HYDRO-QUEBEC GENERATES SPARKS WITH MOVE INTO US UTILITIES DEBATE FAIRNESS ISSUE

HYDRO-QUEBEC GENERATES SPARKS WITH MOVE INTO US UTILITIES DEBATE FAIRNESS ISSUE

Hydro-Quebec, the provincially owned Canadian power giant, has crossed the border to the United States, where it hopes to capture a share of the emerging competitive market for electricity.

But the fairness of allowing a huge, government-financed, foreign power producer to compete with investor-owned U.S. utilities could become an issue as authorities review Hydro-Quebec's plans, a U.S. utility industry spokesman said.The company last month formed Hydro-Quebec U.S. Energy Services Inc. of Montpelier, Vt., to trade cross-border power and provide related services in the Northeast. Hydro-Quebec will begin those operations this fall, following licensing approval by federal regulators.

"We've always done business on our side of the border, but with the restructuring of the marketplace we saw the need to be involved," said Robert Benoit, Hydro-Quebec's manager of energy marketing.

The long-awaited move to competitive power markets, announced by the Federal Energy Regulatory Commission earlier this year, includes open access to the nation's transmission grid and unregulated, competitive wholesale power sales between utilities and other electricity producers.

For Hydro-Quebec, that means the chance, when prices are right, to export up to 3,000 megawatt-hours of electricity for sale to U.S. utilities for distribution.

As a key step in that plan, Hydro-Quebec in December formed a partnership with Canadian gas distributor Noverco of Montreal and Consolidated Natural Gas Co. of Pittsburgh, one of the largest fully integrated gas systems in the United States.

That alliance will allow Hydro-Quebec to arbitrage the delivered value of its electricity against fluctuating prices for gas, the U.S. fuel of choice when incremental electricity supplies are needed. The partnership will sell gas to power plants when it is the cheapest form of energy, or hydroelectricity for distribution when prices are less than the value of gas, Mr. Benoit said.

Still, that could be less than fair, said David K. Owens, a senior vice president at the Edison Electric Institute, a Washington, D.C., trade group representing the investor-owned U.S. utilities that might be hurt by that competition.

"It raises a number of important public-policy questions over the recognition that they get tremendous subsidies from their government, over how their electricity is priced and how it will impact U.S. utility markets," Mr. Owens said.

"It also reflects on our trade agreements, and the fact that it could make some U.S. generating capacity uneconomic," he said. "These are all questions that FERC will be looking at."

So far, the FERC has approved 100 power-marketing licenses, and more are pending. But not all of those marketers are likely to make a go of it, Mr. Benoit said.

"Margins are very thin, and only those with deep pockets will make it," he said. "It's going to be very difficult for power marketers to survive. All our competitors are trying to do the same thing, but we have the physical assets in our reservoirs, our 35,000 megawatts of generation capacity, gas- storage facilities and pipelines."

Regional power pools already are losing market share for least-cost electricity sales, he said, while so-called split savings, or shared benefits

from shutting down one generator to buy cheaper power from another, is becoming a thing of the past.

"People are not doing business through the pools anymore," Mr. Benoit said. "They are doing it between themselves. Power pools used to be divided between economy and reliability, but now their focus is reliability."

For the future, Hydro-Quebec will watch the evolution of U.S. electricity markets very closely, he said.

"We will be looking at all the new opportunities created by deregulation," Mr. Benoit said. "As the rules evolve state by state, Hydro- Quebec will be seeking opportunities. A lot of small utility companies are at risk, (with their bonds) on credit watch. U.S. utilities may divest their generating capacity, and Hydro-Quebec may consider buying or taking a part- interest in those plants."