Business Forum | The inevitable increase in Hydro-Québec rates

The recent rise in inflation has generated a debate on Hydro-Québec’s new rates indexed to the cost of living. Their increase possible to 5% in 2023 has suddenly crystallized all the fears of Quebec households about the economic uncertainties to come. So much so that the Quebec government has announced that it will modify the law in order to guarantee that the rate increase does not exceed 3% next year.

Posted at 1:00 p.m.

Pierre Cliche
Former associate secretary at the Treasury Board and associate professor at ENAP

This gesture, as compassionate and generous as it is, is however only symbolic. Electricity is the only component of inflation that the government had the real ability to intervene on, but unfortunately its impact on the total increase in the cost of living (through the housing category) will be very limited, as the following table on variations in the consumer price index (CPI) clearly shows.

In Quebec in December 2021, the increase in the CPI was 5.1% and even if it can be expected to slow down in the second half of 2022, it should remain at a high level.

Was this measure desirable or necessary? One can doubt its effect on inflation, on the disposable income of Quebecers and on the investment needs of Hydro-Québec.

Very low prices that we do not want to see increase

The cost of electricity is not a significant inflation factor in Quebec. Quebec residential rates are the lowest in North America. As can be seen in the table below, they are $60 less per month than those in Toronto and more than four times less than those in Boston or New York. Even if a 5%, 10% or 20% increase were applied to them in 2023, they would still remain the lowest fares.

Why is this so? Because for some twenty years, the Quebec government has chosen to reserve for consumer households the electricity produced by the first dams that were built in the 1960s and 1970s, what was called the “block heritage”. This energy is made available to Quebecers at a very advantageous price, 2.79 cents per kilowatt hour, which reflects a past and not current reality.

Lower cost of living and growing disposable income

But it’s not just electricity whose cost is lower in Quebec and is increasing more slowly than elsewhere. In fact, the overall consumer price index almost always increases less quickly than that of our neighbor Ontario. A 2018 study by economist Pierre Fortin showed that over a 25-year period (1992-2017), the Quebec CPI increased less rapidly than that of Ontario and that a significant gap existed in 2017. , with a 15% lower salary, a Montreal worker had purchasing power, a standard of living, identical to that of a Toronto worker, both being able to buy the same goods (in quantity and quality) with their salary .

Disposable income (representing the income available to individuals for the consumption of the goods and services they need) is another measure that provides a good understanding of the comparative economic situation of the Quebec population. Disposable income improved faster in Quebec (31.9%) than in Ontario (27.9%) or Canada (28.6%) during the 2009-2019 decade.

This means that Quebeckers were not in a bad position to deal with the increase in electricity rates. In fact, they are in a better position than Ontarians and most Canadians who pay more for their electricity, who have less purchasing power and whose disposable income is growing more slowly.

Lower tax burden and need for investments

Hydro-Quebec not only keeps electricity rates for Quebec households at very low levels; it also contributes directly to reducing their tax burden. Thus, this public company pays the government an annual dividend equivalent to 75% of its net profit. Over the past 10 years, the government has added an annual average of $2,083 million to its revenues, an amount which, had it not been available, would have resulted in an increase in the tax burden of Quebecers. To this must be added the royalties that Hydro-Québec pays each year to the Generations Fund to reduce the public debt. They represented $757 million in 2020-2021.

Until now, the heritage electricity block has made it possible to meet Quebec’s needs and has also generated surpluses that have been used for export, but they will be completely exhausted in 2026, according to Hydro forecasts. -Quebec. Its income also enabled it to support the government budget. What will be done when the surpluses no longer exist and the profit has diminished? Reduce exports and Hydro-Quebec revenues to keep residential rates for Quebecers artificially low? Or increase rates to maintain Hydro-Québec’s financial performance and enable it to cope with the energy transition in which Québec is engaged and which will require significant investment?

An old debate and irresponsible blocking

Hydro-Québec’s current tariff policy benefits Quebecers, but it benefits more high-income people who would have the means to pay higher rates compared to less well-off people who could be supported otherwise. She could be more productive and efficient. This is roughly the message transmitted in 2005 by the group known as the Lucids, a message not accepted at the time and which still seems today to come up against the same refusal. Yet they were right.

The increase in electricity rates provided for by the controversial law is not out of proportion given the real situation of Quebec households. It could make it possible to make the investments required for Hydro-Québec to meet the challenges facing it while maintaining the financial health it and the government need.

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