Artificially cheap hydro power, your equalization dollars at work

Most Canadians may find it surprising that equalization encourages Quebec and Manitoba to waste renewable energy — so let’s walk through the logic.

When provinces develop new revenue capacity, equalization receipts generally go down, because the jurisdiction is deemed to have become less needy under the applicable formulae. Newfoundland and Saskatchewan, for instance, once were deemed have-not provinces until booming oil revenues pushed them into the have category. Rising resource revenues were clawed back from equalization payments until no more payments were forthcoming.

But a quirk in the equalization formula excludes the true value of hydro electric energy produced by Manitoba and Quebec, which sell their hydropower in local markets for below-market prices without penalty. An analogy would be Saskatchewan selling its oil, with a market value of about $95 a barrel, in its local market for $50. The formula is correct to deduct the market price of oil ($95) rather than the artificially low price ($50 in this example) from any equalization payments. The same logic should apply to Quebec and Manitoba’s hydro revenues under the equalization rules — but doesn’t. By creating a massive financial incentive for Quebec and Manitoba to subsidize hydro power heavily, the current arrangements generate market inefficiencies and encourage resource waste.

Between 2005 and 2010, Quebec received $42.4-billion in equalization. Lost revenues resulting from excessively low electricity pricing during that period was $28.6-billion (calculations are available at Fcpp.org). Since the equalization formula deducts 50% as a clawback from additional resource proceeds, an extra $14.3-billion (half of $28.6-billion) should have been deducted from Quebec’s equalization if its hydro revenues were treated the same as Alberta’s oil revenues under the rules. That would yield total equalization payments of $28.1-billion instead of $42.4-billion for the 2005-2010 period.

In other words, the federal government paid 34% more equalization to Quebec than it should have under more equitable rules. Alberta and Ontario taxpayers are effectively paying Quebec (and Manitoba) to consume artificially inexpensive power. (While Ontario now receives equalization payments, it remains a major contributor to the system.)

Read the full article here: http://fullcomment.nationalpost.com/2012/05/29/peter-holle-artificially-cheap-hydro-power-your-equalization-dollars-at-work/
 
Source: National Post, Peter Holle, Frontier Centre for Public Policy