Regulatory Framework

The Act respecting the Régie de l’énergie (CQLR, c. R-6.01) grants the Régie de l’énergie of Québec (the “Régie”) exclusive authority to determine or modify the rates and conditions under which electricity is transmitted and distributed in Québec. Hydro-Québec’s electricity transmission and distribution activities in Québec are therefore regulated.

Power transmission

In its role as the provider of power transmission services in Québec, Hydro-Québec operates and develops one of the most extensive power transmission systems in North America. It markets system capacity and manages power flows throughout Québec, offering non-discriminatory access to its system to all market players in compliance with applicable regulatory requirements.

Since January 1, 2019, the transmission rates have been subject to performance-based regulation (PBR), applicable for a four-year period. Under PBR, rates for the 2022 rate year were determined using a parametric formula that provides for the application of the cost-of-service method for some unpredictable costs and the use of an indexation formula for the other cost components.

Rate case

For 2022, the revenue authorized by the Régie de l’énergie for transmission ratesetting purposes totaled $3,197 million, namely $2,813 million for native-load transmission and $384 million for short- and long-term point-to-point transmission services. These amounts represent decreases of $90 million and $21 million, respectively, compared to 2021.

With regard to its transmission activities, Hydro-Québec informed the Régie that it would postpone its 2023 rate application, initially planned for summer 2022, to summer 2023, due to the change in the company’s organizational structure. The Régie authorized the provisional extension of the 2022 rates until it can study the new rate submission.

Electricity distribution

In its role as power distributor in Québec, Hydro-Québec provides electricity to the Québec market and delivers reliable power and quality services to its customers with a view to efficiency and sustainable development. In this context, it also promotes energy efficiency.

Rate-setting

Hydro-Québec’s distribution rates are subject to An Act to simplify the process for establishing electricity distribution rates, which came into force in 2019. In particular, the Act specifies that rates are to be set or modified by the Régie every five years commencing on April 1, 2025, and that, in the interim, they are to be adjusted each year based on the annual change in the average Québec Consumer Price Index, excluding alcoholic beverages, tobacco

Process for Establishing Electricity Distribution Ratesa

2020 2021–2024 2025 2026–2029

Rate freeze Indexation based on inflationb Régie de l’énergie to set rates based on cost of service for one year and start of new cycle a) Excluding Rate L.

Indexation based on inflationb b) Based on the lesser of the average CPI and the top rate of the Bank of Canada’s inflation-control range for domestic distribution rates beginning April 1, 2023, in accordance with the provisions of the bill entitled An Act mainly to cap the indexation rate for Hydro-Québec domestic distribution rate prices and to further regulate the obligation to distribute electricity. products and recreational cannabis (average CPI). However, it authorizes Hydro-Québec to apply to the Régie, before the deadline, to modify its rates if they do not allow for recovery of the cost of service.

Pursuant to the Act, all distribution rates for the rate year beginning on April 1, 2022, were indexed at a rate of 2.6%, except the large-power industrial rate (Rate L). This increase corresponds to the change in average CPI between September 30, 2020, and September 30, 2021. Rate L was increased by 1.7%, which is equal to the 0.65 rate authorized by the Régie in February 2022 multiplied by the general indexation factor of 2.6%.

All distribution rates were increased by 1.3% for the rate year ended March 31, 2022, with the exception of Rate L, which was increased by 0.8%.

In February 2023, the National Assembly of Québec passed the bill entitled An Act mainly to cap the indexation rate for Hydro-Québec domestic distribution rate prices and to further regulate the obligation to distribute electricity. Among other things, this Bill stipulates that the indexation rate for residential electricity rates will be based on the lesser of the average CPI and the top rate of the Bank of Canada’s inflation-control range. The increase in residential rates will be limited to 3% for the rate year beginning April 1, 2023. Since the rates that apply to business customers are not targeted, they are expected to increase by 6.5%, which is equal to the average CPI between September 30, 2021, and September 30, 2022. The increase that applies to Rate L will be set by a Régie decision expected during the first quarter of 2023.

Supplying the Québec market

In its distribution activities, Hydro-Québec relies on several sources to supply the Québec market, mainly the heritage pool of 165 TWh. It also issues short- and long-term calls for tenders.

For requirements of less than three months, it may also buy electricity directly on the market, without tendering, under an authorization granted by the Régie de l’énergie. For unexpected needs that cannot be otherwise met, it relies on a framework agreement with the internal group responsible for trading in wholesale electricity markets and covering the period from January 1, 2020, to December 31, 2022. The Régie approved this agreement in December 2019, and in December 2022, also approved a renewal request for the period from January 1, 2023, to December 31, 2025. In November 2022, Hydro-Québec filed its Electricity Supply Plan 2023-2032 with the Régie. The plan forecasts demand growth of 25 TWh, or nearly 15%, over the 2022–2032 period. Based on the forecasts, the increase in demand is accelerating, largely due to the energy transition.

Hydro-Québec is also continuing its efforts to promote energy efficiency. For example, it has developed an integrated offer based on raising awareness among customers and helping them make lasting changes in the way they use electricity. In addition, it constantly adjusts its programs according to market needs and the company’s requirements, seeks to ensure that its initiatives are in line with those of its various partners and remains on the lookout for potential energy savings from new technologies.

Finally, in July 2021, Hydro-Québec entered into a partnership agreement with Énergir to reduce greenhouse gas emissions associated with heating residential, commercial and institutional buildings. The agreement seeks to implement a dual-energy solution combining electricity and natural gas in keeping with the 2030 Plan for a Green Economy, which establishes the Québec government’s electrification and climate change policy framework. The Régie de l’énergie authorized the agreement in May 2022, and the partners launched their first dual-energy offer, for residential customers, the following month. An application related to commercial and institutional customers was filed with the Régie in October 2022.