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Raising electricity rates to market levels can unleash the value of Quebec’s energy potential

Montreal, April 30, 2007 – Quebecers own Hydro-Québec but gain little from the so-called “social pact” requiring that electricity demand be met at the lowest possible price. This policy subsidizes some consumers indirectly to the detriment of others and promotes over-consumption of electricity. Ending resource waste and pursuing greater equity through a gradual rate rise to market levels would ensure well-being for everyone.

Raising rates “would generate added income, energy savings and increased export capacity, offering the choice of a dividend to each citizen, lower taxes, debt repayment or improved public services,” says Marcel Boyer, Vice President and Chief Economist, in an Economic Note published today by the Montreal Economic Institute.

A waste of resources

The Quebec Energy Board ordered an average rise of 1.92% in electricity rates, effective April 1, 2007. Various consumer groups, business people and politicians expressed satisfaction with this ruling. We often hear that everyone benefits from low prices, but this is simply untrue. Beyond the advantages enjoyed by specific groups, including industrial users such as aluminum smelters or the owners of large houses with heated pools, Quebec as a whole ends up losing the potential benefits of optimal use. Low prices hide a higher tax load since the government has to look elsewhere for this missing money.

The current policy of low prices favours the development of electricity-intensive economic activities to the detriment of other investments that would create more employment and wealth. It also deters sustainable development by encouraging potential foreign customers to choose relatively polluting energy sources such as coal-fired power plants in the northeastern U.S. rather than the cleaner hydroelectric power we could be selling them.

Minimal rises in electricity prices (just 14% in eight years) penalize citizens who use fuel oil or natural gas (up 130% and 58% respectively). They also represent a transfer from the poor to the wealthy by leading the latter to over-consume electricity and by depriving the government of resources it needs to finance assistance programs.

The true cost of electricity

The real cost of electricity to Quebecers is not its production cost, which has been exceptionally low over time thanks to a bountiful natural heritage. The true cost is the opportunity cost. In other words what could best be done with our kilowatt-hours (kWh) if we did not consume them ourselves? What are we giving up by consuming them as so low a price? The real cost is around $0.10 per kWh, the amount that could be obtained by exporting them.

The advantages of paying market prices

Many advantages are to be gained by gradually bringing residential, commercial and industrial users to pay market prices and sending the right signals of true costs. Since wholesale electricity prices in North America were deregulated a decade ago, the value of our hydroelectric facilities has greatly increased. Our installations, unlike our neighbours’ thermal power plants, offer the flexibility needed to sell electricity at a high price when demand is strong and to buy at a low price when demand is weak, letting reservoirs fill up at those times.

Adding to earnings from our hydroelectric energy would encourage increased investment as well as technological innovation and behavioural change among consumers. It would do so far more effectively than punitive or regulatory measures. Embracing market prices would induce all businesses to adapt to optimal resource use and to introduce green technologies, including development of wind or geothermal power, along with natural gas. The Quebec government is investing in very ambitious energy-saving programs while neglecting the least costly, most equitable and most effective means of promoting energy savings, namely a price equal to the true cost.

If rates were raised to market prices, the average increase would be about 50%. The additional income could be used to reduce taxes, pay off the debt, invest more in education and adult training, or enhance infrastructure. Or else it could be fully redistributed to citizens, somewhat like Alberta’s “prosperity dividend”, with annual payments reaching more than $700 per person, or $2,800 for a family of four. In most cases, this would make up for, or even greatly exceed, the rise in residential electricity bills. Obviously, if letting the price of electricity rise to reflect its true cost ends up hitting hard at low-income households, the government could protect them adequately through various assistance programs such as refundable tax credits.

The Economic Note, titled Higher electricity prices can unleash the value of Quebec’s energy potential, was prepared by Marcel Boyer, Vice President and Chief Economist of the Montreal Economic Institute. Mr. Boyer also holds the Bell Canada Chair in Industrial Economics at the University of Montreal.

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Information and interview requests: André Valiquette, Director of Communications, Montreal Economic Institute, Tel.: 514 273-0969 / Cell: 514 574-0969 / E-mail: avaliquette@iedm.org

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