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Cablegate: Hydro Quebec Changes Course, After Suroit

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 MONTREAL 001435

SIPDIS

SECSTATE FOR WHA/CAN, EB/ESC/ISC, OES/EGC
USDOC FOR ITA/MAC - OFFICE OF NAFTA
DOE FOR INT'L AND POLICY AND IE-141 - DEUTSCH
DEPT PASS INTERIOR FOR INT'L AFFAIRS
DEPT PASS FERC FOR KELLY, LONGENECKER AND LEKANG

E.O. 12958: N/A
TAGS: ENRG TRGY ETRD CA
SUBJECT: HYDRO QUEBEC CHANGES COURSE, AFTER SUROIT
SETBACK

REFERENCE: MONTREAL 451; CALGARY 547

1. SUMMARY: Environmental NGOs and community
activists have drawn sufficient negative attention to
Hydro Quebec's proposal to build the Suroit natural gas
plant near Montreal that the utility appears to have
shelved the project. The provincial legislative
commission that had been tasked to consider the Suroit
plant in view of Quebec's future energy needs will hold
hearings in the next several months. However, Hydro
Quebec has already changed course, selling off its gas
assets, promoting energy consumption savings, investing
in wind power projects, revising its forecasts of
Quebec's energy supply, and above all, counting on
other big hydro projects, expected to come on line in
the next decade. Quebec Premier Jean Charest, on recent
trips to northern Quebec and Boston, has been
supportive of HQ's approach. END SUMMARY.

PUBLIC TRUST IN HYDRO QUEBEC FALTERS

2. For decades, Hydro Quebec (HQ) was a shining symbol
of Quebec pride in the province's economic advancement
through engineering and business expertise and
political vision. But the utility's public image began
declining in the late 1980s following the failure of
the Great Whale project, a proposed dam project in
northern Quebec that would have flooded an area almost
the size of New Jersey on Cree land. Other factors
which combined to shake public trust in Hydro Quebec,
whose sole shareholder is the Quebec government,
included negative reaction to cheap energy deals given
to aluminum companies, a series of black outs
culminating in the 1998 ice storm, and growing
environmental awareness and activism.

3. HQ said last Spring that its plan to build Le
Suroit, an 850 MW gas power plant, was necessary in
order to help bridge a projected provincial energy
shortage which would be most acute during the 2005-2007
period but which could resurface any time water levels
diminish. But in the wake of a bruising campaign
against the plant by Greenpeace and other environmental
and community activists and a fence-sitting report from
Quebec's independent energy regulatory commission, the
Regie de l'energie, which deemed the Suroit "not
indispensable," HQ appears to have shelved the project,
despite the Regie's conclusion that the decision to go
forward should be the provincial government's. While
preparing for the provincial legislative commission
hearings that have been tasked to evaluate the project
in light of Quebec's future energy needs, HQ has
discreetly embarked on a campaign to regain its public
standing, and continues to shore up other energy
capacity building projects.

MOVING TO "CLEANER" ENERGIES

4. Coinciding with the release of the Regie report, HQ
announced last June that it was selling for $C900
million its 50.4 percent stake in Noverco (an oil and
gas holding company) to a consortium headed by Quebec's
pension fund manager, the Caisse de depot et placement.
HQ said that the sale would reduce its involvement in
energies considered less "clean" than hydro, but it
also enabled the utility to increase income in a year
when export sales were down.

5. As part of its overall move to "cleaner" energy, in
early October, HQ announced it would be buying 990 MW
in wind-generated electricity (Calgary reftel). The
projects, which will generate $1.9 billion in
investments, will make HQ Canada's largest wind power
purchaser and provide much needed employment in the
Gaspe peninsula and Magdelen Islands, Quebec's poorest
region. HQ confirmed to post that the decision to
locate all the wind farms in Gaspe was political. The
Gaspe's economy has been almost completely resource-
based but fish catches, forests and mines have all been
depleted.

BACKING ENERGY EFFICIENCIES

6. Also in October, HQ announced an energy efficiency
plan, which still has to be approved by the Regie,
containing $1 billion in energy efficiency investments.
HQ estimates that the new plan, to be announced in
detail in mid-November, will save 3 TWh of energy by
2010. President Andre Caille said HQ intends to
continuing asking for rate increases of two to three
percent a year, raising over time the price that
Quebecers pay for their energy. The energy efficiency
plan will include rebates for home renovations and
purchase of certain energy-saving appliances.

REVISION OF PROJECTED ENERGY NEEDS

7. The wind power contracts and the plan to achieve
increased energy efficiencies enabled HQ to adjust its
August 2003 Electricity Supply projections. On
November 1, HQ announced the adjustment, acknowledging
that industrial demand for energy has also declined.
HQ was able to recuperate up to 175 MW over the next 25
years, thanks to Premier Charest's decision to renege
on the promise made by his predecessor to help Alcoa
expand its Baie-Comeau plant. One other factor
contributing to the utility's adjustment of supply
projections was the record rainfall in northern Quebec
during the summer that replenished water levels in HQ
reservoirs to unprecedented levels. HQ evaluated its
new capacity gains at 0.7 TWh for wind power, 1.5 TWH
for energy savings and 2.9 TWh for reduced industrial
demands.

CLEARING THE ROAD FOR MORE HYDRO PROJECTS

8. Hydro General Manager for Communications and
Environment Pierre-Luc Desgagnes told post that HQ is
hoping its recent decisions will clear the road for the
next series of big hydro projects, such as the 1500 MW
La Romaine Complex on Quebec's Lower North Shore
region, construction for which could start in 2008 if
government authorizations are granted according to
plan. HQ is hoping those authorizations will be
facilitated by the upcoming parliamentary commission.

9. NGOs are already gearing up for battle, however,
maintaining that the consensus established by the last
parliamentary commission in 1995-96 should be
maintained. That commission, held in the wake of the
Great Whale project fiasco, was in large part
responsible for a decade during which HQ's dam builders
(so-called castors in French or beavers) were kept
idle. On October 26, the Coalition Quebec-Vert-Kyoto
(CQVK) an umbrella group of 60 NGOs, held a press
conference during which it asked the Charest government
to impose a moratorium on all thermal power plants
(including co-generation), oil and gas exploration or
pipeline building, and the building of an LNG port
anywhere along the Gulf of St-Lawrence.

PREMIER CHAREST'S ENERGY VISION

10. On October 29, Premier Charest flew for the first
time to northern Quebec, where he participated in an HQ-
organized commemoration of the 25th anniversary of the
La Grande 2 dam complex, in its day the largest
hydropower development in the world. Charest praised
the foresight of his Liberal parti predecessor Robert
Bourassa, after whom the complex is named, for
supporting and promoting the development of hydropower
in Quebec. A week later in Boston, Charest was again
quoting Bourassa and affirming his own will to make
northern Quebec the spearhead of Quebec electricity
exports to the U.S. According to press accounts,
before a group of 300 energy specialists at the U.S.-
Canada Energy Trade and Technology Conference, Charest
said that "in the short term, Quebec faces restrained
supplies until 2007," but that in 2008-2009, when a
series of dam projects are expected to start coming on
line, Quebec will be in a much better position to
export. Charest also met with Massachusetts Governor
Mitt Romney, with whom he reportedly discussed both
border and energy security issues.

11. Charest told the energy conference that
diversification is becoming essential but "that
hydroelectricity will always be our first choice."
According to La Presse, Charest also affirmed that his
government's priority is the Quebec market and keeping
electricity prices, which he said are "300 percent less
in Quebec than in the State of New York," as low as
possible.

12. Comment: Opinions differ at the upper echelons of
HQ on whether or not the Quebec public is ready to
accept new large-scale hydro projects. Recent rate
hikes may temper public receptiveness to environmental
activism against non-wind, non-solar capacity building
projects. But the final decision on whether to build
more hydro projects will rest with the provincial
government. Charest has been supportive of big hydro
development in his remarks to audiences in Boston and
in northern Quebec but he will need to support HQ's
agenda closer to home if the utility is going to put
its beavers back to work. End Comment.

ALLEN

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