The opening of the export market for electricity from Quebec - Reality or mirage on the horizon

Worldwide the electricity industry is undergoing a substantial process of r estructuring. The most significant aspect of this process is the introducti on of competition in the production sector. The principal objective is cost reduction, which should eventually lead to lower electricity prices. In th e United States bulk power markets, that is, markets involving transactions between producers and distributors, have been open since the beginning of 1997. Hydro-Quebec believes that this opening represents an opportunity for it to increase its sales in the northeastern US. This belief is based in l arge part on the considerable differences between electricity prices in the latter market and in Quebec. In this paper we outline two factors which we believe will limit profitable exports of electricity by Hydro-Quebec. The first is the fact that transmission on Hydro-Quebec's grid must now be pric ed at the average system cost. The second is the fact that Hydro-Quebec's d omestic tariffs continue to be pegged to the average cost of production whi ch is lower than the system marginal cost. This implicitly encourages domes tic consumption rather than exports. Both of these factors illustrate the i mportance of correct price signals for efficient resource allocation.