COAL PRODUCERS PROTEST CANADA POWER SUBSIDIES CONGRESS TOLD FREE TRADE PACT IS UNFAIR

COAL PRODUCERS PROTEST CANADA POWER SUBSIDIES CONGRESS TOLD FREE TRADE PACT IS UNFAIR

Canadian electric utilities exporting power to the United States will have an unfair advantage under the free trade agreement because they benefit from government subsidies and less stringent pollution laws, coal producers will tell Congress today and tomorrow.

However, a draft report sponsored by utilities in the Northeastern United States concludes that the subsidies are insignificant and that Canadian electricity is actually less subsidized than some electricity in the United States.Coal producers have long favored some form of duty for Canadian electricity, which is available at a cheaper price than domestic supplies from coal-fired power plants. While most of this advantage is due to the enormous hydroelectric resources of Quebec and Ontario, opponents argue that the free trade agreement will allow Canada's government-owned utilities to pass along the benefits of their tax-free status and blue-chip bond ratings.

The House Energy and Power subcommittee of the Energy and Commerce Committee is holding a hearing today on the free trade agreement's effect on electricity trade with Canada. On Thursday, the matter will be brought up by the House Mining and Natural Resources subcommittee of the Interior and Insular Affairs Committee.

In 1986, U.S. imports of Canadian power accounted for about 1.5 percent of total U.S. consumption, according to the Edison Electric Institute. However, long-term power supply agreements signed in 1987 will substantially increase Canada's share of the U.S. market in the 1990s.

Late last month, 22 senators sent a letter to President Reagan complaining that a number of Canadian industries, including electric utilities, receive indirect government subsidies and would have an unfair advantage over their U.S. competitors under the free trade agreement. The draft free trade pact must be approved by legislators in both countries before it can take effect.

For electricity, the subsidy argument has traditionally been made by the Ad Hoc Coalition on International Power Trade, which represents some coal producers. The National Coal Association, the main industry lobbying group, has taken no formal position on the free trade agreement. The association

plans to testify Thursday that the agreement would allow Canada's utilities to take advantage of the subsidies to cut prices and capture a larger share of the U.S. market.

Meanwhile, Harvard University researchers are completing work on a comprehensive study of Canadian electricity imports. The work was paid for by the U.S. Committee for Electric Consumers, a group of Northeastern U.S. utilities that receive electricity from Canada.

A draft of the report obtained by The Journal of Commerce forcefully rebuts opponents of Canadian power, finding little evidence that government subsidies will affect the price of Canada's electricity in the United States. The report also concludes that Canada's lower pollution standards for coal- fired power plants do not violate U.S. trade laws or the free trade agreement and have little effect on the overall competitiveness of Canadian power.

The Ad Hoc Coalition and other opponents have attacked Canadian utilities on two main subsidies the utilities receive in their status as government- owned corporations - preferred treatment for borrowing because of government debt guarantees and lower rates of taxation. The coalition contends that these subsidies violate U.S. trade law and must either be eliminated or included in the cost of power charged to U.S customers.

A spokesman for the coalition said the situation resembles foreign manufacturers dumping goods in the United States at prices below the cost of production, in order to drive competitors out of business and grab a larger market share.

The Harvard study contends that the opponents of Canadian power have ignored several key questions. First, are Canadian utilities engaging in predatory pricing, or are prices market-driven? Second, do the subsidies violate U.S. trade law? Third, are the subsidies enjoyed by Canadian utilities different from those granted to public power companies in the United States?

On the first question, the authors find that prices for Canadian power are market-driven, and that Canadian government policy has led Canada's utilities to charge U.S. customers the highest price that the market will bear. They noted that a June 1987 decision by Canada's National Energy Board requires that the subsidies provided to the utilities be recovered in prices charged to export customers.

The Harvard researchers also conclude that the subsidies do not violate U.S trade law because export prices are not targeted to specific Canadian industries or to specific U.S markets.

The draft report finds that government-owned utilities in the United States are subsidized in much the same way as Canadian utilities but have never been restricted from competition with investor-owned U.S. utilities. In fact, some measures indicate that government-owned utilities like the Bonneville Power Authority and the New York Power Authority receive larger benefits than Canadian utilities.

Finally, the Harvard study refutes the argument that Canada's milder pollution standards provide an unfair advantage for its exported electricity. The authors conclude that for comparable environmental regulations, like sulfur dioxide rules, Canadian standards are as strict or stricter than U.S. standards.

Beyond this, the report outlines the difficulty in using a fairness standard to address differences in regulations for two trading partners.

Implicit in (these) arguments . . . is a fairness standard, that to export fairly to the American market Canadian utilities should face an identical environmental review process, and be forced to install the same amount of pollution control equipment as American utilities. . . . An analogous argument could be made for any other regulatory intervention in the American economy - for example, for occupational health regulation by OSHA (the Occupational Safety and Health Administration) or U.S. labor law.

A strict application of this 'fair trade/level playing field' argument would suggest that trade is only fair when foreign competitors have the same costs, plant by plant, process by process, as their U.S. counterparts. This is a rejection of the basic premise of comparative advantage that underlies all international trade, the report said.