After evaluating the performance of the Société des alcools du Québec and of Loto-Québec, the Centre for Productivity and Prosperity – Walter J. Somers Foundation (CPP) has now released the third part of a trilogy examining the productivity of state corporations: Productivité du secteur public québécois – Hydro-Québec. Once again, the study’s authors identified a productivity problem: “Although Hydro-Québec has managed to keep rates low while turning a profit, the fact remains that it could do better,” maintains CPP Director Robert Gagné. “Over the past ten years it has made barely any productivity gains, suggesting that the state corporation could have added even more to Quebec’s coffers, either by paying a higher dividend or by limiting rate increases.”

Labour productivity at Hydro-Québec skyrocketed in the 1980s and 90s, but plateaued in the early 2000s. The government certainly tried to address the situation in 2010, by requiring greater efficiency from its corporations, but in hindsight this intervention was ineffective: “By seeking to increase the dividend paid by Hydro-Québec in order to get its own budgetary house in order faster, the government forced the corporation to find short-term accounting solutions with very little impact in terms of economic efficiency,” explains the co-author of the study. “The real solution doesn’t lie with Hydro-Québec employees, but rather with its use of its generating facilities.”

By measuring multifactor productivity at Hydro-Québec, i.e. by evaluating the overall efficiency of all its production factors (labour, production infrastructure, fixed assets, etc.), the authors found that its productivity has plummeted by 20% over the past 10 years. According to the CPP Director, this loss of efficiency masks a very worrisome situation: Hydro-Québec seems to be having trouble generating more wealth, despite its expanded production capacity. “Claiming the need for energy security, the corporation planned new generating stations in the early 2000s and launched calls for tenders as a way of maintaining exportable production surpluses. But in the time it took to put this strategy into place, market conditions tightened and Hydro-Québec found itself with surpluses it couldn’t fully exploit. So its productivity declined.”

Whether or not this situation was beyond Hydro-Québec’s control, the consequences of its lack of efficiency must not be minimized. Although the corporation makes a large contribution to the province’s tax revenue and offers Quebeckers low electricity rates, it appears that it could have done better if its efficiency had not suffered over the past decade.

A costly intervention

By judging Hydro-Québec’s performance solely on the basis of profits and rates, the government ignored its efficiency problems. And this time, the government itself contributed to its corporation’s declining performance. “The Quebec government forced Hydro-Québec to shift into wind energy for regional development reasons, whereas less costly solutions would probably have better served Quebeckers’ interests. Up to a point, the decision could be justified as a social choice. But the real problem is that the government continued on this path even as market conditions worsened.”

As a result, Quebec consumers were forced to absorb higher than necessary rate hikes – by an estimated $2.5 billion, according to the Quebec Auditor General. More important still, the government’s intervention accentuated the efficiency problems at Hydro-Québec by unnecessarily adding to its surpluses, to the point where they were wasted. Hydro-Québec is already required to pay high annual fees to TransCanada Energy for idling the Bécancour gas plant, and had to release the equivalent of 10 TWh from its reservoirs in 2018, given the lack of demand for its product.

Some recommendations

Given these findings, it seems that some aspects of Hydro-Québec’s operations must be rethought. The government should avoid using the corporation as a regional development tool for purposes that exceed its mission as a state corporation, i.e. producing hydroelectricity. If the corporation considers it necessary to invest in alternative energy sources, let it be a business decision and not a political one, and the corporation will be answerable for its own performance. “Why create a commercial state corporation if you’re going to run it like a government department?”, asks Gagné.

To encourage transparency, the Régie’s control over electricity rates should be eliminated and the concept of a heritage pool abandoned. In fact, these are essentially political artifices that do very little to serve Quebeckers’ interests. Since rate increases have not exceeded inflation since 1944 – long before the Régie was called upon to regulate rates – it would seem much simpler to keep them below inflation in future. In this way the government would simplify rate setting and limit sterile debates concerning rate increases.

To read more: Deslauriers, Jonathan, Robert Gagné and Jonathan Paré, Productivité du secteur public québécois – Hydro-Québec, Centre for Productivity and Prosperity (CPP) – Walter J. Somers Foundation, HEC Montréal, January 2019