[BETA] Fortnightly

TWO RECENT shocks could turn up the pressure on Canada's two state electricity giants to deregulate.

After January's ice storm, about half Quebec's population went without heat or light for up to a month (em at the coldest time of the year. Almost one-quarter of the provincial economy was shut down. It was the continent's worst-ever blackout and Canada's worst natural disaster. It cost Quebec 1 percent of its flagging gross domestic product.

The ice storm affected Ontario Hydro much less. That company is scrambling to replace the 10 percent of its electricity supplied by seven nuclear reactors being decommissioned. The shutdowns follow a scathing safety and management report last summer and will cost consumers $7 billion on top of Ontario's already high electricity rates.

Ontario built massive nuclear complexes to supply 60 percent of the province's power. Quebec built remote, hydro megaprojects, despite protests by environmentalists and native peoples. These self-sufficient megaprojects, born of the 1970s energy crises, made the provincial-government-owned utilities the world's second biggest electric utilities in dollar and unit volume, respectively. They supply more than 10 percent of North America's electricity but their combined service territory contains less than 6 percent of North America's population. They are also two of the world's biggest industrial-sector debtors, now saddled with high interest-rate debt in a low-interest-rate era.

Looking closely, one finds that these shocks share a common origin: too much command and control. But in adversity lies opportunity (em on both sides of the border.

Feeling the Pressure

Cost overruns and the growing burden of operating and maintaining so much nuclear capacity have left Ontario Hydro holding more debt than assets. Hydro-Quebec's mainly hydroelectric assets far exceed debt; nevertheless, the utility had to resort to heavy borrowing of U.S. dollars. As the developed world's biggest industrial-sector borrower of U.S. dollars, Hydro-Quebec is incurring losses as its local currency is weakening. The company has tried vainly to generate enough U.S. dollar revenue from power exports just to service the debt.

But there's more. U.S. electricity deregulation is putting additional pressure on the two utilities.

Industrial consumers are driving deregulation in Ontario. They are threatening to move their production across the U.S. border to access increasingly competitive electricity prices. Ontario Hydro's proposal to establish a central "market" operator in Ontario (as opposed to a "system" operator) has hurt the prospect of U.S. electricity inflow; the U.S. Federal Energy Regulatory Commission has already rejected such a plan.

U.S. competition and the impact of the ice storm will limit Hydro-Quebec's prospects of increasing export earnings. Hydro-Quebec's concentration has raised concerns, addressed in a recent FERC ruling, that it would manipulate the competitive northeastern U.S. electricity markets now being set up. Following the ice storm, Quebec consumers should demand a level of reliability consistent with North American standards, which will mean higher electricity rates or more U.S. currency borrowing by Hydro-Quebec.

For now Quebec appears stuck with an unreliable grid shaped much like a barbell. Electricity moves from massive, remote hydro production far to the subarctic north across many hundreds of miles of empty woodlands,