Hydro-Quebec's Strategy for the New Millennium

July 1, 1999
Deregulation is the single most important trend in our industry, and for Hydro-Quebec, the shifting regulatory landscape and the transition to competition-both

Deregulation is the single most important trend in our industry, and for Hydro-Quebec, the shifting regulatory landscape and the transition to competition-both at home and in the United States-has meant drastically changing the way the company operates. Yves Filion, Hydro-Quebec's deputy chief executive officer, outlines the utility's restructuring strategy to transform its business activities.

Until recently, Hydro-Quebec was a traditional vertically integrated utility operating the largest generation, transmission and retail distribution electric power system in Canada. The utility supplies most of the electric energy consumed in Quebec and continues to develop hydropower resources in the region. In 1997, sales totaled 162.5 TWh, including 9.4% exported to the external markets in the neighboring provinces of Ontario and New Brunswick, as well as the northeastern United States.

A significant result of deregulation is the convergence of gas and electricity businesses. Yves Filion, Hydro-Quebec's deputy chief executive officer, believes that during these turbulent times there are major business opportunities for multi-energy companies. The new emphasis on multi-energy services has given the company a favorable position in the rapidly changing market and will help it to continue to fulfill its primary mission of serving all customers at a high level of service. The shift in business focus started in 1997, when Hydro-Quebec acquired a 41% interest in Noverco Inc., the holding company that controls Gaz Metropolitain, Quebec's major natural gas distributor. The utility's partnership with Noverco, combined with the opening of its transmission system, will accelerate penetration of the continental market. Hydro-Quebec also has formed strategic alliances with IPL Energy Inc. of Calgary, North America's largest gas pipeline company, and Gaz de France.

Quebec's New Wholesale Market In Quebec, the wholesale market includes 11 electric power distributors including Hydro-Quebec, nine distributors operating municipal systems, and one regional cooperative. The market was opened to competition in May 1997. This brought major changes to the structure of the Quebec electricity market. At the same time, Hydro-Quebec's electricity transmission system was opened for use by third parties, becoming an open-access system.

To meet new market requirements in terms of nondiscriminatory management of the transmission system, Filion said, "We separated our transmission operations from generation, distribution and marketing activities and created TransEnergie, a new autonomous division." TransEnergie provides transmission services to any customer in the marketplace.

Strategic Plan 1998-2002 Filion said, "The object of the Strategic Plan 1998-2002 was to establish a new set of directions and transform Hydro-Quebec into one of the world's leading energy companies. This development strategy is based on growth and profitability. We aim to make the company more profitable, more active on energy markets and more solid financially, while ensuring our technological development, respecting the environment and optimizing our role within the Quebec economy and on global markets. The U.S. market offers the most attractive business opportunities at present, and we have what it takes to penetrate that market. Our hydro-based generating facilities are a unique asset, one of a kind in eastern North America. Another significant advantage is that our energy is renewable and nonpolluting; hydropower from Quebec helps reduce greenhouse gas emissions. Our third major asset is a solid reputation for quality and reliability in the northeastern United States. Finally, our rates are very attractive, thanks to low gene ration costs."

Filion states that over time, Hydro-Quebec will broaden the potential for growth by developing a world-class international activity base.

Low Energy Costs Low generation costs give Hydro-Quebec a major competitive advantage in the region. Hydro-Quebec's generating capacity comprises 94% hydroelectric power, totaling 37,000 MW, including 5000 MW in Labrador. These plants have an average output cost of less than 2 U.S. cents per kWh, which is about one third of the average generation cost in New England and New York.

The Strategic Plan sets an objective to increase electricity sales outside Quebec by 6 TWh by the year 2002. To achieve this goal, Filion confirmed that the company would require additional generation and supplies at competitive terms. However, he emphasized that "it is our fundamental commitment to meet energy requirements within Quebec; our domestic customers come first."

Environmental Responsibility Just like every utility, Hydro-Quebec is keen to acknowledge its responsibilities to protect the environment and address all the concerns and issues raised by local communities affected by its projects. In assessing the impact of each proposed new generating station, substation or power line, the company takes all reasonable steps to mitigate those impacts. In 1996, Hydro-Quebec adopted a new environment policy and is now implementing an environmental management system that complies with the ISO 140001 Standard. Filion said the Strategic Plan includes an innovative approach: limited partnerships. "These initiatives will enable the host communities to invest directly in their local projects as partners with Hydro-Quebec. This approach is meant to promote dialogue and the convergence of economic interests over the long term," he said.

Restructuring the Business Hydro-Quebec remains vertically integrated while creating four major operating units: Generation, Distribution and Customer Services, Energy Services, and International Affairs and Projects. Each unit has specific objectives so they can become profit centers.

One of the company's key strategies is to develop and market new products and services related to generation, marketing, transmission, distribution and customer service, as well as associated under-utilized assets. The Strategic Plan forecasts that new products and services should be contributing about US$143 million to net income by 2002. The changes outlined in the Strategic Plan will affect all the company's business units, as well as new business ventures in areas such as telecommunications. In the telecommunications arena, Hydro-Quebec already owns a private telecom network and has established a partnership with Bell Canada, the largest telecom operator in the country.

Research Development To sustain technological leadership, three major strategies were set forth. The first involves meeting the research and development (R&D) internal needs of its business units on a self-financing basis by 2002. The aim of the second strategy is to earmark US$14.5 million per year for future needs in prospective and long-term research. The third strategy specifies that Hydro-Quebec will invest, together with partners, in R&D and in the commercialization of its technological assets.

The company's existing cooperative R&D work will continue and be expanded by creating working partnerships with plant and equipment manufacturers. They have already established, on a 50/50-basis, contracts with ABB and Siemens. This type of R&D partnership should prove to be cost effective for both parties as all the R&D funding allocated to optimizing the business units' performance will be spent on applied research projects. Hydro-Quebec's work with ABB has led to the development of two innovative devices: a submersible dry-type distribution transformer for underground distribution systems, and the interphase power controller, which allows an optimal flow of power between electric utilities. With Siemens, the activities have focused on the design, manufacture and testing of a 100-kVA superconducting current limiter.

Expansion of the Customer Service Business The company is committed to remaining the top energy supplier for Quebec's residential, commercial and industrial users. Like many multi-energy suppliers, the company assists in marketing new lines of products and services to meet the changing needs of various customer segments. For example, Filion referred to the new electrotechnology implementation service available to small- and medium-sized businesses; energy management services for commercial, industrial and institutional customers; and assistance to businesses concerned with disturbances in power supply. "For residential customers, services designed to improve the quality of life in the home-in terms of automation, security and comfort-are planned, and the first phase involving the installation of electronic and interactive metering is in progress," Filion said.

International Investment Plans Hydro-Quebec International (HQI) has completed about 300 technical assistance contracts in more than 60 countries in the past two decades. In 1997, the company expanded the mission of HQI, which now acts as a single window for international development projects. HQI's goal is to invest in foreign markets as an industrial partner-a role that will extend beyond financing projects. HQI invests in power generating facilities, as well as in transmission and distribution systems, working with local and international partners. Funds totaling US$1.2 billion were available for investment in international energy projects during the next four years.

HQI's investment strategy found success in the Latin American market through a US$180 million contract with the Peruvian government. This was a significant breakthrough, as this build-own-operate-transfer contract includes the construction, interconnection and operation of a 220-kV, 660-km (410-mile) 300 MW capacity transmission line that will link the power grids in the north and south of Peru. Filion confirmed that "TransEnergie, the transmission division, will also benefit from the 30-year contract to operate the interconnector on a circuit utilization basis. This contract will provide the business with guaranteed revenue flow," Filion said.

HQI also managed a build-own-operate project to build and operate a 10.6 MW hydropower plant in Costa Rica. More recently, HQI has signed technical assistance and training contracts with various countries in Africa, the Middle East and China.

Reversing the Trend Deregulation and competition within the industry have created major changes that will expand the range of Hydro-Quebec's business activities. In an effort to "buck the trend of downsizing," Filion openly expressed the central role played by employees whose expertise has been the key to the company's past success. Filion recognizes that it takes the full support of employees to succeed. "Our human resources strategy recognizes that the transition to a business culture focused on growth and profitability must be based on a climate of trust and partnership with the unions, which play a major role at Hydro-Quebec, and we must ensure that the knowledge base is maintained," he said. "We implemented a new quality-based management system in 1990, and are forging ahead with the continuous improvement process. By buying into and contributing to the system, employees are the prime architects of the success of our commitment to customers."

Following a 12.5% reduction in its workforce, the company plans to stabilize at 19,500-a total that preserves expertise and maintains a significant presence in each administrative region. Growth in some business sectors such as generation, distribution and international operations combined with natural attrition will be met by hiring new employees when needs justify.

As the industry faces the new challenges of the millennium, Hydro-Quebec has clear business objectives. Utility managers have 'freedom of choice' in deciding their future strategy. There is no definitive solution, other than ensuring that the policy adopted results in a financial performance that satisfies industry regulators and meets shareholder expectations. There is already evidence to support that Hydro-Quebec is on the path to success, and Filion is both determined and confident when predicting that Hydro-Quebec is destined to retain its position as a global industry leader well into the next century.

Yves Filion holds a degree in applied science from the Universite de Sherbrooke. Filion joined Hydro-Quebec in 1971 and has held several positions, including interim executive vice president installations; executive vice president generation, transmission and telecommunications; and executive vice president distribution and marketing. In November 1996, he was appointed deputy chief executive officer and chief financial officer. Currently, Filion also is head of distribution and customer services. He is chairman of the board of CITEQ, HQ Capitech and HQ ValTech as well as a member of several other boards and committees, including Caisse de depot et placement de Quebec and the International Executive Committee.

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