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



    MONTREAL, April 30 /CNW Telbec/ - 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.

    The Note is available at www.iedm.org.

    The Montreal Economic Institute is an independent, non-partisan,
non-profit body that takes part in public policy debate in Quebec and across
Canada, offering wealth creation solutions on matters of taxation, regulation,
and reform of health and education systems. Its publications since 2000 have
included the Report Card on Quebec's Secondary Schools. In 2004 it won a
Templeton Freedom Award for Institute Excellence for the quality of its
management and public relations.




For further information:

For further information: and interview requests: André Valiquette,
Director of Communications, Montreal Economic Institute, (514) 273-0969, Cell:
(514) 574-0969, avaliquette@iedm.org


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