Fix Hydro Pricing – Then Sell

Worth A Look, Public Sector, Frontier Centre

At first glance, the idea of privatizing HydroQuébec has obvious appeal. On second thought, maybe not so much.

The Montreal Economic Institute issued a call for privatization yesterday, noting that the crown utility has long been used by Quebec’s government to funnel foolish subsidies to power users. While politically popular, this policy actually undermines the province’s prosperity.

The institute’s proposed cure is to privatize Hydro, either completely, as former Standard Life president Claude Garcia suggested, or partially, as economist Marcel Boyer of the Institute and the Université de Montréal would prefer. Both assume that a degree of private ownership would bring more rational pricing of power.

There’s certainly nothing wrong with privatizing Hydro, assuming wise regulation. After all, a little experience with Quebec’s roads, overpasses, hospitals and other public infrastructure is more than enough to make the case that public ownership doesn’t guarantee good management.

And there’s everything right with the underlying argument that we would be better off if we paid market prices for electricity, even though this seems intuitively unwise to those who assume that cheap power is the best way to stimulate business and help low-income residents of Quebec. This is one of those cases where intuition leads us astray.

If you want a healthy economy, by all means keep the cost of doing business as low as possible, but in an era of widespread energy shortages, why favour firms that squander the most electricity?

After all, where would you prefer your child to work: in an aluminum smelter or for a software or biotechnology company? Smelters have benefited greatly from cheap power. Most other companies would prefer improved infrastructure and lower taxes.

As for helping low-income residents, it’s undeniable that low Hydro rates do this, notes Andrew Leach, an environmental and resource-policy economist at the University of Alberta.

But you could hardly find a dumber way to accomplish this objective.

Why? Because cheap power actually benefits the rich more than the poor.

After all, Leach asks, who is likely to have a big house filled with appliances? How ironic that Hydro’s cheap power is the major government subsidy available to Quebec’s most prosperous families.

If you want to help the poor, why not give them something better than a subsidy – one that’s really useful only to those who happen to heat with electricity. How about using Hydro dividends to fund cash payments, which would benefit all equally and which could also buy food, shelter and clothing.

For the big picture on how energy pricing affects prosperity, just look at the contrast between Alberta, Canada’s richest province, and Quebec, which remains one of the poor provinces. Both have massive energy resources, but Alberta sells its oil at market prices while Quebec gives away its power on the cheap.

There are other factors that help explain Alberta’s greater wealth, of course, but the divergence in energy policy is a major factor, suggests Leach, who has seen both up close. He was until recently at the Université de Montréal.

Still, it’s not clear that trying to privatize Hydro would be the best way to get to market-based power rates.

The deep attachment of Quebecers to a public power utility means that privatization would come only after a political battle royal. In Ontario, for example, political opposition destroyed the government’s privatization project, leaving behind a shambles.

Heck, even in California, where private utilities were already in place, incompetent regulation forced them to sell power below cost, creating a financial crisis for the utilities and a painful shortage of power.

None of this means that privatization can’t work or that it’s a bad idea in principle.

But it does mean if the real goal is to fix a dysfunctional pricing regime, maybe we should aim for that first and think about privatization later.

Garcia’s added inducement, the promise that selling Hydro would enable Quebec to pay off its debt, seems alluring, but isn’t very meaningful. As Boyer points out, once you sell the utility, you no longer own a hugely profitable asset.

Why not just use higher profits to pay down the debt over time?