On February 3, the Montreal Economic Institute published an 84-page study recommending the privatization of Hydro-Québec.
Obviously, this will be a hard sell in Quebec: privatizing government-owned utilities is rarely a popular idea in this province, especially when it comes to the province's electrical crown jewel. But dismissing the idea based on nothing but ideology is as absurd as supporting privatization based on nothing but the opposite ideology. The study authored by Claude Garcia, a former president of Standard Life Canada, makes a compelling case for selling Hydro-Québec.
The first issue to consider is the value the province would get for the utility. In 2007, Garcia estimated the market value of Hydro-Québec at an optimistic, but nonetheless impressive, $130 billion. That's enough to erase the province's $124-billion debt. Garcia's valuation, however, was based on North American average energy prices and, as we all know, power in this province is kept far below market prices.
Yet the sale of Hydro-Québec, even maintaining subsidized prices, would go a long way toward erasing the public debt. The government would likely receive between $20 and $25 billion if it divested itself of the utility over a 10-year period, as Garcia suggests. It's also worth noting that Hydro-Québec has $34.2 billion in debt (backed by a government guarantee), so the utility's enterprise value is closer to $60 billion. And that's only the initial sale: Hydro-Québec would keep contributing to the government's coffers though royalty payments and taxes.
Privatization would require a transition period. Garcia's suggestion of a 10-year transition is about right-it would help prevent any shocks to the system from an overnight privatization, such as a sudden jump in prices.
Any sensible plan would see the government progressively sell off Hydro-Québec, with energy prices gradually rising to market levels. At first glance, low prices may seem like a good thing. But they create economic imbalances and often do more harm than good.
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