A few weeks ago, I mentioned that I am generally skeptical of “accepted wisdom” on many topics. “Accepted wisdom” is a construction of a stylized fact by a party with intense preferences that is gradually able to remove nuances over time to solidify its preferred narrative. The example I gave a few weeks ago concerned antitrust laws. There are many more. One of those concerns a research agenda that I laid claim to in a recent article in Atlantic Economic Journal (co-authored with my dear friend Germain Belzile): the nationalization of electricity in Quebec.
My home province of Quebec is basically one giant network of rivers well-suited for the production of hydro-electricity – a potential that was noticed in the late 19th century and led to a rapid expansion of the network. Historians (and some economists) have depicted the early electrical industry in Quebec as a “trust” (a cartel) that gouged consumers and could only be resolved, as witnessed by the neighboring province of Ontario, by nationalization (which occurred in two waves – one in 1944 and one in 1962).
In the article I published with Belzile, I argue that this narration is largely incorrect. First, before nationalization prices in Quebec were falling and were low by North American standards (see figures below). Second, production was expanding rapidly. This is in spite of the fact that taxes imposed on the electrical industry grew rapidly over time from less than 10% of total expenditures to close to 30%. Moreover, we point out that looking at residential prices is bound to yield bad comparisons (if we can call those made above as “bad”) if there is price discrimination. The industry price discriminated and offered incredibly low prices for industrial customers (large power) than in Ontario or anywhere else in Canada (in spite of the taxes it was operating under and the fact that Ontario subsidized its own).
We also point out that there was a dynamics of interventionism problem. The neighboring province of Ontario (more populous and richer than Quebec) nationalized its industry and set prices well below the market level which is an implicit subsidy. However, at the subsidized rate, Ontario could not supply its own demand and had to buy at the market price in Quebec. Its over-equilibrium quantity of energy demanded was transferred on the freer Quebec market, thus increasing prices on that market.
We also argue that there was wide heterogeneity of rates in Quebec that relate to the structure of municipal regulation (the level at which electricity was regulated pre-1935). The price differences depended on the political games involving rent-seeking firms and politicians (best exemplified by the case of Quebec City). Cities with high prices were places where the electrical market was heavily politicized and franchises (i.e. the contracts fixing rate schedules over long periods of time to recoup capital investment) were short and subject to holdups.
This latter point is meant for us (me and Germain) to stake a claim on future research to document the nationalization and regulation process at the municipal level and see what the effects on prices and outputs were. In a certain way, I am trying to establish a research agenda extending the skepticism of “accepted wisdom” that has emerged with the economic history of antitrust in the United States to the case of electricity trusts in Quebec. This first article is, I believe, a promising start for such an inclusion.