A parliamentary committee is examining Bill 69, which concerns the governance rules and the rate regime of Hydro-Québec (HQ). The proposed changes are part of the evolution of HQ’s rate regime since nationalization in 1962. The creation of the Régie de l’énergie in 1997 ended direct government intervention in setting rates. The Legault government interrupted this stability by intervening in pricing on a number of occasions; the factor that triggered its action was HQ’s overcharges. It is surprising to note that Bill 69 does not address this issue and that the proposed three-year rate cycle may even increase the extent of overcharges.
Apart from the territorial uniformity of rates by consumer class, the regulatory framework for setting rates was not a major issue during the nationalization launched in 1962 and the one already in existence since the first nationalization of the Godbout government in 1944 was adopted. Rates are established by HQ and approved directly by the government. In 1981, the government changed the status of HQ, which changed from a commission to a state-owned company. The Minister of Finance is the sole shareholder; an annual dividend must be paid while respecting certain financial criteria. The introduction of the dividend created a direct link between the level of rates approved by the government and that of the dividend received by the same government. On the other hand, no target for return on equity was set, and the level of dividends paid remained very low, in the order of a few million.
The major change in the tariff regime occurred with the creation of the Régie de l’énergie in 1997; this administrative tribunal publicly analyses the tariff increases requested by HQ and independently determines the tariffs for the coming year. This annual cycle is based on HQ’s forecast of electricity demand for the coming year and on the forecast of the costs to meet the expected demand. It is in this context that HQ’s overcharges appear. When the actual demand for electricity exceeds the demand forecast at the Régie de l’énergie hearings, HQ derives a double benefit due to a higher volume of sales and a higher unit sales price linked to the calculation of the average unit cost.
In opposition, the Coalition avenir Québec presented these overcharges as a disguised tax since they are integrated into HQ’s net profit, a portion of which was passed on to the government through the dividend. Thus, during its first year in power, the Legault government returned $1.5 billion in overcharges through legislation by paying $500 million directly to electricity users in proportion to their consumption, freezing rates for 2020 and letting rates increase at the rate of inflation for the following four years. Therefore, no rate hearing by the Régie was to take place before 2025.
The Legault government found itself in an uncomfortable position when inflation reached 8.0% in 2022. It intervened again to limit the rate increase to 3.0% in 2024 and 2025 for residential customers, but not for the commercial and industrial sectors.
This was the situation before Bill 69 was tabled last June. This bill establishes a three-year cycle for the independent determination of rates by the Régie de l’énergie. However, increases could not exceed 3% for the residential sector until at least 2026; if the increase assessed by the Régie were to exceed this threshold, the government would compensate HQ for this shortfall. This would be the first time that the government would directly subsidize electricity consumption since HQ’s creation.
It is still surprising that the problem of overcharges that led the Legault government to intervene in the independent analysis of rates by the Régie de l’énergie is not addressed in Bill 69 and that the proposed cycle for this review is triennial rather than annual as before. A forecast over a three-year horizon is generally subject to higher errors than over a single year horizon.
Welcome to overcharges and upcoming government interventions in electricity pricing!