Cheap Hydro is Wrong On At Least Two Counts

Worth A Look, Equalization, Frontier Centre


It’s not every day that a government manages to be wrong in two different ways on the same issue at the same time. But if a report in La Presse this week is correct, the government of Quebec is making two mistakes in one on electricity prices.
The paper reported Finance Minister Raymond Bachand’s budget next week will barely raise electricity rates. This is bad policy, even if it’s popular policy, since Quebec is desperate for revenue and our rates now are among the world’s cheapest. Higher ones would encourage conservation, eventually allowing Quebec to export more power. That would be lucrative and would allow other jurisdictions to phase out coal-burning power plants.
But it’s bad policy in a whole other way, as well, one that will have some nasty repercussions once the word gets out: One reason for avoiding a real increase in rates is that that would reduce Quebec’s equalization payout.
Provinces’ resource revenue is a key factor in calculating how much each province receives in equalization. So if Hydro-Québec remits more money to the government, the cheque from Ottawa would shrink, perhaps by about half as much.
Talk about moral hazard! Economist Claude Montmarquette compares this to a welfare recipient refusing to seek work because he would lose his benefits if he found a job.
Already, equalization is coming under attack, notably by Alberta’s Finance Minister Ted Morton. And last week the Frontier Centre for Public Policy noted how equalization is working now: So-called "have not" provinces that receive equalization now enjoy, by many measures, more lavish government spending than "have provinces." Quebec gets $8.4 billion a year in equalization.
This state of affairs invites a considerable backlash from the rest of Canada.
The principle of equalization is protected in the constitution, but the current formula with its perverse results are not. A cynical budget decision about power rates can only add to the pressure to rewrite the current deal.