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, 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 from reliable competitively priced electricity, and from inflow of equity capital to replace high-cost government debt.

Anxious to face elections, Ontario's and Quebec's Premiers have been reluctant to embark upon breaking up and privatizing their state electricity monoliths. But a combination of natural and man-made disasters is forcing their hand. And they shouldn't hesitate before the Clinton Administration moves forward on the rumored privatization of federal power agencies like Bonneville Power Authority and the Tennessee Valley Authority. The time has come for the Premiers of Canada's two most populous provinces finally to treat their constituents as consumers with choices, not as captive spectators of grand financial maneuvers or socioeconomic schemes.

Robert Blohm is a dual U.S./Canadian citizen, adviser to the staff of the North American Electric Reliability Council and former adviser to the Macdonald Committee on Competition in Ontario's Electricity System. He is a planning committee member of the Consumer Energy Council of America/Research Foundation's Convergence Forum.

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