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Energy Regulation in Quebec

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  • C. Robert Clark

    ()

  • Andrew Leach

    ()

Abstract

This report characterizes the regulation of energy markets in general and focuses on the electricity and natural gas markets of Québec. Markets are regulated if they are deemed to represent natural monopoly situations or if unregulated firms would not take into account externalities that they might generate. Energy market regulation has been justified with the claim that regulation represents the “second-best” alternative. That is, given a situation in which there is market failure, the outcome derived under regulation may be better than the outcome that would arise if the market were unregulated. Government intervention may be required in order to protect the interests of consumers. Energy markets have been considered natural monopoly situations in large part because of the enormous fixed costs associated with production and distribution. Furthermore, electricity and natural gas are generally considered essential goods, or more accurately, goods with significant positive externalities from reliable supply. A reliable supply is necessary for the proper functioning of any modern economy and a private market might not provide equally for all people in a service area. In recent years, however, certain segments of some energy markets have been liberalized, since these segments might not actually be natural monopoly situations and/or because the market may provide means to ensure that firms internalize externalities. We describe the experiences of a number of jurisdictions that have experimented with energy market liberalization and show that restructuring is feasible and may provide an improvement over the status quo if market power can be limited. We consider the potential for restructuring in Québec’s energy markets which are currently mainly regulated by the Régie de l’énergie du Québec. Québec’s electricity market does not represent a typical case for the restructuring of the production side since the vast majority of its generating capacity comes from hydro projects. Over 90% of Québec’s installed electrical capacity is hydro generated, making Québec the second most hydro-dominated market in the world after Norway. Furthermore, this capacity is highly concentrated on three river systems. The usual model of forced divestiture by hydrologic system is therefore likely to introduce market power in a restructured market, and may lead to greater inefficiencies than those present under regulation. In order for any market restructuring to succeed, (at least) one of two approaches must be undertaken. A system of tradable water rights could be established in parallel with a competitive power pool in order to allow divestiture of individual plants within a river system and/or Québec’s markets could be opened to foreign production. The retail segment of Québec’s energy markets could potentially benefit from liberalization. The only obvious difference between Québec’s energy markets and those in other jurisdictions is Québec’s price-equalization policy. Lower prices could prevail if competition were introduced to the markets for electricity and natural gas, but not for all consumers. Québec’s insistence on uniform prices throughout the province means that some consumers are currently paying below market price for energy. Prices for these consumers could rise if the market is restructured.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Burgundy Reports with number 2005rb-03.

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Date of creation: 01 May 2005
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Handle: RePEc:cir:cirbur:2005rb-03

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  1. Borenstein, Severin & Bushnell, James, 2000. "Electricity Restructuring: Deregulation or Reregulation?," Competition Policy Center, Working Paper Series qt22d2q3fn, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  2. Ambec, S. & Sprumont, Y., 2000. "Sharing a River," Cahiers de recherche 2000-08, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  3. Stefan Ambec & Joseph Doucet, 2003. "Decentralizing hydro power production," Canadian Journal of Economics, Canadian Economics Association, vol. 36(3), pages 587-607, August.
  4. Paul L. Joskow, 2001. "California's Electricity Crisis," Oxford Review of Economic Policy, Oxford University Press, vol. 17(3), pages 365-388.
  5. Ferdinand E. Banks, 2003. "An introduction to the economics of natural gas," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 27(1), pages 25-63, 03.
  6. Paul L. Joskow, 2003. "Electricity Sector Restructuring And Competition - Lessons Learned," Working Papers 0314, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  7. Braeutigam, Ronald R., 1989. "Optimal policies for natural monopolies," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 23, pages 1289-1346 Elsevier.
  8. Paul L. Joskow, 1997. "Restructuring, Competition and Regulatory Reform in the U.S. Electricity Sector," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 119-138, Summer.
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