ADVICE CONCERNING THE DISTRIBUTION OF ELECTRICITY
TO MAJOR INDUSTRIAL CONSUMERS IN QUÉBEC (June 2005)
SUMMARY
The Minister’s request
On March 15, 2005, the Minister of Natural Resources and Wildlife asked the Régie de l’énergie (the Régie) for its advice concerning the distribution of electricity to major industrial consumers in Québec, in connection with the development of a Québec energy strategy.
Two questions were submitted to the Régie:
To examine the legal and regulatory framework applicable to major industrial consumers of electric power, with particular attention to the obligation to provide service, the 175 MW limit in Hydro-Québec’s tariffs (article 307) and the Régie’s mandate as stipulated in section 5 of the Act respecting the Régie de l'énergie ; and
To study the impact on consumers of electric power and on Québec society of supplying large quantities of electricity to a single company.
Question 1
Under the Act respecting the Régie de l’énergie (the Act ), the distribution division of
Hydro-Québec (the Distributor) has a responsibility to serve all consumers of electric power. Under the Hydro-Québec Act , Hydro-Québec is responsible for supplying heritage pool electricity (165 TWh) to the Distributor and, more generally, for estimating
Québec’s energy needs and the means of meeting them. Beyond heritage pool electricity, it is up to the Distributor to solicit tenders and award contracts for the supplies required to serve all Québec consumers.
The Distributor has a monopoly on electric power distribution in virtually all of Québec.
Since it operates as a monopoly, the Distributor has an obligation to distribute electric power to every person who so requests (section 76 of the Act ), in accordance with the rates and conditions set by the Régie. The Distributor’s Distribution Tariff provides that the Distributor is not obliged to grant contracts for contract power greater than 175 MW.
The Régie performs a detailed analysis of the origin of this provision, which has been included in one form or another in the rates of Hydro-Québec and of the Distributor for nearly 30 years. On the basis of this analysis, the Régie concludes that the 175 MW limit in the Distributor’s Distribution Tariff is compatible with its more general obligation to distribute electricity to any person who requests it, within the territory in which the
Distributor holds exclusive rights, and therefore the obligation to provide service is not absolute. The Régie further considers that this limit is consistent with the public interest and with an approach based on sustainable development and due regard for individual

and collective equity, considerations which the Régie must take into account pursuant to section 5 of the Act .
Given the applicable legal and regulatory framework, energy policy and economic development must be taken into account when considering service to major industrial consumers. The Régie therefore recommends that the government provide, in the Act respecting the Régie de l'énergie, specific regulatory powers related to rate fixing principles or other factors that it wants the Régie to consider in connection with service to major industrial consumers above a certain power.
Question 2
The impact on electricity consumers of supplying large amounts of electricity to a single company depends on the quantity involved, the acquisition price and the manner in which the resulting supply costs are divided among the various classes of consumers and recovered through their rates.
First, the Régie explains the process by which it sets or modifies rates. Then, using as an example the addition of a 500 MW load to the Large Power class, the Régie demonstrates how different cost distribution scenarios would impact rates.
New supplies and rate fixing
In 2005, Québec’s electricity consumption will reach the maximum heritage electricity pool of 165 TWh, of which the average cost is 2.79¢/kWh. All new supplies, including those intended for the projects of Large Power customers, will have to be contracted at the market price, which the Distributor estimates at 7¢/kWh. Therefore, any increase in electricity demand in Québec will translate into an increase in the average cost of supply for all customers. Supply costs account for more than 50% of the Distributor’s total costs.
Depending on the customer’s location and the additional transmission and distribution costs, the rate impact of adding a 500 MW load will be an increase of between
$137 million and $179 million per year, or between 1.5% and 1.9% in comparison with current rates.
Electricity rates are set on the basis of the projected cost to the Distributor of serving customers (cost of service). The Distributor’s cost of service is divided into three major categories: supply, transmission and distribution. Revenues from a particular class of consumer should theoretically reflect as objectively as possible the cost of providing service to that class. However, subsection 52.1 of the Act imposes a specific condition: the Régie cannot modify the rates applicable to one class of consumers in order to alleviate the cross-subsidization of rates between classes of consumers.

Distribution of supply costs
The method of distributing the supply cost of heritage and post-heritage electricity among the different classes of consumers is currently under study. In its decision D-
2005-34, the Régie referred this matter to a technical committee. The Distributor is to submit a report to the Régie when it files its next rate application, which is expected in late summer 2005. However, the Régie presents, as an example, the application of two approaches regarding the distribution of supply costs.
The comprehensive approach distributes heritage pool electricity across the customer base in a manner that may vary over time. Therefore, a significant addition of load in the
Large Power category will have the effect of increasing the quantity of heritage pool electricity allocated to this class of consumer. Consequently, the supply costs allocated to the other classes will rise more quickly.
The marginal approach distributes heritage pool electricity among the different classes of consumers in a manner that does not vary over time and therefore yields a constant supply cost of heritage electricity for each class. Therefore, a significant addition of load in the Large Power category will have the effect of increasing supply costs for that class without affecting the supply costs allocated to the other classes.
Impact of adding a 500 MW load, by class of consumer
Under the comprehensive approach, adding a 500 MW load in the Large Power category will lead to additional rate increases of 1.3% in the Domestic category, 1.6% in the Small and Medium Power category, and 1.8% in the Large Power category.
Under the marginal approach, the addition of this load would leave rates for the
Domestic category and the Small and Medium Power category virtually unchanged, while the Large Power rate would rise an additional 5.9%.
Large Power category
The Large Power category includes major industrial consumers of electric power with demand power above 5 MW. These consumers pay Rate L or have a special contract.
The price of electricity is one of the most important factors major industrial consumers consider when deciding where to increase production capacity or build a new plant.
Electricity accounts for an average of 25% of the variable costs of major industrial consumers. This proportion may be as high as 60% or even 80% in some cases.

The case of aluminum smelters
The median electricity rate paid for aluminium production worldwide is around
C2.4¢/kWh. Approximately 48% of world aluminum output is currently produced with electricity sold at rates higher than those stipulated under the special contracts in force in Québec.
The Régie believes Rate L makes it possible for the industry to preserve its position and even to grow to some extent. Rate L therefore remains attractive.
Measuring the impact on Québec society
Major industrial consumers of electric power generate 31% of Québec’s industrial GDP and 33% of Québec government revenues from the manufacturing sector.
Consideration of the direct and indirect economic impact of adding a 500 MW load must include not only effects related to investment and to the level of economic activity of the company that receives an energy block but also the impact of the rate increases that must be borne by consumers of electric power.
Conclusions
Québec is at a turning point in its history in terms of energy: the comparative advantage stemming from the low cost of hydroelectric power is disappearing as the cost of future projects increases.
Any additional demand for electric power, whether it originates from industry or other quarters, will have to be satisfied at market prices and will therefore create upward pressure on rates.
The low price of heritage pool electricity enables a gradual transition to market prices for electricity possible, shielding Québec consumers from rate shock.
However, an assessment of the impact on Québec consumers of granting or not granting a large energy block to a singe company cannot be confined to rate considerations; the question raises much broader issues.
To answer it, therefore, one must also measure the impact on the Québec economy and take into account the social and environmental effects and the regional impacts, in the present day and for future generations.