordingly, the author suggests a quick privatization of Hydro-Québec and a gradual rise in electricity rates spread over 10 years, which would lead to additional gains of $6.1 billion. The dividends the Quebec government receives each year from Hydro-Québec would have to be replaced by an annual royalty of $1.9 billion. This amount would rise once the size of the heritage pool electricity starts being reduced. Royalties would climb to $8 billion at the end of the 10-year transition period.

To provide for privatization, Hydro-Québec’s assets would be divided into two billion common shares, with no shareholder allowed to hold more than 10% of the total. The law would have to guarantee that the head office remains in Montreal. Quebec’s energy board would continue to have a major role in encouraging maximum competition and enabling citizens to choose their electricity supplier so as to avoid replacing a government monopoly with a private monopoly. However, it would no longer set electricity rates, which would be determined by the market.

A rate hike that would look after protecting consumers

Quebec electricity consumers will have to pay more if this reform is adopted. They will react by saving energy and by choosing other forms of energy that suit their needs better. The author suggests that 90% of additional income resulting from the market adjustment of electricity rates be paid as annual royalties to the Quebec government so that Quebec’s population, rather than future Hydro-Québec shareholders, can benefit from the benefits arising from this reform. It is also suggested that all Hydro-Québec residential customers be compensated in whole or in part by issuing 110 free Hydro-Québec shares to each of them at the time of the stock listing. The government will receive $24.7 billion from the gradual sale of its shares in Hydro-Québec and will thus be able to improve the state of public finances.

The author

The Research Paper titled How would the privatization of Hydro-Québec make Quebecers richer? was prepared by Claude Garcia, member of the board of directors of several corporations and president of the Canadian operations of Standard Life from 1993 to 2004. He completed doctoral studies at the London School of Economics.

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The Montreal Economic Institute (MEI) is an independent, non-partisan, non-profit research and educational organization. Through studies and conferences, the MEI informs public debates in Quebec and Canada by suggesting wealth-generating reforms based on market mechanisms.

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For more information or interview requests, contact: André Valiquette, Director of communications, Montreal Economic Institute, Tel.: (514) 273-0969 ext. 2225 / Cell: (514) 574-0969 / Email: avaliquette (@iedm.org)