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Fortnightly Magazine - March 15 1998

serving a dense concentration of the continent's most electricity-intensive consumers located in the south, along the Saint Lawrence. Aluminum smelters and residential heating in the continent's coldest populous jurisdiction use electricity the most intensively. Balancing such a network has proven a dispatcher's nightmare. And since the grid was never directly connected to its neighbors, Quebec has limited ability to import U.S. power in emergencies. (Quebec's contiguous neighbors are directly synchronized with the rest of the eastern North American grid.) Finally, boosting remote reliable production in Quebec resulted in skimping on transmission and distribution investment by Hydro-Quebec. The proportion of Quebec's distribution system that is underground is nearly one-third of the Ontario average and one-quarter the U.S. average.

The Solution? Redesign, Privatize

A government commission has recommended competition in Ontario. They suggest breaking up and privatizing Ontario Hydro into competing companies and opening the grid to U.S. electricity. The market value of all public electricity assets in Ontario would offset Ontario Hydro's debt. Privatization would thus offset all budgeted growth in Ontario government debt.

The best solution for increased reliability in Quebec is a redesigned grid with many small gas plants closer to consumers, following the trend throughout deregulated electricity markets. This solution means finally abandoning the policy adopted by the provincial government two decades ago of discouraging dependence on Western Canadian gas.

That policy has denied Quebec the benefit of the dirt-cheap prices that followed wholesale gas deregulation by the U.S. and Canada (and that presaged U.S. electricity deregulation). As a result, Quebec accounts for only 10 percent of Canada's natural gas consumption, versus 25 percent of Canada's population. Expansion of Quebec's gas grid has been stunted. Quebec has sought intervention by the federal government to pipe in Atlantic gas that was since discovered offshore of Nova Scotia. It proves more economical to pipe that gas directly to New England where demand is robust.

Privatizing Hydro-Quebec would handily net the Quebec government $20 billion (after paying off Hydro's debt), but only if electricity rates in Quebec were allowed to rise to market levels. Higher rates also would improve reliability by encouraging a shift away from electricity, which has proven the most expensive heating fuel for more than a decade. The government could use the privatization proceeds exclusively to lower Quebec's high tax rates, thereby more than offsetting the short-term impact of electricity rate increases. Privatization also would eliminate Hydro-Quebec's $10-billion U.S. currency debt to American pensioners and insurers, and remove the prospect of dramatic currency losses to Hydro-Quebec, if Quebec ever separated from Canada. Locally competing economic agents are best equipped to determine the fuel and location of new generating plants and can redesign a more reliable layout of Quebec's grid.

Ontario's and Quebec's highly concentrated electricity systems are ripe targets for North American electricity companies seeking to diversify their generation portfolios by fuel-type and location. Duke Energy is reportedly interested in buying Ontario-Hydro nuclear assets, while most companies could use more hydroelectric generating assets to diversify their portfolios away from fossil and nuclear. There's a golden opportunity here for economic growth