An interview with Thierry Vandal, president and CEO of Hydro-Quàƒ©bec
by John M. Powers, associate editor
We can’t be all things to all people. Usually that phrase is true, but after learning about Canadian utility Hydro-Quàƒ©bec, we may have found the exception to the rule.
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Why? The government-owned Hydro-Quàƒ©bec keeps Quàƒ©bec energized with a generation arm, a transmission arm and a distribution arm. That’s just for starters. The company also has the largest engineering and construction group in Canada, which is overseeing $8 billion worth of hydropower projects at the moment. And that’s still not all. Hydro-Quàƒ©bec also invests $100 million a year in research that’s carried out at its own research institute and has helped develop such technologies as an underwater inspection robot and an electromagnetic pulse de-icer.
At the head of the operation is Thierry Vandal, president and CEO of Hydro-Quàƒ©bec. With an engineering degree from àƒâ€°cole Polytechnique, Universitàƒ© de Montràƒ©al, and an MBA in finance from àƒâ€°cole des hautes àƒ©tudes commerciales (also at the Universitàƒ© de Montràƒ©al), Vandal has 25 years of business development experience in the energy industry. Starting in the downstream part of the oil business, moving into petrochemicals then natural gas T&D, Vandal has been with Hydro-Quàƒ©bec for the last 10 years. Oh, and Vandal just added to his academic bona fides by receiving an honorary doctorate from àƒâ€°cole Polytechnique.
A dynamic speaker, Vandal took some time to tell us how our neighbors to the north do business.
How does Hydro-Quàƒ©bec’s business model differ from that of a U.S. investor-owned utility?
It really doesn’t differ all that much, other than the fact that we have one shareholder: the Quàƒ©bec government. But other than that, we’re an integrated utility. We have around $60 billion worth of assets. Half of those assets are in the transmission and distribution side of the business, cost-based regulation, and the other half is in generation. Generation is market-based outside Quàƒ©bec and regulated within Quàƒ©bec through a fixed price vested contract for 95 percent of our generation. It’s a deregulation within Quàƒ©bec, which is kind of a soft landing approach where we vest 95 percent of our generation at a fixed price to the consumers here in Quàƒ©bec and beyond that it’s market-based pricing.
The other distinction that you can make, if you compare [us] to other large utilities, is the engineering and construction side of our business is perhaps more significant. Right now we’ve got $8 billion worth of large hydro projects under construction and we do the project management, engineering/construction management in-house. So we have a very large engineering/construction group. The largest engineering/construction group in Canada is Hydro-Quàƒ©bec. We’re sophisticated project managers for that along with our large transmission investments. To put things in perspective, we invest around $4 billion a year, and a billion of that is in transmission, so we’re a large transmission investor.
The other thing that’s perhaps distinctive from what you see in U.S. investor-owned utilities is that we’re a heavy player in research. We have a research center. We spend about $100 million a year in pure research and development around our business.
Hydro-Quàƒ©bec had a profitable 2006, but on the distribution side, the company lost money. Will your new wind energy and hydropower projects counter the effect of purchasing power “beyond the heritage pool”?
Actually, we didn’t lose money per se in 2006 on the distribution side. But you’re correct, we did not earn our regulated rate of return. We should be making roughly $250 million a year, bottom line, in distribution, and last year we were at the level of roughly $50 million. The reason was we had a very warm winter. So we took a hit on the weather side. Great news for our customers, we’re very happy for our customers, but obviously for the corporation it shaved a couple million dollars off the bottom line.
We have a regulated regime that basically passes through the costs of all new supplies. If you look at our distribution business, it’s very typical. We have short, medium and long-term RFPs out for new supplies. And those costs, which are market-based costs, come into the rates on a pass-through basis. In distribution, Hydro-Quàƒ©bec does not earn on the supply-it’s a pure pass-through cost-so the wind energy or hydro projects are not going to change the equation on the distribution side of our business. On the hydropower projects side, it’s obviously going to generate significant additional revenue and income, income through export sales, for example.
So, another cold winter and everything will be fine?
Another normal winter and we should be earning our regulated rate of return. We face the same situation as U.S. investor-owned utilities. Today, if you look at your risk-free rates and add to that your typical regulated spreads, the allowed rates of return are less than 8 percent and that’s obviously historically low. But nevertheless, we’re continuing to invest, even at those rates of return, significantly, for example, in large high voltage transmission because we definitely do not want to create a situation where we’d have a congested bottlenecked transmission grid.
Hydropower is, of course, a big part of your generation mix. Are you experiencing problems caused by drought, the way the U.S. is?
No. If you look at where we have our reservoirs, they’re very far north. They’re 1,000 kilometers north of Montreal in the St. Lawrence Valley. So, the weather patterns are quite distinct. It can be very sunny here in Montreal, and you can have a lot of rain up north. We had a very normal year last year and the reservoirs are in good shape. This year, up until now, it’s fairly close to normal. We get the heavy in-flows during July.
The reservoirs also are multi-year reservoirs. These are not run-of-the-river or just any old reservoirs. Some of the reservoirs have very, very significant storage capacity. To put it in perspective, we can store in our reservoirs as much energy as a state like New York would consume in a year.
In the United States, utilities have trouble siting transmission. Do you experience the same difficulties?
It’s always a challenge. Obviously we face some of the same challenges but we’ve been able to succeed in investing roughly a billion dollars a year in new transmission. A lot of the generation is remote, northern, or far to the east in fairly uninhabited regions so siting transmission in those areas is not as great a challenge. But it gets to be very, very challenging as you move toward the south and get into more congested areas. We have faced challenges but so far we’ve been able to overcome and to continue to invest. The grid is a very solid grid, very technologically advanced, very stable and fortunately we’ve been able to steer clear of significant congestion on it.
Would you consider building another nuclear plant?
Not for the foreseeable future. Right now we have one nuke plant. We’re going to be investing over a billion and a half dollars to do a full refurbishment of that plant around the turn of the decade. The rest of our development is really going to be concentrated around large hydro. There’s still some very good large hydro potential and we see ourselves developing that before going to other sources. Having said that, we see the same thing as others: With CO2 emissions and the greenhouse gas debate, there’s clearly a new window opening for nuclear and we think nuclear makes sense. It would make sense for us were it not for the large hydro potential that we still have here that can be developed in a very competitive way.
When it comes to climate change, what sort of regulation, if any, do you favor?
Keep it simple. Keep it very, very straightforward. Obviously, we’re a renewable generator: 98 percent of our generation is renewable large hydro, so we look at either a cap-and-trade approach [or auctions]. But if you do cap-and-trade we think allocations are going to get very, very complex, so we’d favor auctions. If not, then go the simple route of a carbon tax. The Quàƒ©bec government has initiated something that is along the lines of a carbon tax and we think that makes a lot of sense.
Hydro-Quàƒ©bec has been selling its foreign holdings. Why is this part of your corporate strategy?
First of all, it was a good time. These were assets we’d acquired over the last five to 10 years and we’d seen the value of those assets really appreciate. So we thought it was a good time to sell and we saw some very significant return on that. Last year on our bottom line there was a $900 million gain through the disposal of those assets. It was also a good time to sell because there are tremendous growth opportunities in our markets here in Quàƒ©bec, across the Northeast of the continent, to the west in Ontario, and to the south in the Northeast U.S.
Our capital program for the next five years is $20 billion, so we have quite a bit on our plate in markets that are really linked to the core of this corporation. We wanted to really make sure we executed well and that required that we focus our resources. The problem is not the financial resources, it’s the human resources. You want your best people to be there and available. So we thought it was a good time to sell these foreign holdings.
Quàƒ©bec, the largest province in Canada, is home to a quarter of the country’s population. What unique challenges do you face providing power there?
I’d say it’s the same challenge as elsewhere: it’s always correctly anticipating growth. We’ve seen some pretty good growth over the last 5 or so years. We had underestimated, for example, the residential construction boom. Ninety percent-plus of the new homes in Quàƒ©bec use electricity for heating and air conditioning, so it’s always a challenge of correctly anticipating growth. The other challenge is to make sure we execute well and we max-out on energy efficiency opportunities. The challenge right now is you’re planning for growth but there are very strong expectations from your customers in terms of energy efficiency programs. We really want to meet those high standards on that side. We’re investing a billion dollars on a 5-year basis in energy efficiency programs. That’s a significant part of the challenge in terms of serving this market.