Canada: Québec Energy Board Proposes Improvements To Electricity Rate-Setting Practices

On April 7, 2016, the Government of Quebec made public the 2030 Energy Policy, Energy in Québec – A Source of Growth. This policy suggests greater flexibility and proactivity in rate-setting for electricity and natural gas in order to better respond to the economic, social and environmental issues of energy consumers, producers and distributors.

For this policy to be rapidly deployed and translated into concrete actions to improve the situation of electricity and natural gas consumers, Pierre Arcand, Minister of Energy and Natural Resources and Minister responsible for the Plan Nord, forwarded a request for an advisory opinion on measures likely to improve rate-setting practices for electricity and natural gas (the Opinion) to the Quebec Energy Board (Board) on June 10, 2016.

On June 7, 2017, after more than a year of work, the Board submitted its Opinion1 to the Minister. Part of the Board's mandate was to take into account the deterioration in the ability of low-income households to pay their electricity bills on time. Its mandate also included the erosion of the competitiveness of electricity rates in some of Quebec's industrial sectors. In addition, the Board was to propose to the Minister solutions for industries with special needs, such as greenhouses and ski resorts.

Objectives of the Opinion

For this Opinion, with respect to electricity, the Board analyzed the rate options available to consumer categories and examined the competitiveness of rates applicable to major industry and certain industries with special needs. In this respect, the Board proposes various solutions. Cross-subsidization between consumer categories and support for low income households are also recommended.

For natural gas, the Board studied the issues related to rates and the rate structure, as well as those associated with processing biogas and its use in renewable natural gas.

Several possible solutions to promote the transition to an energy environment characterized by the arrival of new technologies were brought to the Minister's attention. Many of these solutions offer an active role to energy consumers. The Opinion finally addresses the issue of energy choices in Quebec. Here are just a few of the highlights of the Opinion in the field of electricity and, more specifically, dynamic ratemaking, cross-subsidization and the challenges of new technologies and energy choices in Quebec.

Introduction of dynamic ratemaking for critical hours

Currently, Hydro-Québec's rate offering is characterized by fixed rates year-round and a structure that includes a number of rate options and specific programs in demand management and energy efficiency.

Dynamic ratemaking would involve variations in energy prices for different periods (season, month, day, time or peak and off-peak). The prices would then reflect the variability of supply costs and, in some cases, would decline based on peak and off-peak periods. Dynamic ratemaking can include time-of-use pricing, real-time pricing, and critical peak pricing.

According to Hydro-Québec, shifting consumers' loads is really only useful for a limited number of hours during the winter—less than 100 hours. However, "critical hours" dynamic ratemaking based on new technologies in home automation and informative applications could prove beneficial for Quebec. It would allow a reduction in peak demand for Hydro-Québec in exchange for a reduction in the bills of consumers willing and able to reduce their consumption during the grid's critical hours.

According to the Board, the introduction of such an option would allow optimal management of the available resources and would send consumers a clear price signal that takes into account the reality of costs for Hydro-Québec. In this respect, the Board reiterates that the principle of respect for true costs is at the heart of the regulator's role when setting rates. This could also have the effect of stimulating technological innovation in Quebec as well as the development of solutions and companies offering services or products allowing dynamic and optimal management of electricity consumption. The Board believes that dynamic ratemaking at peak periods would allow residential consumers and businesses able to move a portion of their consumption outside critical hours to reduce their energy bills and thus, in the case of businesses, improve their competitiveness.

Accordingly, the Board is asking Hydro-Québec to submit suggestions for voluntary, dynamic ratemaking options during critical hours, available to all categories of consumers, for implementation beginning in winter 2018–2019. It can therefore be expected that the Distributor's next rate application will address these issues.

Reduction of cross-subsidization indexes

The Board points out that one of the principles underlying any rate structure is to be fair and non discriminatory. This implies that in general, the revenue generated by the rates applicable to a category of consumers should normally reflect the cost attributable to its service.

Despite this principle, cross-subsidization exists between the various rates applicable in Quebec. Rates applicable to the domestic category (Rate D) currently recover 84% of the costs attributable to this category, while large industrial customers (Rate L) generate more revenue (113%) than the costs for which they are responsible. In other words, the major industries in Quebec subsidize the residential sector in a way. This is also true for small-, medium- and large power customers, who have cross-subsidization indexes of 119.4%, 131% and 108.5%, respectively.

Among the Canadian jurisdictions studied by the Board during its work, the Board noted that cross-subsidization does not always favour residential rates, and that the difference between the categories of consumers is not as high as it is in Quebec.

The Board does not consider the complete abolition of cross-subsidization to be desirable or possible in the foreseeable future. It nevertheless suggests that the Minister amend the Act to give it greater flexibility with respect to cross-subsidization. In order to avoid a rate shock, the Board feels that any adjustment aimed at reducing the degree of cross-subsidization, even partially, should be considered over the long term.

Erosion of the competitiveness of the industrial rate (Rate L)

Although the discrepancy observed between Rate L and other industrial rates has narrowed over the past 15 years, the Board found that Hydro-Québec's Rate L is still competitive with equivalent rates in other jurisdictions. In the Board's opinion, the slight erosion observed in the competitiveness of Rate L is offset by the fact that the rate exhibits moderate growth and greater predictability from one year to the next—two characteristics sought by industries with very high energy consumption. The low level of greenhouse gas emissions associated with hydroelectric generation also provides a competitive advantage for Quebec's industrial sector.

However, in order to compensate for this erosion, the Board proposes that Hydro-Québec reduce the eligibility criteria for Rate L. It is also of the opinion that an industrial development rate offered for a fixed, longer term not linked to energy surpluses could attract other types of investments in Quebec. In this regard, it suggests introducing an industrial development rate based on a dedicated block of energy so that such an offer is not financed by the other categories of consumers.

New technologies and energy choices

The Board also makes recommendations regarding new technologies and the energy choices that Quebec society is called upon to make. It addresses, in turn, self-generation, solar energy, energy storage, net metering and electric mobility. The Board notes that self-generation remains very marginal in Quebec, especially with solar panels. It invites the government to keep abreast of new technologies and suggests that Transition énergétique Québec can support pilot projects on renewable energy generation combined with electricity storage. The Board recommends holding a public consultation on self-generation in order to review the parameters of the net metering option and evaluate its impact on overall costs.

With respect to solar energy, we remind you that Hydro-Québec recently announced its firm intention to build and operate a 100 megawatt solar park in Quebec over the next few years. Investments could reach $200M. According to Hydro-Québec, the shift toward (or adoption of) solar energy would have become inevitable due to low production costs and technological development.2

With respect to electric mobility, the Board recommends that owners of electric vehicles be offered a "critical hour" dynamic ratemaking option to minimize the potential impact of electric vehicle charging on peak demand for the grid.

In conclusion, given the interrelation between the various forms of energy, the Board emphasizes that the best economic choice is one based on an examination of all possible solutions. It must be recognized that the needs of Quebec consumers can be met by more than one form of energy. For example, a project to invest in electricity or natural gas could be considered unprofitable according to traditional economic principles, that is to say that the present value of the revenues generated by the project would not allow the investment costs of the project to be recovered. However, the price paid by consumers who meet their needs with another form of energy could be significantly higher than that of natural gas or electricity. According to the Board, if this additional cost were socialized, it could justify the profitability of a project that is considered unprofitable. In doing so, the Board proposes that the growth investment projects of energy distributors be examined, taking into account the costs of the various energy options.

It remains to be seen which recommendations or solutions will be put forward.

Footnotes

1 http://www.regie-energie.qc.ca/audiences/decisions/A-2017-01.pdf

2 http://www.tvanouvelles.ca/2017/06/28/hydro-quebec-veut-construire-un-parc-solaire; see also http://www.journaldemontreal.com/2017/06/28/hydro-veut-construire-et-operer-un-parc-solaire-de-100-mw; http://www.lapresse.ca/actualites/politique/politique-quebecoise/201706/25/01-5110672-quebec-met-le-cap-sur-le-transport-vert-et-le-solaire.php

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