Conceptualizing the impact of demand elasticity of Hydro-Quebec TransÉnergie

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Conceptualizing the impact of demand elasticity of
transmission services on the potential revenues to
Hydro-Quebec TransÉnergie
prepared by London Economics International LLC
October 18, 2005
London Economics International LLC (“LEI”) was retained by Brascan Energy Marketing Inc.
(“BEMI”) to review the economic rationale of a possible rate change for Hydro-Quebec
TransÉnergie’s (“HQT”) point-to-point transmission service, especially in the context of
incentivizing more utilization of HQT’s system. Although HQT has proposed to retain its current
point-to-point firm and non-firm transmission rates (for example, the non-firm hourly transmission
rate will remain at $8.33 per MWh), it has also been forced to propose an increase of 7.35% in the
annual invoice amount for transmission services to local load because of rising needs of local load.
In our opinion, HQT could in fact increase its revenues by further incentivizing use of excess
capacity on its transmission system for short-term market transactions by way of a rate decrease
on certain classes of point-to-point transmission services.
Demand for short-term point-to-point transmission services is generally known to be highly
sensitive to prices because of the nature of “wheel through” and “wheel in and out” energy
transactions. The economics of such energy transactions depend not only on commodity prices for
electricity but also on transmission system charges that the customer must pay; thus, the cost of
short-term transmission service will have a direct impact on whether a “wheel through” (and
“wheel in and out”) transaction is profitable and whether it will be executed. According to the
principles of the Law of Demand, this price sensitivity translates into a very elastic demand for
such short-term point-to-point transmission services. This is further enhanced in the case of HQT
given its location at the cross-roads of several large wholesale power markets with varying
capacity resources and demand needs and steadily growing cross-border trading in electricity.
Moreover, HQT has confirmed, as does the data on actual flows across the interties, that there is
spare capacity on HQT’s system.
Conceptually, a rate decrease for short term point-to-point services would reduce the opportunity
costs for cross-border transactions and would increase the volume of trade in and out of Quebec.
The increased utilization of spare HQT transmission capacity would raise overall revenues to HQT.
This would directly benefit captive customers (local load), by reducing the share of the total revenue
requirement that HQT must recover from local load.
Though HQT has not been satisfied with the results of its provisional rebate program, the design of
that scheme did not prove that opportunities for increasing volume on HQT’s system are lacking.
Indeed, we believe opportunities remain untapped. The conceptual ideas outlined in this paper are
sufficiently impressive as to suggest that additional empirical analysis on the elasticity of demand
for HQT’s electricity transmission services is warranted prior to accepting the current proposed
rates, as there may be opportunities to improve market efficiencies and benefit Quebec native load
through a rate decrease for certain classes of transmission service.
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contact:
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1 Introducing the Law of Demand
The fundamental economic theory of the ‘Law of Demand’ states that quantity demanded for a
good or service should move in the opposite direction of price, holding all else constant.
Economists like to illustrate this relationship using stylized graphs such as the one below,
where we observe a downward sloping (linear) demand curve (see Graphs B and C in the figure
below). Most (‘normal’) goods and services, with the exception of certain theoretical oddities1,
exhibit this profile to some degree, though there are some products which may be more elastic
than others. The graphs below also highlight the degrees of elasticity and how that reflects on
the slope of the demand curve.
Figure 1. Illustrative examples of a downward-sloping demand curve and various levels of
demand elasticity
Price
(downward-sloping)
Demand Curve
Supply
Curve
Quantity
Demanded
P
P
P
Supply
P
Supply
Supply
Perfectly
Elastic
Demand
Graph A
Q
Relatively
Elastic
Demand
Graph B
Q
Supply
Relatively
Inelastic
Demand
Graph C
Q
Perfectly
Inelastic
Demand
Graph D
Q
What is the intuition behind the downward sloping demand curve? As consumers, all of our
economic decisions are bounded by our budgetary constraints: if one good gets very expensive
then we will switch to a relatively less expensive one that is a good substitute. As we discuss
below, some customers of HQT’s transmissions services evaluate the cost of transmission
services directly in their decision to purchase and trade electricity and have the discretion and
1
Alfred Marshall wrote in his treatise on economics: “There are however some exceptions (to downward
sloping demand). For instance, as Sir R. Giffen has pointed out, a rise in the price of bread makes so large a
drain on the resources of the poorer labouring families and raises so much the marginal utility of money to
them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods:
and, bread being still the cheapest food which they can get and will take, they consume more, and not less of
it. But such cases are rare; when they are met with, each must be treated on its own merits.” (Principles of
Economics, Marshall A., Macmillan 1946, pg. 132). The Giffen paradox relates to a special type of an inferior
good (in contrast to a ‘normal’ good) which has the characteristic of falling demand when a person’s income
rises. Thus a positive income effect outweighs a negative substitution effect and quantity demanded rises
when prices rise. The Giffen paradox is an interesting model, but most economists agree that there is little
firm evidence to support real-world examples.
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ability to shift their electricity purchases geographically in order to avoid high-priced
transmission service territories, and vice versa. Therefore, if HQT’s transmission services were
comparatively cheaper than those of transmission service providers in neighboring regions,
customers using those transmission services elsewhere would be encouraged to shift their usage
to HQT’s transmission system, assuming there is excess capacity and technical feasibility.
2 What type of transmission services does HQT provide?
HQT’s transmission services can be classified along two general categories of customers:
transmission services for domestic (captive) customers (i.e., local load) and transmissions
services for market transactions.2 It is important for us to understand the fundamental
characteristics of these two classes of services, as that will then drive our hypothesis regarding
the overall demand for HQT’s transmission services.
Currently, most of Quebec’s electricity customers are captive, i.e., they cannot choose their
electricity supplier.
These customers, who are served solely through Hydro-Quebec
Distribution (“HQD”), are provided with electricity derived principally from heritage assets but
also from power obtained competitively. In economic terms, these customers’ demand can be
described as inelastic, as they do not have the opportunity to respond to prices - they simply
consume the quantity of electricity they need, irrespective of the overall cost of the service.3
Based on figures from 2002, total demand for electricity (and thus electricity transmission
services4) from all domestic customers in the province of Quebec was 183.7 TWh.5 Assuming a
growth rate of 1% per annum, an estimate of current domestic demand would be at
approximately 189 TWh. HQT, as monopoly transmission operator in the province of Quebec,
would be responsible for transmitting electricity to serve these customers.
Figure 2. Historical demand in Quebec (TWh)
Residential Sector
% of total
Commercial Sector
% of total
Transportation Sector
% of total
Industrial Sector
% of total
Total Provincial Demand
1998
49.5
30%
31.1
19%
0.3
0%
84.3
51%
165.1
1999 2000 2001 2002
51.2 53.7 52.8 55.2
30% 31% 30% 30%
32.0 32.8 32.7 34.1
19% 19% 19% 19%
0.3
0.3
0.3
0.3
0%
0%
0%
0%
85.9 88.3 90.8 94.2
51% 50% 51% 51%
169.5 175.1 176.6 183.7
Source: Ministry of Energy, “L’Énergie au Quebec 2004”
2
In 1997, Québec opened its transmission system to third party access.
3
In the long-run, continued escalation of prices is likely to catalyze conservation efforts, which should change
the consumption profile of these customers.
4
Ignoring, for simplicity, line losses.
5
Source: latest data from the Ministry of Energy
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Figure 3. HQT’s break-down of revenue
(2004)
International Others
6%
Markets
8%
North
American
Wholesale
Markets
4%
In addition, HQT provides transmission services
to
third-parties
making
market-based
transactions in electricity, for example Hydro
Quebec Production’s sale of excess energy to
neighboring provinces and the United States.
While HQT has typically not provided a
breakdown of transmission grid usage across
different customer classes, it does state in its
2004 Phase I filing with the Régie de l’Énergie
(Document HQT-3) that 6% of its revenues were
derived from North American wholesale market
transactions. This is consistent with the financial
highlights in its 2003 Annual Report. In 2004, the
Hydro-Quebec Annual Report states this figure is
now 4%.
HydroQuebec
Distribution
82%
Source: Hydro-Quebec 2004 Annual Report
In contrast to transmission services for domestic customers, market-based transactions (i.e.,
“North American wholesale market activities”) are likely to be more sensitive to transmission
costs, especially in those cases where the market transactions are based on the profitability of
short-term commercial trades rather than long-term contracts. As we discuss further below,
such market transactions are driven by price arbitrage opportunities between electricity markets
that arise as a result of ‘instantaneous’ disconnects in market fundamentals (such as supplydemand imbalances) or as a result of long-lived and persistent cost advantages of production
due to a regions’ natural endowments and resource base. As can be seen from the Figure 5,
Quebec has a substantial amount of interconnection with its surrounding regions, which
facilitates such market transactions.
Based on National Energy Board’s records of imports and exports from Quebec, Quebec’s
transmission lines carried electricity in and out of the province in the range of 13 million MWh
to over 24 million MWh per annum. It is important to note that these electricity trades include
long-term contracts as well as the arbitrage transactions we discussed earlier. In fact, a
substantial contributor to the drop off in exports over recent years from Quebec is the expiration
of certain long-term contracts with suppliers in New England.
Figure 4. Quebec’s imports and exports (MWh)
1999
2000
2001
2002
2003
2004
2005*
IMPORTS
2,452,966
3,953,226
3,448,796
2,545,734
3,924,972
3,459,812
1,747,633
EXPORTS
16,560,101
20,232,744
14,819,802
14,738,630
10,038,238
9,478,025
8,001,081
TOTAL
19,013,067
24,185,970
18,268,598
17,284,364
13,963,210
12,937,837
9,748,714
Source: NEB
*Data from January through August
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Figure 5. Quebec’s transmission system and import/export capabilities
Source: NEB
What do these market transactions represent? There are two broad classes of trades represented
in these market transactions – “wheel through” and “wheel in and out.” “Wheel through”
transactions represent trades where Quebec’s transmission system is used solely for
transportation purposes, in other words, electricity enters the Quebec system at one point of
interconnection and then exits the system at another point of interconnection. These
transactions are more likely to be affected by prices levels for transmission services, as they
represent electricity that is simply “transiting” through the transmission system. Because of the
availability of alternative transport paths, such as having power scheduled to be “wheeled
through” neighboring markets, “wheel through” transactions are sensitive to transmission
rates, relative to those in neighboring markets. We illustrate this point in a hypothetical
example below. “Wheel in” and “wheel out” transactions are those that involve energy that
originates in Quebec (i.e., Quebec as a supplier) or energy that is consumed in Quebec. A
“wheel in” is effectively equivalent to imports into Quebec from an external market for
consumption by consumers in Quebec; while, a “wheel out” is an equivalent to exporting
electricity. All these transactions benefit the Quebec economy by providing for the opportunity
to cheaply buy electricity for consumption in Quebec (and thus preserve scarce hydroelectric
resources) or sell Quebec’s electricity services for a profit when conditions warrant.
Thanks to the evolution of technology, market constructs, and the very quick (if not
instantaneous) dispersion of information, those entities and individuals transacting on the basis
of arbitrage are making decisions on a very short timeframe. Their price sensitivity cannot be
under-estimated. As in stock markets, very small price differences drive the decision regarding
where to purchase power and where to sell power. Transmission costs must enter into this
determination, as well any other levies and fees (such as export taxes, mandatory ancillary
service charges, and system operator fees).
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As an example, let us analyze the decision-making process that a customer would undertake for
evaluating his opportunities. Though his main objective is to buy and sell power, his decision
will affect transmission owners as well; as he will (at least financially)6 decide on which
transmission system he uses and thus schedule his transaction accordingly. In other words, the
economics of the transaction need to account for the costs of transmission services. Let us step
into the shoes of Mr. Dupont, a hypothetical customer in upstate New York, who needs to
acquire 100 MW of electricity for the next operating day in order to meet his other
commitments. He will review market opportunities locally, but he will also look externally to
interconnected markets, such as Ontario, Quebec, New England, as well as possibly other
markets that are further away (such as the Maritimes). Let us assume that he observes the
following hypothetical commodity prices for electricity:
Figure 6. Hypothetical customer example - commodity prices ( $/MWh)
Electricity prices (commodity only)
New
New York England
$60
$60
Quebec
$50
Ontario
$55
Maritimes
$51
And let us assume that the hypothetical customer faces the short-term transmission rates7 noted
below to get the electricity from the various locations delivered to New York:
Figure 7. Hypothetical customer example – transmission rates ($/MWh)
Non-firm transmission tariffs
New
New York England
$4.3
$2.5
Quebec
$8.3
Ontario
$7.2
Maritimes
$4.2
The summation of the actual transmission costs (based on aggregate of all markets traversed)
with the commodity cost of electricity results in the following hypothetical delivered prices of
electricity to New York based on systems traversed:
Figure 8. Hypothetical customer example – total cost for economic decision ($/MWh)
Commodity
Transmission (NEW ENGLAND)
Transmission (ONTARIO)
Transmission (QUEBEC)
Transmission (MARITIMES)
Transmission (NY)
Total cost ($/MWh)
New
New York England
$60.0
$60.0
$0.0
$2.5
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$4.3
$4.3
$64.3
$66.8
Quebec
$50.0
$0.0
$0.0
$8.3
$0.0
$4.3
$62.7
Ontario
$55.0
$0.0
$7.2
$0.0
$0.0
$4.3
$66.5
Maritimes Maritimes
via QC
via NE
$51.0
$51.0
$2.5
$0.0
$0.0
$0.0
$0.0
$8.3
$4.2
$4.2
$4.3
$4.3
$62.0
$67.8
6
As we all know, the physical flow of electricity on AC networks cannot be controlled. Thus, physical flows may differ
with financial or contracted flows. Transactions are typically determined on the basis of financial or contracted paths,
subject to certain over-arching physical limitations (such as available transmission capacity).
7
Transmission rates as of Spring 2005. For illustrative purposes, we have translated these into Canadian dollar terms,
however the currency is irrelevant to the conceptual framework of the example.
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Based on these parameters, it is self-evident that Mr. Dupont will choose to wheel power from
the Maritimes through New England and into New York, as that is the most economic
alternative. Now let us assume that point-to-point transmission rates are decreased in Quebec
by a hypothetical 15%. Although this is a hypothetical example, it is important to note that
transmission charges play a major part in the delivered price of electricity. Therefore, although
Quebec may have cheaper power, this may not necessarily be the case once all delivery charges
are factored in.
Figure 9. Hypothetical customer example – total cost for economic decision with 15%
transmission rate decrease on HQT’s system ($/MWh)
Commodity
Transmission (NEW ENGLAND)
Transmission (ONTARIO)
Transmission (QUEBEC)
Transmission (MARITIMES)
Transmission (NY)
Total cost ($/MWh)
New
New York England
$60.0
$60.0
$0.0
$2.5
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$4.3
$4.3
$64.3
$66.8
Quebec
$50.0
$0.0
$0.0
$7.2
$0.0
$4.3
$61.6
Ontario
$55.0
$0.0
$7.2
$0.0
$0.0
$4.3
$66.5
Maritimes Maritimes
via NE
via QC
$51.0
$51.0
$2.5
$0.0
$0.0
$0.0
$0.0
$7.2
$4.2
$4.2
$4.3
$4.3
$62.0
$66.7
The 15% transmission rate decrease, holding all else constant, will change the economic
parameters of the decision. Mr. Dupont will now consider importing power from Quebec as the
most economic alternative and by so doing make use of the HQT transmission system. Were
power to not be available from Quebec, then in this example with the 15% discount, the least
cost option for Mr. Dupont remains importing electricity from the Maritimes through New
England, thus leaving the surplus import/export capacity on the HQT system unused.
However, if HQT’s were cut to $2/MWh for “wheel-through” transactions, Mr. Dupont would
then find it more economical to source his power from the Maritimes and import it through
Quebec and in doing so would contribute $2/MWh of revenue to HQT that they would not
otherwise have received.
Let us look at the situation from a different perspective. What does the data on actual imports
and exports suggest? Though a full empirical study of the transmission usage, interregional
trade, prices, and transmission costs is outside the scope of this report, a simple review of the
hourly flow data shows extreme volatility of both quantities of electricity transacted and prices.
As a further example, let us take electricity flows between Quebec and New England on the
Phase II interface over the last two years8 and nodal prices at the Quebec-New England border
(Phase II Intertie), as reported by ISO New England. The data graphed in Figure 10 represents
hourly day-ahead transactions on the Phase II intertie over the March 2003 through August
2005 period. The nodal price represents ISO-New England’s reported cost of power (energy
costs) plus marginal congestion and marginal losses in transmission to get power to the border
8
We have used flows and prices from March 2003 through August 2005. Since New England ISO transitioned
to nodal prices only as of March 1, 2003, earlier data is not available for nodal price at interties.
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with Quebec. If we believe in the efficient operation of markets (which eliminate arbitrage
opportunities and thus reduce or remove price differences), then this price is also a proxy for
Quebec’s cost of power and transmission costs to the border at each trading interval. As can be
seen in the figure below, there appears to be a relationship between flows and prices, which as
we note above includes the commodity cost of power and transmission costs. For illustrative
purposes, the average pattern suggested by the raw data is represented by the red downward
sloping trend line.
Figure 10. Illustration of relationship: hourly electricity flows between New England and
Quebec and nodal prices at the intertie
ISO-NE Locational Marginal Price at Phase II, US$/MWh
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$-2000
-1500
-1000
-500
0
500
1000
1500
Net Hourly Flows Recorded by ISO-NE at Phase II intertie with Quebec (MW)
(positive = flows in New England)
(negative = flows into Quebec)
3 Hypothesis and recommendations
Having extensively observed and analyzed trading arrangements for market transactions, we
can, under most circumstances, conclude that demand for short-term point-to-point
transmission services is elastic. It is therefore our belief that customers other than native
demand will make more use of HQT’s transmission services as HQT decreases its prices,
provided there are no other barriers to using the transmission system. Thus, with a rate
decrease, HQT could obtain greater revenues through an increase in transaction volumes from
its point-to-point transmission services and could then pass along cost savings to local load.
We know that HQT has been granted a revenue requirement of $2,591 million by the Régie in
D-2005-63. For the purposes of our hypothetical example below, we used historical data that
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suggests that 4% to 6% of HQT’s revenues have historically been generated by “North
American wholesale market transactions”, which we hypothesize are elastic in their demand (as
opposed to transmission services for domestic demand, which is less likely to be sensitive to
prices). On the basis of this notional demarcation, we estimate that transmission services for
‘wholesale market transactions’ may represent between $103.6 million and $155.5 million of the
approved revenue requirement, depending on the percentage share of “North American
wholesale market transactions” in HQT’s total revenue.
For illustrative purposes, let us further assume that HQT faces a linear demand curve for this
class of services (we denote these as ‘wholesale market transactions’) based on the assumed
elasticity of -2. The elasticity of demand measures the percentage change in quantity demanded
of a product or service with respect to a percent change in the price (or cost) of the product. In
other words, elasticity measures the responsiveness of quantity demanded to changes in price.
Products that have an absolute value of price elasticity that is greater than one are called price
elastic, and products that have an absolute value of price elasticity that is less than one are
categorized as price inelastic. Given current published rates (hourly non-firm of $8.33 per
MWh), we can, thus, estimate the potential impact of a 15% rate decrease on quantity of services
demanded and the revenue this class of services would generate under the above assumption of
elasticity.
The graph below highlights the results of our hypothetical model where the revenue generated
by transmission services for ‘wholesale market transactions’ as a result of the 15% decrease (see
the blue area) is larger than that amount generated by current tariffs (see yellow area), which is
approximately $103.6 million. A 15% decrease would results in an estimated ‘wholesale market
transactions’ revenue of $105.8 million based on our assumptions regarding elasticity. This
represents a 2.14% increase in revenue generated using the recently approved revenue
requirement level. The increase in revenues would be due to an increase in utilization of
existing transmission capacity, assuming that capacity were available. Though this is a highly
stylized example of the possible impact of lower tariffs on the revenue requirement with elastic
demand, it nevertheless illustrates the basic benefits HQT could obtain.
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Figure 11. Illustration of hypothetical example
$14.0
Transmission Cost ($/MWh)
$12.0
$10.0
$8.0
$6.0
$4.0
$2.0
$0
5
10
15
20
25
Quantity of Transmission Services Demanded (TWh)
The figures above are purely for illustrative purposes as it is highly likely that demand elasticity
would vary over time (and perhaps over transmission paths) and that a decrease of less than
15% would have positive effects on the revenue requirement. We have summarily tested
various combinations of elasticities and rate decreases. At an elasticity level of -3 for example, a
rate decrease of even 70% would produce a 7.5% increase over the revenue level generated
using current tariffs, assuming that capacity were available. Additionally, a decrease of 15% in
transmission rates would result in an increase in revenue at an elasticity level as low as -1.75.
These figures simply serve the purpose to demonstrate that there are various alternatives that
HQT should explore and that a thorough analysis of demand elasticity should be undertaken
prior to any decision on transmission tariffs.
As an epitaph, it is interesting to note that HQT acknowledges having faced demand declines in
the recent past for certain classes of services, which signals a need to review and reconsider the
rate structure. In Hydro-Quebec’s Annual Report (2004), they state in the financial review section
the following: “Sales amounted to $2,835 million down $127 million from 2003. The decrease is
due to a $111-million reduction in revenue from long-term reservations for point-to-point
transmission service”9. This decrease reflects a continuing trend, as the 2003 Annual Report, also
reported decreases in profits as a result of declining point-to-point transmission services.10 This
9
Hydro Quebec. Annual Report (2004), pg. 64
10
The Hydro Quebec Annual Report (2003) on page 68 stated: “The transmission segment recorded income
before financial expenses of $1,374 million, versus $1,467 million in 2002. This decrease is attributable to a
decline in demand for long-term point-to-point service.”
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reduction in demand for transmission services is directly related to the class of services we
believe would be elastic, as demand by domestic customers increased rather than decreased
over this time period with electricity sales to Hydro-Quebec Distribution increasing from 158
TWh in 2002, to 165.3 TWh in 2004.11 A decrease in transmission rates for the class of service we
are suggesting (i.e. non native load) would enable HQT to reverse the recent trend in declining
non native-load sales.
4 Concluding remarks
In order to stimulate demand for transmissions services and maximize the economic benefits of
HQT’s transmission assets, it may be preferable for the Régie de l’Énergie to consider lowering
rates for certain classes of transmission service (especially if the rate decline will be outweighed
by the increased demand response). If elasticity is as substantial as implied by submitted
evidence on market transactions and intuition on how these transactions work, then some of the
additional revenue received from increased usage from market transactions could go to offset
the rising needs of Quebec’s domestic (captive) customers. This type of tariff optimization
follows the policy concepts of the Diamond extension12 of the famous Ramsey Pricing Rule,
allowing the Régie de l’Énergie to then consider fairness and impact of rate changes on
domestic customers and market transactions, alongside with arguments for efficiency (i.e.,
minimal distortion to economic social welfare).
The concept of demand elasticity is not new to the Régie de l’Énergie, nor to HQT. Both have
acknowledged the fact that demand for transmission services could be increased through some
form of a rebate or discount mechanism – this is equivalent to saying the demand for point-topoint transmission services is sensitive to price changes. The Régie de l’Énergie has noted these
considerations in its directive to have HQT to pursue a provisional rebate policy on the belief
that rebates could optimize the use of the system.13 While HQT has been ambivalent14 on the
success of the provisional rebate scheme that the Régie mandated in 2002, it has nonetheless
acknowledged in its recent discount policy proposal15 that demand on certain transmission
paths is likely to be sensitive to price decreases. These complementary views reiterate the
potential for improved system optimization and increase revenues and the need for a thorough
empirical analysis on demand elasticity of transmission services. Furthermore, while
conducting such an analysis, it is essential for the Régie de l’Énergie to direct HQT to consider
the utilization level of the transmission system and the existing amount of spare capacity on it.
Such a consideration would enable HQT to better determine the optimal rate decrease given
existing system capacity for point-to-point services.
11
Hydro Quebec. Annual Report (2003), pg. 68 and Annual Report (2004), pg. 62
12
Diamond, Peter A. A Many-Person Ramsey Rule. Journal of Public Economics 4 (1975): 335-42.
13
Decision D-2002-95, pg, 280
14
Although HQT has mentioned that the provisional discount policy had provided inconclusive results, we
wish to point out that the discount was only applied to off-peak hours and that the rebate level was not
based on a quantitatively rigorous analysis of the elasticity of demand for transmission services.
15
Application R-3549-2004-Phase 2, HQT-2, Document 1 & 5
London Economics International LLC
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Boston, MA 02111
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contact:
Julia Frayer
617-494-8200
[email protected]
Therefore, we recommend that Régie de l’Énergie direct HQT to undertake more substantive
studies on the elasticity of demand for transmission services in order to better address the
impact that rate decreases may have on demand for point-to-point services and ultimately, on
achieving the necessary revenue requirement for HQT while minimizing rate increases to native
load customers. There is a wealth of data in the public and private domain on costs, market
prices, and the transmission flows for the Quebec market (and more so) for neighboring regions.
We would recommend that HQT undertake a thorough econometric analysis of elasticity for
those transmission services that are likely to be responsive to price/cost changes (such as those
described as ‘North American wholesale market operations’).
From an econometrics perspective, elasticity can be estimated using an estimated demand
model, where the quantity of demand for transmission services (for ‘wholesale market
transactions’) would be explained by key drivers, like transmission costs (rates), supply
conditions, path location, and arbitrage opportunities. With econometrics, the marginal impact
of the change in transmission costs could be isolated from other variables that impact
transmission services. In our opinion, such a model would require the inclusion of the
simultaneous market dynamics that exists between interconnected regions to Quebec, such as
Ontario, New England, New York, and Maritime. Though this is an intensive and challenging
quantitative exercise, it is also one that would add substantial rigor to the determination of
future transmission rates taking into account capacity utilization to the ultimate benefit of
ratepayers.
London Economics International LLC
717 Atlantic Avenue, Unit 1A
Boston, MA 02111
www.londoneconomics.com
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contact:
Julia Frayer
617-494-8200
[email protected]
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