RÉGIE DE L’ÉNERGIE 
A NEW REGULATORY FRAMEWORK
Speaking notes

Jean A. Guérin, Chairman
Régie de l’énergie

Industrial Gas Users Association
Annual Conference

November 5, 1997

Ladies and gentlemen,

I thank the organizers of this meeting for the opportunity offered me here to speak to the representatives of the natual gas industy on the occasion of this Annual Conference.

The Régie de l’énergie is a quasi-judicial economic regulatory body, which was created on June 2, 1997, in response to demands by a majority of stakeholders in the Quebec energy industry. Its role consists of regulating monopoly activities related to the supply of natural gas and electric power. Within the energy markets where there is no monopoly, the Régie plays the role of a monitor in order to ascertain that market activity is to the advantage of the consumer, while also encouraging healthy competition among businesses.

Four major steps led to the setting up of the Régie. Let us review them briefly.

First, the creation of the Régie de l’énergie was the result of one of the main recommendations of the Consultation Table of the Public Debate on Energy, presented to the Minister of Natural Resources in March 1996. The holding of this exhaustive debate enabled all those involved in the industry and market to present their views regarding the future of the energy sector.

The second important milestone which led to the creation of the Régie was the adoption, by the Government, of a new energy policy which is presented in a document entitled Energy at the Service of Quebec, A Sustainable Development Perspective. Adopted during the autumn of 1996, this policy defines the broad directions and courses of action that the Quebec Government has prioritized in the field of energy.

On December 23 of the same year, the Assemblée nationale adopted the Act respecting the Régie de l’énergie.

Last June 2, the government, by adoption of appropriate decrees, created the Régie and appointed the seven members of the new board, including a chairman and vice-chairman.

Since the Régie de l’énergie has been in existence for only five months, I believe that it is important to clarify its powers, functions, objectives and priorities, so that everyone involved in the industry may have a clear understanding of its role.

• • •

First, I want to recall that the creation of the Régie de l’énergie falls within a context of rapid evolution in the energy industry.

You are well aware of the main characteristics of the far-reaching changes that have been taking place in the North American market during the past few years. These changes have been not only in the field of energy, but also in many other economic sectors, which at one time were heavily regulated, such as transportation and communications.

In the field of natural gas, the liberalization of the market started in the United States in 1978 and ended in 1993 with the complete liberalization of wellhead prices. Natural gas is now being considered as a commodity that obeys the same marketplace rules as other goods, such as grain or oil. Today, natural gas options and term contracts can be traded on the New York Mercantile Exchange (NYMEX).

In Canada, the liberalization of the production and trade of natural gas occurred at the end of 1985. Transmission and distribution activities are still regulated, because they constitute natural monopolies. For obvious economic reasons, we cannot contemplate doubling these infrastructures on a common territory. We must emphasize that the deregulation in the field of natural gas has caused a decrease in gas prices during the past years and has provided the consumer with a wide choice of suppliers.

In Quebec, the Régie du gaz naturel has been closely linked with the liberalization trend in the natural gas trade. I must emphasize the significance of decisions such as the one issued in 1988 concerning the integration of a buy/sell service in Gaz Metropolitain’s tariff and that of 1994 relating to the customer buy-sell. These decisions have enabled customers to purchase natural gas from the supplier of their choice without any intervention by the distributor.

Also to be noted is the introduction, for system gas customers, of a prospective adjustment process that applies to both the price of gas commodity and to the price reevaluation of seasonal inventories. Although the price of gas fluctuates monthly according to market trends, the use of swap type transactions and of the prospective adjustment process enables the minimization of the impact of gas price variations on the customer’s invoice.

Finally, let us mention the policy decision made by the Régie last December concerning the introduction of unbundled rates and services by Gaz Métropolitain in its franchise.

• • •

As for electric power, the deregulation of the wholesale markets has been, for all practical purposes, completed in the United States. In Canada, several provinces have initiated steps in order to gain an eventual access to the U.S. electric power market.

In Quebec, more specifically, the Government complied with the reciprocity requirements of the Federal Energy Regulatory Commission (FERC) last May 1 by approving transmission rates which enable Quebec producers to trade on U.S. markets, and to the US producers to have access to the Quebec wholesale market in particular the municipal system market.

But the liberalization trend which has occured in every segment of the industry, is not the only phenomenon that is modifying the energy market. Now that all energy markets have been deregulated, or are in the process of being so, there is an increasing convergence among them - particularly between gas and electric power - to provide customers with multi-energy services capable of meeting all their needs. This liberalization has resulted, in some cases, in mergers and in equity participation among gas, electric power and oil companies.

In fact, this phenomenon is comparable to that which occurred in the field of telecommunications when telephone, cable, television and computer businesses began to merge some of their activities in order to provide consumers with one-stop shopping allowing them access to a multitude of services.

• • •

The stakes involved in all of these market changes are major ones. In fact, the energy industry occupies a significant place in every industrialized economy. This is because of the direct and indirect spin-offs that it generates, as well as its contribution to the competitiveness of many businesses.

In Quebec, for example, while there has been a slow-down in the growth of energy consumption in the past few years, natural gas, electric power, gasoline and diesel fuel represented total sales of 13 billion $ in 1995.

In the same year, capital expenditures in the energy sector reached approximately 3 billion $, that is, close to 13% of total investment in Quebec. As for direct jobs, there were a total of 45,000 in these three segments of the industry.

Together, these figures show the necessity to implement and maintain conditions that foster sound competition in the energy sector, while ensuring that the development of this industry is in compliance with the economic, social and environmental concerns of Quebec society.

• • •

It is with this objective in mind that the Régie de l’énergie was created. Its role is clearly defined in section 5 of the Act :

« In the exercise of its functions, the Régie shall promote the satisfaction of energy needs through sustainable development. To that end, the Régie shall have due regard for economic, social and environmental concerns and for equity both on the individual and collective planes. The Régie shall also foster the conciliation of the public interest, consumer protection and the fair treatment of distributors ».

This definition describes the purpose of the activities of the Régie, which is the satisfaction of energy needs through sustainable development, as well as the guidelines which include conciliation of the public interest, consumer protection and also the fair treatment of distributors.

Let us focus now on how the Régie will operate in each sector of the industry. First : natural gas.

In this field, which is of primary interest to you, the Régie de l’énergie will continue, as the Régie du gaz naturel did before it, to fix or modify the rates and conditions according to which natural gas is transmitted, delivered or supplied by a distributor. Let me recall that this authority applies to the rate level and structure as well as to the commercial programs of the distributors.

In order to fix those rates, the Régie will apply the generally accepted methodology related to economic and financial regulation. It will continue to establish a rate base, to determine the overall level of expenditures necessary to cover the cost of providing the service, and to fix a fair and reasonable return on the rate base, just as the Régie du gaz naturel did in the past.

The Régie de l’énergie will also have exclusive jurisdiction to monitor the operations of natural gas distributors in order to guarantee that consumers are adequately supplied and are charged fair and reasonable rates.

Furthermore, the Act respecting the Régie de l’énergie introduces a number of new elements that concern natural gas as well as electric power distributors.

From now on, when the Régie fixes a rate, it must provide for measures or incentive mechanisms that favor improved distributor performance and the increased satisfaction of consumer needs.

Another new element concerning consideration of consumer interest : the Régie de l’énergie has the authority to fix a rate intended to compensate for energy savings which are not beneficial for the distributor, but are beneficial for the consumer.

Thirdly, in the future, natural gas distributors will be required to submit a resource plan to the Régie. This plan must take into account both supply and demand and be in accordance with economic, social and environmental concerns and also take into account the risks associated with the chosen sources of supply.

The Régie will review these plans according to an integrated resource planning approach, taking into consideration the environmental impact of those projects. These provisions of the Act express the will to meet Quebec energy needs in a satisfactory way through sustainable development.

Finally, the Régie has the power to review any consumer complaint concerning the application of a rate or service condition. As we know, the examination of complaints constitutes a sensitive element for both consumers and distributors. To comply with this requirement of the Act, distributors must henceforth establish an internal complaint examination procedure and submit it to the Régie for approval. In cases where plaintiffs are not satisfied with the decision, whether they are residential, commercial, institutional or industrial customers served by gas and electric power distributors, including private and municipal electric power systems, they may apply to the Régie which has the authority to review and dispose of these complaints.

• • •

In the electric power sector, the Act respecting the Régie de l’énergie brings important changes compared to the past.

In a way, the Régie replaces the Government concerning the approval of Hydro-Quebec rates. However, the new approach will be different. For example, in order to determine electric power rates, the Régie will have to establish a rate base that corresponds to the various Hydro-Québec business units. It will also approve the different components of the cost of service and determine a reasonable rate of return on the rate base.

The fixing of the rates and conditions under which electric power will be supplied or transmitted by Hydro-Québec will take place at the conclusion of a rigorous public hearing process that will enable all interested parties to be heard.

The power of the Régie concerning tariffs is decisional and will apply to rate levels and structures, as well as to commercial programs. However, in the case of new or additional power installations of 10MW or more for industrial customers, the Government reserves the option of fixing tariffs for special electrical supply contracts. The Régie will also authorize both the export of electric power from Quebec, and contracts for electric power exchanges, in cases that it will determine.

In addition, the Régie will fix the rates and conditions applicable to the transmission of electric power in order to ensure, namely, free access and non discriminatory transportation service. This is a basic condition for the participation of Quebec in a deregulated north-east American electric power market.

Similarly and for the same reasons as for gas distributors, Hydro-Québec will be required to submit to the Régie its resource plan proposing strategies for achieving a balance between supply and demand, in keeping with economic, social and environmental concerns and with the risks inherent in the different energy channels involved.

The Act respecting the Régie de l’énergie also grants Hydro-Québec exclusive electric power distribution rights throughout the territory of Quebec, excluding areas served by a distributor operating a municipal or private electric power system. These are to remain under the jurisdiction of the Act respecting municipal and private electric power systems.

According to decree 1351-97, adopted last October 15 by the Government, the application of subsection 1 of article 167 is scheduled for February 11, 1998. Under this clause, theRégie, within six months of this date, shall advise the government on Hydro-Québec’s proposal concerning a procedure for the determination and implementation of rates for the supply of electric power.

To this end, the Régie will hold public consultations in the first half of 1998 in order to hear stakeholders’ opinions on Hydro-Québec’s proposal.

Following these hearings, the Régie will present recommendations to the Government focusing on the most appropriate method to regulate Hydro-Québec’s production activities. The Government will then determine whether this will be regulated according to the traditional cost of service approach or on a market price approach.

Once this step has been taken, the Régie will be in a position to undertake the preliminary activities necessary to the fixing of rates and conditions that will apply to the transmission or supply of electric power by Hydro-Québec.

To end this brief overview of the major changes introduced by the Act respecting the Régie de l’énergie, I want to emphasize the powers of the Régie in the sector of petroleum products and steam. Since last November 1, sections 55 to 58 are in force to enable the Régie to exercise its powers of monitoring, inspection and inquiry concerning the sale or distribution of petroleum products and steam.

Section 59 will be effective next February. The Régie will then be empowered to hold public hearings in order to assess the amount per litre representing the gasoline or diesel fuel retailer’s operating costs and to assess on the expediency of including this amount in the total costs to be borne by the retailer in the various regions of Quebec.

• • •

To adequately fulfill its mission, the Régie must, of course, arm itself with an efficient organization and with the expertise before it necessary for a proper analysis of the issues.

First, I would like to recall that the Régie is composed of seven commissioners, including a chairman and a vice-chairman who are all from different backgrounds. They were appointed by the Government under a strict selection procedure that garantees their ability and independence. Together, they possess the diversified experience and expertise that will enable them to take into consideration a multitude of viewpoints when reviewing the issues upon which the Régie will exercise its jurisdiction.

With a projected personnel of approximately 60, we consider that we are able to adequately and diligently fulfill our mission and meet the expectations of the different stakeholders. In order to increase its efficiency, the Régie intends to maximize the use of the Internet in its communications by fostering the use of electronic consultations. Our Web site will soon be accessible.

The funding of the Régie will be assured by the collection of an annual duty from every subject distributor. This duty will be in accordance with the services rendered to the concerned clientele based on the user-pay principle. No operating deficit may be incurred in any fiscal year and any revenues which exceed expenditures in a given year will be transferred to the subsequent annual budget.

In its operations, the Régie will adopt rigorous and transparent approaches. It will encourage wide participation in public hearings, in order to ensure a proper review of the issues submitted to its attention.

Formal rules of procedure will ensure the efficiency, equity and transparency of the Régie‘s regulatory process. These rules specifically clarify the conditions and criteria which will apply to the reimbursement, if need be, of expenses incurred by persons or groups appearing before the Régie.

In addition, the Régie intends to make every effort needed in order to make the regulatory process more light and flexible. In order to decrease the cost of regulation as much as possible, it will foster consultation and joint actions among the parties concerned as well as pre-hearing conferences and negotiated settlements.

Both its incorporation Act and its operating procedure give the Régie the advantage of an independence that guarantees its credibility. This condition of independence is the bulwark of its authority. It ensures compliance with its decisions by the various stakeholders concerned, both in Quebec and abroad. In its decision last May 9, the FERC recognized the competence and the independence of the Régie de l’énergie in granting Hydro-Québec a wholesale trade license in the United States.

Moreover, in all its actions, the Régie will consider the objectives of the Politique énergétique du Quebec. When it acts, the Régie must ensure that its decisions are in accordance with the requirements of other public bodies, such as the Bureau d’audiences publiques sur l’environnement (BAPE). In return, following the Régie’s approval of facilities contained in a resource plan, the BAPE will not require the applicant to justify its energy rationale a second time.

• • •

I will end this brief presentation of the Régie with the list of issues that will be dealt with in the next few months.

• Let me begin by reminding you that our very first objective was to design an organization and staffing plan and to have it authorized by the Quebec Government. We are now completing the implementation of this staffing plan, to fulfill the mandates assigned to us as rapidly and efficiently as possible.

• As for the consumer complaint examination procedure, we asked the distributors concerned to provide the Régie with the procedures they intend to establish. These proposals are now under study and a process of consultation of stakeholders will soon be undertaken. We expect that, as early as the beginning of next year, the distributors together with the Régie will have implemented an adequate procedure for accepting and managing these complaints.

• I mentioned earlier the regulation concerning the rules of procedure which will ensure the efficiency, equity and transparency of the regulatory process.

The stakeholders are presently being consulted on the proposal set out by the Régie to this end. The adoption of those rules of procedure is to be in effect by the beginning of next year. If anyone wishes to study this proposal and express his or her comments, I remind everyone that this proposal can be obtained from the Régie.

• Concerning the funding of the Régie, in the beginning of September we undertook consultation of all concerned distributors. Their comments have been received and a draft regulation will be submitted to the Government. It is expected that this new system of collection of duties and fees will be in effect by the beginning of next year.

• The Régie has, of course, pursued the activities already in progress in the natural gas sector. As you know, major cases pertaining to the Quebec natural gas industry are now under review by the Régie. I am referring in particular to issues such as the allocation of the cost of service, the unbundling of services, and out-of-franchise sales. You will understand that I cannot discuss these issues here because they are currently before the Régie. I can only say that we expect to issue decisions on these matters by the end of this year.

In general, the Régie intends to pursue its activities in the area of natural gas with a focus on easing and lightening the regulatory process and to implement incentive measures aiming at the improvement of both distributor performance and the satisfaction of consumer needs.

• In the sector of electric power, one of the major issues which we will be dealing with during the next few months is undoubtedly the inquiry to enable us to advise the Government on a procedure for the determination and implementation of rates for the supply of electric power.

Concerning this issue, Hydro-Québec should soon file its proposal on the regulatory process of its electric power supply rates with the Régie. The application of the first paragraph of section 167 of the Act respecting the Régie de l’énergie , which has been scheduled by decree for next February 11, will be the starting point for this inquiry. The proceedings will extend over a period of six months, in other words from February to August 1998.

We must recall that until the Régie is able to issue a decision concerning electric power supply rates, the Act provides for transitional measures that enable the Government to set Hydro-Québec rates. This transition was adopted in order for the Régie to carry out all of the activities preliminary to the fixing of rates. These activities especially concern :

- the establishment of a rate base divided into functional activities ;

- the separation of regulated and unregulated activities ;

- the establishment of a cost allocation method ;

- the approval of a resource plan ; and

- the establishment of authorization criteria for capital projects.

The Government has recently invoked section 165 to fix, by decree, an adjustment of electric power rates as of May 1, 1998. The expected increase corresponds to that of the consumer price index, not exceeding 1.8% however. Incidentally, Hydro-Québec has commited not to request a rate increase during the following three years.

As soon as sections 48 and subsequent sections in Chapter IV of the Act concerning electric power will be effective, the Régie will, on the request of a concerned person or on its own initiative, fix or modify the rates and conditions for the transmission or supply of electric power by Hydro-Québec. The Government has given notice that it will soon announce the date of application of these sections.

• In the field of petroleum products, the application of sections 55 to 58 of the Act since last November now enables the Régie to exercise its monitoring, inspection and inquiry powers concerning the sale and distribution of petroleum products and steam. As of next February 11, the application of section 59 of the Act will enable the Régie to hold public hearings in order to assess the amount per litre representing the gasoline or diesel fuel retailer’s operating cost. It will also assess on the expediency of including this amount in the total costs to be borne by the retailer in the various regions of Quebec.

With both natural gas distributors and Hydro-Québec subjected to the same regulatory body, and given the equity objective imposed by the Act on both individual and collective planes, the Régie will have to define fair competition rules between the two forms of energy, and that as early as 1998.

Globally, these rules will have to avoid favoring one energy distributor at the expense of another or one group of consumers at the expense of another. They will permit the achievement of what is termed the « level playing field » throughout North America.

In the exercise of its mandate, the Régie will aim at encouraging competition between energy distributors and at fostering the free choice of the consumer with no discrimination whatsoever. This is because it is the consumer, and not the Régie, who must decide which type of energy to choose.

You are now familiar with the mandates, priorities and principles which will govern the actions of the Régie de l'énergie.

Of course, in order to adequately fulfill our mission, we need the co-operation of all those involved in the industry. As you have noted, the mandates are numerous, the subjects complex, the issues major and the deadlines tight.

It is within this demanding yet stimulating context that the Régie is committed to accomplishing its mission by applying principles of equity, fairness, independence and transparency, in order to establish the conditions that will encourage a healthy competition among suppliers and a respect for the free choice of the consumer - all this in the perspective of sustainable development.

I thank you for your attention.