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Supply Chain Management of Hydro-Quebec
Supply Chain Management of Hydro-Quebec - January 10th, 2011
Hydro-Quebec is one of the world's largest generators of 'green' energy. With its subsidiaries, the company constitutes the third largest electric utility in North America. In 1998 Hydro-Quebec provided electricity to more than 3.5 million customers in the Canadian province of Quebec and also supplied electricity to nine municipal systems, one regional cooperative, and 15 electric utilities in the northeastern United States, Ontario, and New Brunswick. As a power marketer, Hydro-Quebec made direct sales to U.S. power wholesalers; through its high-voltage, high-power research center, IREQ, the company was involved in energy-related research and testing. Sales outside Quebec accounted for nearly 11.5 percent of the company's total in 1998.
Montreal Light, Heat & Power Company: 1901-18
The province of Quebec emerged as one of the world's major producers of hydroelectricity in the late 19th century. Construction of the province's first large dam began in 1898, just three years after completion of the world's first hydroelectric plant at Niagara. Hydroelectricity was a powerful force behind the development of Quebec's economy, since many other industries, including aluminum and carbide production, relied on the cheap, abundant power produced on Quebec's raging rivers.
Montreal Light, Heat & Power Company (MLH & P) was formed in 1901 under the leadership of two powerful Montreal financiers, Louis-Joseph Forget and Herbert S. Holt, from three electric companies (Royal Electric Company, Montreal & St. Lawrence Light & Power Company, and Imperial Electric Light Company) and one gas company (Montreal Gas Company). The new organization soon dominated power distribution in and around the city of Montreal.
In 1916 the Civic Investment & Industrial Company, a holding company, was created to acquire the capital stock of MLH & P and the Cedars Rapids Manufacturing & Power Company. The company name was changed to Montreal Light, Heat & Power Consolidated in 1918 to reflect the incorporation of practically all the gas, electric light, and power business in Montreal as one enterprise.
Consolidation and the Great Depression: 1920-41
During the 1920s many energy companies were absorbed by MLH & P, and by 1930 the company owned or controlled six of its former competitors, an electric railway, and a coal and coke plant. The monopoly allowed MLH & P to set prices and reap big profits. From 1910 to 1930, domestic electric rates dropped from nine to three cents per kilowatt hour, and costs fell even faster. Holt held Quebecers' domestic rates at twice those offered in Ontario. Opposition to the 'electricity trust' focused on these big profits and came primarily from local businessmen. Others were outraged at the perpetual land leases granted to the MLH & P along with rights to use the streets in suburbs within 100 miles of Montreal.
The Great Depression undermined the finances of many hydroelectric companies around Montreal during the 1930s. MLH & P gained control of Beauharnois Power Company, a large producer of energy on the St. Lawrence River, in 1933. It also took advantage of the economic opportunity to acquire municipal utility companies in Pointe Claire, Baie d'Urfe, and St. Anne de Bellevue. By 1941, MLH & P owned three hydroelectric plants and operated a fourth in cooperation with Shawinigan Water and Power.
Provincial Control: 1940s
The Lapointe Commission, formed in 1934, recommended the creation of an Electrical Commission in 1935. The Electrical Commission (later named the Provincial Electricity Board), regulated electric distribution, focusing on rates and services. In 1937 the provincial government adopted a bill that favored municipal control of electrical service.
The Quebec Hydro-Electric Commission, better known as Hydro-Quebec, was created on April 14, 1944, and took over the assets of Montreal Light, Heat & Power Consolidated the next day. The new commission compensated MLH & P shareholders in 1947 but did not settle contracts with minority shareholders in MLH & P subsidiaries Beauharnois Light, Heat & Power and Montreal Island Power until 1953. By 1948 the government had gone a long way toward achieving its goals of reducing rates and standardizing service: residential rates were cut by 20 percent and commercial power prices went down 26 percent.
Building to Meet Demand: 1950s
Demand for cheap power was driven by the defense industry. Aluminum, copper, and nickel refining were in high demand during World War II and on into the military build-up during the Cold War. As a result, many major hydro projects were undertaken in the 1950s.
Hydro-Quebec's first bond offering to U.S. markets was used to finance a project on the Bersimis River. In 1953 Hydro-Quebec undertook a project to widen the Beauharnois canal, which diverted water from the St. Lawrence River to drive hydroelectric plants. The project kept Quebec in the forefront of hydroelectric development in Canada. The next year, the company installed the world's largest submarine power cable, connecting the Bersimis generating facility with the Gaspe Peninsula. The discovery of rich copper mines in this previously undeveloped region raised demand for inexpensive power. The area had been electrified by diesel generators, which cost two to three times as much as hydropower. The cables provided for the complete electrification of the area, 20 percent of which had been without power up to that time.
In 1957 the company sold its gas system to concentrate on water power. After that year, virtually all of Hydro-Quebec's generating capacity came from hydroelectric generators. By the end of the decade, the province of Quebec produced 48.9 percent of Canada's hydroelectricity and was the greatest producer of power per capita in the country. Hydro kept costs low, too: the price per kilowatt hour in Quebec was 33 percent less than that of the United States.
Government Nationalization of Electricity: 1960s
The 1960s were characterized by the purchase by Hydro-Quebec of the private electrical distribution companies. The Shawinigan Water & Power Company, Quebec's largest non-government hydroelectric company, was bought out in 1963 in an effort to standardize rates and services throughout the province. Between 1963 and 1965, 45 rural electrical cooperatives and 19 municipal systems came under government control. They had constituted about one-third of Quebec's power sources. The 1960s also brought technological strides for Hydro-Quebec. In 1963 the company co-sponsored extra-high voltage experiments with Pittsfield Massachusetts's General Electric Company. The 700-kilovolt tests surpassed U.S. voltage limits by 200 kilovolts.
During the 1950s an unfavorable balance of trade with the United States led the Canadian Exporters Association to discourage electric exports because of U.S. quotas and tariffs on many Canadian products. But in 1963, the federal government began to encourage the export of hydroelectricity to U.S. markets. In 1966, after two years of talks, Hydro-Quebec entered into agreements with British Newfoundland Corporation (Brinco) to begin a massive project at Churchill Falls of Newfoundland. The falls at Churchill were a tremendous untapped resource: at 245 feet (50 percent higher than Niagara Falls), Churchill was considered the western world's largest single source of power. Work began at the site in 1967 and was completed in 1970. Hydro-Quebec co-sponsored the project, which diverted the river above the falls into a tunnel to an underground powerhouse. When finished, the project produced more power than all the American and Canadian plants at Niagara Falls.
The James Bay Project and Great Whale: 1971-84
In 1971 the James Bay Development Corporation was created by an act of the Quebec National Assembly to develop natural resources. Increased demand for electricity inspired a plan known as the James Bay project to develop generating stations. The venture was controversial from its inception and throughout its development, with plans calling for the construction of over 200 structures that would alter the courses of 19 waterways in northwest Quebec.
The James Bay project consisted of three different complexes hundreds of miles apart. The La Grande Complex, commonly referred to as James Bay 1, consisted of a series of dams and dikes stretching a total of 41 miles, guiding regional rivers through three generating stations. Despite efforts to stop the project the undertaking was completed in 1985. James Bay 2, commonly known as the 'Great Whale' project, began in 1987. The $13.5 billion plan called for the construction of a hydroelectric plant on the Great Whale River and the construction of facilities on the Nottaway, Broadback, and Rupert Rivers.
The project drew opposition from Cree and Inuit Indians, and from international environmentalists, who cited the possibility of higher mercury levels in fish, destruction of caribou habitat, and the unpredictable geological impact of massive artificial reservoirs on the earth's crust as reasons to stop the project.
Utility and government officials, on the other hand, pointed out that hydro power does not produce air pollution or wastes, and that if the equivalent of the annual production of the Great Whale complex was produced by thermal power stations, it would be necessary to burn at least 26 million barrels of oil per year. Furthermore, the James Bay Project created thousands of jobs and opened up more than 1,000 miles of roads in previously inaccessible areas. Hydro-Quebec's increased generating capabilities would also enable the company to sell surplus electricity to neighboring provinces and to the United States.
Hydro-Quebec took a number of steps to resolve the concerns that impeded the conclusion of the James Bay projects. In cooperation with the provincial government and native groups, the company participated in environmental impact studies and drafted agreements to hire Native Americans and to award contracts to their firms. Although Hydro-Quebec's own $400 million study suggested that the demand for electricity would justify the $13 billion project, it was canceled by Premier Jacques Parizeau in November 1994.
Reorganization: Early 1990s
Despite the negative publicity it received from Great Whale, Hydro-Quebec instituted several successful programs during the early 1990s that improved both customer and employee relations. In 1993 the company reorganized the administrative structure of its major activities in hopes of improving efficiency and lowering operating expenses--two of the primary goals behind its growing Defi performance or 'performance challenge' program. This long-range project, with its 400 improvement teams involving more than 3,000 employees, played a large part in boosting customer approval ratings to 95 percent in 1994. A broad range of Energy Efficiency Projects helped customers save money without a reduction in comfort.
Hydro-Quebec also earned high marks during the 1990s for its commitment to research and technology. Devoting almost two percent of its revenues and more than 800 employees to developing new computer software, electronics equipment, and various other high-tech projects, the company was generally acknowledged to be one of the Canadian leaders in R & D. In May 1995 the company was named a finalist for the Edison Award in recognition for its many technological breakthroughs during the previous year, which ranged from the Language Expert System, a sophisticated diagnostic software program, to the Organic Electrosynthesis Program, a more efficient method of producing a wide array of chemicals and pharmaceuticals. Once new technologies such as these were developed at its two research sites in Quebec, they were marketed by one of the company's subsidiaries, Nouveler, which negotiated licensing agreements representing some $14 million in revenue during 1994. Nouveler also launched several new companies, such as Scompitech, a firm engaged in the manufacture of a Hydro-Quebec's own newly developed robotic solder system.
Beginnings of Deregulation: 1995-97
By 1995, Quebec had more power than it knew what to do with. Hydro-Quebec's surplus inventory reached 4.2 million kilowatts and the company indicated the province would not need to add any new sources of electricity to its power grid until 2000. Hydro continued its research work on batteries: with its partners, 3M and Argonne National Laboratories, the company was developing prototypes of lithium-polymer storage batteries for electric vehicles, and in Japan, it announced construction of a plant to manufacture small, non-rechargeable batteries for radio frequency identification cards.
The privatization of Hydro remained an issue. In 1996, after a year of province-wide public discussion, industry and political leaders favored the move, but a report by a panel appointed by the government unanimously rejected the idea, pointing out that Quebec's utility rates were 30 to 40 percent cheaper than those of Ontario. The panel acknowledged that the Quebec government could privatize a portion of the company 'for financial reasons.' These included a debt of $40 billion, the annual awarding of untendered contracts worth $380 million, and a top-heavy, well-paid management structure. The government agreed to create an energy board to regulate Hydro-Quebec, as recommended by the panel.
Meanwhile, deregulation of, and increased competition in, U.S. electricity markets was causing Canada's provincial utilities to make changes. In response to requirements of the U.S. Federal Energy Regulatory Commission (FERC), Hydro-Quebec had already restructured, separating its transmission, generation, and distribution services. In May 1997, the company created a new division, TransEnergy, to operate its transmission network completely separate from its energy services. With that step, along with opening its grid to all suppliers and allowing Quebec municipalities to choose their wholesale power suppliers, Hydro received permission from FERC to sell electricity in the United States at market-based rates, instead of just trading it.
The company's exports to the United States were already triple the amount sent south in 1990. In addition, Hydro was also aggressively diversifying into natural gas, as part of a strategy to provide both types of energy in Canada and the United States.
Moving into New Areas: 1998
Increased exports, international investments, venture capital--1998 was a year of new undertakings for Hydro-Quebec. It created H.Q. Energy Marketing, a holding company charged with conducting energy transactions in Canada and H.Q. Energy Services (U.S.), based in Pittsburgh, to market energy generated outside Quebec. The company indicated it planned to spend some $8 billion over the next ten years to increase its generation capacity by 25 percent, in order to increase its power exports. In line with those plans, it announced an agreement for a new 440 megawatt plant and river diversion plan. Hydro also opened a wind power test facility, exploring renewable energies.
Through its subsidiary, Hydro-Quebec International (HQI), the company developed new international markets for Hydro. These included building a gas turbine in Senegal, purchasing a third of that country's privatized electric company and taking responsibility for providing power to many of its towns, and heading a consortium to build and operate a connection between Peru's northern and southern power grids.
1999 to the Present
Hydro-Quebec was in a good position to take advantage of the changes occurring in the North American and global energy markets. While the province's demand for electricity was predicted to increase moderately, there was little expectation that the retail market would be opened for competition because of Hydro's competitive electricity rates. Not having to worry about retail competition at home, the company was able to concentrate on the deregulated wholesale market in the U.S. Furthermore, through its stake in the holding company Noverco, Hydro was involved in the transportation and distribution of gas. Finally, the company continued to make investments in international energy-related opportunities. With this three-pronged approach, Hydro hoped to become a major energy hub, as called for in the Quebec government's 1996 Energy Policy.
Principal Subsidiaries:Hydro-Quebec International; CapiTech; Societe d'energie de la Baie James; H.Q. Energy Marketing Inc.; H.Q. Energy Services (US) Inc.; H.Q. TransEnergy Inc.; Churchill Falls Corporation (34.2%); Noverco Inc. (41%).
Last edited by netrashetty; January 10th, 2011 at 01:47 PM..
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