03 August 2007

The myths debunked - once again

In a post taking issue with the opinion of two economists at the Universite de Laval, the self-styled Hydroqueen makes some claims. Let's look at a couple of the claims and examine them systematically and in detail.

1. " This ignorant person [ that is, your humble e-scribbler] found some critic to suggest that selling power to industry does little more than provide jobs."

The post is based on the work of the two respected economists whose work has, in one case, spanned about 15 years of commentary on the aluminum and electricity industries in Quebec. There was no finding involved, except perhaps in conducting the same sort of google search any competent researcher can do.

The post actually makes the point that Quebec's aluminum industry costs the provincial economy cash. In the most recent smelter deals, for example, the aluminum company will drop $2.0 billion into the projects and the provincial government (with Hydro-Quebec) will subsidize the projects to the tune of $2.7 billion in lost revenue compared to shipping the same electrical power out of the province to consumers who will pay cost plus a profit margin.

It's about selling power at or below cost versus selling for a profit.

Their argument is simple.

Odd that Hydroqueen can't see the simple logic or repeat the argument accurately.

2. "I know why the individual makes such idiotic statements nevertheless more ridiculous concepts have stuck here before - SPRUNG."

This sentence borders on the incomprehensible. Is she speaking of your humble e-scribbler or of the economist Bernard when she claims knowledge of motivations?

If she's saying Sprung was a good idea then we can all understand why she continues to advocate ideas that make no economic sense.

Sprung was - somewhat facetiously - a plan to spend $1.50 of public money to sell cumbers at 50 cents each. That adds up to a loss of a dollar a cuke and goes a long way to explaining why the project collapsed not long after it started.

3. "The profits of Hydro-Quebec at about 3 billion dollars a year - almost a third of which are from our power."

Profit is the money left after all expenses are paid. Revenue is total amount of income an organization has from all sources.

Those are pretty simple concepts and the words have specific meanings.

Let's take a look at the HQ annual report for 2005, for example, to see if that figure of a profit of $3.0 billion is correct. Let's take 2005 for starters since that allows us to compare directly to the Newfoundland and Labrador Hydro latest annual report available online.

In 2005, Hydro Quebec had total revenue from its generating operations of $6.2 billion and a net income - a profit - of $1.873 billion.

Incidentally, Hydro Quebec has four components and revenue is generated in each. Since we are talking about sales from power generation, let's focus on that aspect for this bit.

If one takes a look at the 2006 HQ annual report there is indeed a larger net income - $2.1 billion - and total revenues of about $6.2 billion.

Even if we look at the total Hydro Quebec position, including all its operations and overseas investments, one cannot find the figure $3.0 billion or anything reasonably close to it in any of the financial statements that discuss revenues.

For example, in 2006, the company's operations - of all types - generated a net income of more than $5.0 billion; but it must be appreciated, as the financial statements clearly show, that a good chunk of the income for HQ outside its generating capacity comes from various overseas operations and investments.

So where does this idea come from that HQ generated a "profit" of $3.0 billion and that one third of that figure, i.e. about $1.0 billion came from "our power", i.e. Churchill Falls?

This remains a mystery.

Whenever she has been asked to provide the figures, the self-styled researcher has refused to provide the information.

In the meantime, there are other examples from Bond Papers discussing the Iceland model.