André Caillé is the President and Chief Executive Officer at Hydro Québec. Mr. Caillé holds a doctorate in physical chemistry from the Université of Montreal. He started his career as a professor at Québec's National Institute for Scientific Research. Subsequently, he was appointed Director of Québec's Environmental Protection Services and served as deputy minister in the Québec Department of the Environment.
Mr. Caillé joined Gas Métropolitan in 1982 and held several senior management positions before being named President and Chief Executive Officer in 1987. He was appointed President and Chief Executive Officer of Hydro-Québec in October 1996. Mr. Caillé is Chairman of the Board of Noverco Inc. He also sits on the boards of Hydro-Québec International, Abitibi-Consolidated Inc., Axa Canada, The Conference Board of Canada, Montréal International, IPL Energy Inc. and Research Funds at the Cardiology Institute of Montréal.
What led to your interest and specialization in chemistry?
I was raised on a farm, and so was close to nature when I was young. In my family, there are four boys and all of us were interested in science and understanding about nature. I have a brother who studied physics, another one in biophysics, and the three of us have Ph.D.'s. Among the three of us, I was the one with the interest in physical chemistry. Physical chemistry is the study of heat and how it transfers from one system to another. I thought physical chemistry was the most fundamental science there was at the time and therefore the most promising science to help me understand nature, how it evolves or why it is in such a state.
I became a big fan of thermodynamics, and of statistical mechanics. Specifically I was interested in how statistical mechanics relates to unstable systems that have achieved steady state. That's a new science, by the way, in physical chemistry. It was developed by Dr. Pete Jojen; a Belgian, but I think he's now living in the U.S.
One of the teachers I had in military college [inspired] me to make the final decision, because he was a very good teacher, a very well organized mind. He was the most rational teacher I ever had. In Dr. Tasee's classroom, I think we may have [numbered] 25 or something like that, everyone enjoyed his classes very much. That's how I got to be very interested in physical chemistry.
I went from military college to the University of Montreal, and I received an M.Sc. and then a Ph.D. in physical chemistry. After school, I was hired by the Institute National de la Recherche Scientifique in Québec City, where I worked for three or four years. From there [I went] to the Canadian federal government, [then] to the provincial government, and then I began work in the energy business.
What was the focus of your studies at the Institute for Scientific Research?
Water chemistry, and more specifically the development of models for water quality management. We were trying to develop a model for the St. Lawrence River, which integrated both quantitative and qualitative aspects of the source. That's how I got to be known scientifically, and why I became the president of the task force that was to prepare a plan to manage the water in the St. Lawrence River. That was in the middle of the 1970s. I gained some experience at that time in how to coordinate the work of many different groups. There were three federal departments involved in that work, and I think there were four from the provincial government. There was a very large number of scientists, a few hundreds working to develop that plan, which we completed in 1976 I think.
And then you went on to work in the government, in the environmental area?
Exactly. That became natural at that point, and I became the director of the Environmental Protection Services in Québec. We have changed that [due] to an administrative reform, it became the Department of Environment. A couple of pieces of legislation brought at that time, and so we went on with the pollution program that's the largest Québec has ever known; related to municipal sewage, industrial sewage, and agricultural impact on water quality.
How did you reconcile government and industry interests in environmental issues?
I was trying to develop a new approach with the industrialists -- that would be integrated with each of their [strategic] plans. That approach was to come to a specific agreement with every one of the large industrial plants that were here in Québec. That totaled somewhere between 50 and 60 very large industrial plants. Most of them you would find along the St. Lawrence River of course, for obvious reasons: transportation facilities and so on. The approach was a specific approach with each one, rather than putting forward a regulation that would apply to all, representing too many constraints for half of them and not enough for the other half.
A problem with regulation, especially when it relates to environment, is that the environment is something that does change from one place to the other. There is no place like the other one. Everything is specific to wherever it [is]. So if you have an averaging approach, I think you will find that you won't resolve any of the problems. You will resolve half of them, but not all of them. I thought that the real way to go about it was to take [the problems] one by one. Especially for the large industrial plants. I thought, and was absolutely convinced, that this was the way to bring about the real changes that were required. In fact it went on that way, and I'm pretty convinced that this is the way to go about it today as well.
You eventually went to work in the private sector. What was behind that decision?
I was 38 years old and I had been a senior manager in government for 10 years. I had the feeling [that I had been] around most of the government activities, and was very attracted at the same time by the [public] sector. The Chairman of the Board of the Gas Distribution Committee and the president of that company [had been] at the military college with me. Therefore I had known [him] for many years. [He] came to me and offered me the job to become Vice President of Strategic Planning of Gas Metropolitan. I accepted because of the experience in planning I had acquired doing this work on the St. Lawrence River, and I felt very comfortable to move back to the energy sector. I was in research before, in the energy field, and I came back into a gas distribution utility. So to me it was a [return] to fundamental energy.
Were the problems you faced at Gas Metropolitan similar to the ones you faced in government?
They were different. The main issue at that time in Gas Metropolitan was growth. And the plan we established at that time meant that we double the size of the company. That's a statement I'm very proud of. We doubled the size of the sales. And (although it was not in the plan at that time), when I became the CEO of Gas Metropolitan, we acquired 50% ownership of a transmission company which made us a transmission and distribution company for natural gas in the province of Québec.
That was quite an enlargement of the mission of the company. I'm very proud that we succeeded. Gas Metropolitan will become a natural gas hub. Some gas flows to Montreal from the eastern provinces (namely Nova Scotia), and of course gas lines continue to flow from western Canada to Montreal. With the construction of a pipeline from Montreal to Boston-- called the PNGTS project -- that will link the Montreal area with gas from the Gulf Mexico.
What was the strategy that underlay your plan for growth at Gas Metropolitan?
Partnership, working with others. We succeeded in working with our large industrial customers in Québec, which were essential to the development of the sales in Québec. The large industrials here are the aluminum companies, the pulp and paper companies, and a few others. I think we [developed] a relationship that went very much further than simply selling tariffs to those industrialists. Through partnership as well, we transformed the company from a distributor to a transmission and distribution company, working with TCPF: therefore true partnership again. The same is true of the PNGTS project, we have five partners.
I think partnering is one of the best ways to come as close as required to the interest, challenge, and issues of others representing the marketplace. Being closer to the market is always preferable as everyone knows, and if you find out [the interests of others], you will be very successful working close with the market. Essentially that's what we did. Originally [Gas Metropolitan] had the same approach as all other public utilities. That is, simply setting tariffs. "These are the tariffs approved by the board so this is what is available to you Mr. Customer." In order to double the size of a company in a ten year period, you have got to change some of this logic. You've got to be much closer to market.
What were the circumstances that led you to move to Hydro Québec?
I was enjoying a very good job at Gas Metropolitan. We helped the company grow, and we were profitable, enjoying a stable and predictable return from year to year. [We developed] very good relations with our share holders. So everything was quite all right for me. A friend of mine, someone I had known in the Québec government, called me and asked if I would help him find the next CEO of Hydro Québec. My first reaction was, "Well, I'm a competitor. It is at least the appearance of a conflict of interest. So I might not be a very good advisor to you. But nevertheless, if you want to, you can come and talk to me about it." So we had a discussion about how I saw the future of the energy sector, the energy market and so on.
I couldn't give him a recommendation as to who the person should be. I just gave him the criteria he should use to choose, but not [who] because of such an evident conflict of interest. So he stood up and was prepared to leave my office, when he turned back to me and said, "Well most of the people here, a very large majority of everyone I have consulted with, are saying that it has to be you."
I don't think I've ever been that surprised, and I was caught off guard. So I said, "Well I don't know. I never thought about that. This idea was light years away from me because I am the competitor, and if you read the press here in Montreal, once a week they report on the competition between Gas Metropolitan and Hydro Québec, so I am most surprised." So he only asked me to promise that I would think about it over the weekend, and that he would call me next week. He did call me, and I met with people that are known to be very convincing. So that's how I am here today.
And I am very happy I'm here. I think it comes in my career at the right time. And I think the challenge before Hydro Québec at this time, or at the energy market, is deregulating the electricity market. It's a very, very important challenge for Hydro Québec. I think we can succeed in that new market.
What are your expectations for electric power deregulation?
I was involved in the deregulation of the natural gas market, so I have a practical experience of deregulation. I started as the CEO of Gas Metropolitan starting in1987 and deregulation really happened here between 1985 and 1987,so I was in the middle of the process. I expect that it's not going to be an identical process, but it's going to be very similar for electricity. I've learned from science that there is never a situation identical to another one. At the end of this, you will find that there is going to be one North American market for electricity, as we have achieved essentially one North American market for natural gas.
The speed at which [deregulation] will be achieved depends really on the market place and not that much on the producers or the transmission company or the distribution companies. It depends on the marketplace. Putting it in very simple words, it's the wish of the customers that will determine the speed at which it will be achieved. I have no doubt that we will achieve electricity deregulation.
The first step is the wholesale market and in that case, it's obvious that this FERC Decision 888 is fundamental in that opening. The next step is the retail market and that will depend on each jurisdiction in both the States and in Canada. It should be left to the customers because all of this process in itself will be governed by the regulators. Being responsible for public hearings and so on, there the customers will be very close to contributing to the process. Because it's been placed in the hands of the Public Utility Boards (PUBs) and the regulators. I think speed can vary from one state in the United States to another state as we see it unfolding right at this time. But it's going to end up all in the same place. That first phase divided into wholesale deregulation and then retail deregulation, will lead to another phase that is the rebundling.
In the first phase you will see separate billing for production, transmission, distribution and non-regulated activities which are already on the menu for many energy consumers (the maintenance of equipment and things like that). Most utilities do offer that kind of non-regulated service. You will be billed differently and specifically for production, transmission and distribution. It's unbundling of the energy services, and then it's going to be the rebundling or repackaging of the service. I can foresee that in that second phase.
The rebundling will be most probably a new market. I would call it the home services market. It will include of course, energy: electricity, oil, and gas. It will include also the communication interface: telephone, TV and all the rest. It will include security services. It will include (as it already does) maintenance of different systems: those related to cooling, to heating; and it can include many other services not defined yet. It's going to be the challenge for those companies to develop the home services industry. It won't be necessarily a power company. There may be some companies in the power business today that will be in the business, but it may be a completely new commerce.
That's the latter phase. I think it has to be taken into consideration when you're trying to make the accountability of deregulation because it's part of the benefit. It doesn't come right at the start. Although there are already signs and already some utilities that do offer products or service they never offered before. After deregulation of the retail market there will be that other phase which will be just as important as the first phase. Deregulation will not be completely achieved after deregulation of the retail market. For those involved in the business, it is a mistake to come to this conclusion [that deregulation is achieved after the first phase]because it impedes you from preparing for that other phase.
And that's what we will be working on here in our case for sure: the definition of a new industry sector. The home services sector. We have to make sure we understand probable needs of the customer in ten years' time, the real needs of the customer. We need to understand probably the evolution of the technology. Not only as it relates to energy, but also and obviously as it relates to telecommunications. And with a good understanding, we have to prepare to put in place the right organization to achieve what will be our objective for this after a ten year period.
How do you respond to concerns of individuals or small companies that industrial consumers will be the chief beneficiaries of deregulation?
That relates to [the] speed with which the process moves. I don't think there will be losers here without impeding a lot on the speed at which it does happen. For instance, if in fact there is the [perception] by small customers that this deregulation is only a good thing for large industrial [companies], I think we will find that the deregulation process will be slower than expected.
To the contrary, if in the first phase it can be demonstrated that this was also positive for the small customers, to all customers, I think it can speed up. So the issue here is not to make any losers, and I don't think there are many processes in democratic societies that will speed up when one important group is a loser. It can only go very much slower and it can even stop. But the driving force behind deregulation is such that I think it will go on. And I think it will go on in a manner that will prevent the situation you describe, that is the small customers being the losers in the process.
The losers will be people that are producing power inefficiently or ineffectively now?
That is an issue very much related to industry. You see if we look in the past, as far as the beginning of the century, what you find is that those large monopolies have been put in place to make sure that the public will support the investment in order to develop what is now a huge system of production, transmission, and distribution of energy. You needed that at the time the demand was growing very fast.
You don't find that [growth] in the demand any more. And at the same time this huge organization has developed in North America, Europe, and developed countries, you find that regulation had protected many of the activities. That is, without the regulation they wouldn't survive. And the regulation therefore does protect productions that are not efficient. If you remove the regulation, yes, there are some clients, not all, but some that may be closed. In the competing market without the protection of regulation, they will not survive, will not be able to compete.
But there is a question that comes to mind. Why should we keep them? What's in the best interests of society? To continue on, protecting operations that should be shut down. Or to come to confront the problem. The way I see things unfolding in the United States and in Canada, I think there has been the decision, that we should not continue on like this. If you decide now to continue, the next question is how many years. A century, ten years, twenty years? And why is it not the time now to confront the problem? More and more people do believe that the time has come, and that's why we are talking about deregulation.
Of course, there is [one] way to confront this situation that has not at this time completely unfolded. That is, are we going to deal with stranded costs? It's not completely clear. There are opinions that are on the end of the spectrum and opinion at the other end today. I suppose that a situation will sort out as to be what is in the best interest of everyone. Not putting aside the interest of anyone in particular. Not putting aside the interest of the share-holders. Not putting aside either the interests of the small customers. A sound process as to integrate all of those issues.
It cannot only go one way, otherwise the process may be postponed or seriously impeded. It's going to take more time. I think there's a rational way of doing this and the way we are structured at this time is ideal because we have all these public utility boards, which play at this time a very important role. That is the place where the people, where the customer, big or small, can go and be listened to.
This is very important at a time where we decide to uncover the situation, to deregulate. Put aside the regulation umbrella. There are going to be many public debates. There's going to be a public debate that will be able to take into consideration the specifics of every plant, because there area large number of Public Utility Boards (PUB's). And the franchise areas in the states are very small. We have established a PUB right here. There were no regulatory bodies looking at Hydro Québec before. There will be no regulatory body of the same nature. Everyone, small or big customers, will be able to go to the board and be listened to. So therefore there's a real public debate. And the structure is there to sustain a public debate about deregulation, both in Canada and in the U.S.
Is there an ideal time period to resolve the stranded assets issue?
Between now and five years. Within a five year time [we have] to decide on how exactly. Some will come before, some will come after. You can see the trend establishing here currently being established now in the States. There are states where the situation is such that obviously they'll be first to decide which will go with the stranded assets. And there are other states (most of them enjoying lower tariffs) where the situation is not as urgent. There is not the public pressure there. No public opinion is asking, demanding that a decision be taken immediately.
Do you think that the deregulation of natural gas moved about the way that it should?
I think, globally speaking, it went the way it should have. Of course one could say that transmission companies, especially those in Canada, should have planned for more capacity to be built. In 1985, the Canadian export to the U.S. market were what, 10 - 20% of total production? Today it's 50% or more. It would have been seen as presumptuous on the part of a transmission company if they doubled or tripled the size of export to the U.S. -- in planning. I think if you look to the past, you can see that different decisions should have been taken. But of course that's after the fact. And I think there is nothing, essentially, that should have been different. Maybe in intensity: a little bit more of this, a little bit less of this.
The natural gas deregulation is a real success. And I do believe that success has brought about the deregulation of the electricity market. Suppose that natural gas deregulation would have been a failure, I don't think we would be here today to talk about electricity deregulation. It's been a real success for both countries. It's good for Canadian producers, it's good for the natural gas industry in the States. It's good for the customers, so it's quite an achievement one could say. And not much predicted in the past. If you look in 1975, you cannot read a lot about natural gas deregulation. But [this is] something that was completed and started in '85 in Canada, a bit later in the States.
What are your plans to educate consumers and to market your product to them?
What we did in the gas industry here in Québec to educate the people is that we unbundled the service at the billing department. That is, nowadays they receive a bill that says so much for natural gas (the molecules themselves), so much for transportation, so much for distribution. This tells them there are three components to this and exactly the price of every component. That gives the fundamental of the education. That's the least we can do, I think. Then the customer can decide, if a gas marketer comes by the house one night and say, "I am prepared to deliver you natural gas at such and such a price." It's very important that the customer make the right comparison. It's molecules to molecules, not molecules to transmission, or not molecules to total billing.
The same thing will have to be done in electricity. The people, the customers, need to know if [they] are to do anything. They need to know the price of the electricity itself, the energy itself. The price, the cost of transmission, and the cost of the distribution. Then they'll be in a situation where they are educated and can wisely choose from many producers, maybe more than one transmission company. Obviously (and that's what I think at least), there will be only one distribution company. The latter really needs to be regulated, because it is what's called a natural monopoly as far as I'm concerned. There's no need to develop a second distribution network, that will increase the price.
It's a matter of price. It's a matter also of the nature of the product. Like in our case, the green product (environmentally friendly electricity). It's not only one element that will count. It's going to be the differentiation of a product which was not differentiated starting back at the turn of the century. Electricity was electricity. All electrons look alike, like all gas molecules. It's methane and they're all methane.
So there's going to be a differentiation process. Is it green, is it wind, is it large hydro power, is it fossil fuel, is it nuclear, and so on. It becomes a dimension because the customer makes it a dimension. The customer can make it even a larger dimension, as well, of course, as a lesser dimension. It's really a service to the people. We were seeing at last the utilities are allowed to sell the product to customers under the review of a public utility board. I wonder why it was not always like that. It could have been like that right at the start, but it was not.
Do you see a difference between what a customer wants to know and what a customer needs to know?
Yes, there is a difference between the two because the latter is usually defined by the managers of the utility. I think what's more important is what the customer wants to know. And we're an open market here, a deregulated market. So what he wants, he's entitled to. Those who will not respect that will not live long in the marketplace. You know that the non-regulated businesses in North America are not going outside telling their customer, "We will tell you what you need to know." You will see a lot of them going to their customers and asking, "What do you want to know?" Hydro Québec will not [argue] about what they want to know. What they want to know is absolute.
There is a role here to be played by the utilities. We have to explain to the customers what hydroelectricity from Québec is all about. How do we produce it? How do we protect the environment, and so on. We'll have to market our product. And our case being very good, I have no doubts that we can put in place something that the customer hasn't seen or heard - especially in the States over the last few years.
But that's marketing. That will not always be seen as education. A lot of the education will come from the deregulated process - which is run by who? By the Public Utility Boards, by the regulators. The decision is made as to how the billing should be done. This is part of education, what information has to be put on the bill. For instance, how much renewable energy is there on this bill -- 10%, 15%. But this could be information that the customer could want, could express a need for.
I am prepared to go very far that way. I think the billing of the distribution, which is a regulated activity, has what it takes to reassure the customer that this is true because there is a PUB, a third body, looking at this. Not only the supplier and the customer, to make sure that the information is right. And there are decisions to be made of practicality, of course. [The Public Utility Boards] have to be practical, and make decisions that will ensure us that the customer knows about the future, as it relates to energy.
Hydro Québec is a nationalized company. Is that a benefit or disadvantage for deregulation?
I think it has no effect on our position relative to deregulation. One of the reasons why I have accepted this position is the shareholder telling me that this company had to be run like a private company. It was very clear between us that if I have any ability, if I have any knowledge, it is to run a company like a company. But I made it very clear that I have no knowledge or interest in running what would be a subsidiary of government. I never had to make a big thesis about it before the government, because they had already adopted that position. The government is now convinced that this company (it's Hydro Québec Inc. by the way, let's not forget about the Inc.) has to be run like any other company. So I'm not here to do anything different than what I did at Gas Metropolitan. It's the very same approach, the very same issues. Profitability being one of them.
Hydro Québec really hasn't experienced the profitability it should have in the immediate past, in the last 5 - 10 years. One of the main issues for me, is to go back to profitability. And there is no reason why Hydro Québec should not enjoy the just and reasonable return for the activities that will remain regulated, namely transportation and distribution. Relative to production, I don't think it should be regulated. We will manage production like all of the other producers in North America, and the price we will get for the production will be the market price. A price established through relations between consumers and producers. And we are quite prepared to do that. We did it in the gas industry. And this is very simple, so there is no new mental attitude to this, because of the nature of Hydro Québec.
But see, business contacts are just like thermodynamics - it is simple. Science is the domain of knowledge for humankind, and it is the simplest one. When it appears to students as being difficult, you should turn your head in the direction of the teachers, because most of the time they are the ones that make it appear very complicated. Nature is simple. If you imagine that something is very complicated, stop this way of thinking. Ok -- come back to the fundamental issue and be simple.
Business is much like science, it is simple. You develop projects. You control costs. You make sure that your cost is going to be lower than the price you will get from the market, and you are in business. It is simple. It's only sophisticated in the mind of the one that complicates everything. If we keep it the way it is, in its [simple] nature, I am convinced we will run a sound business. I think we can achieve success.
Do you see a differentiation between publicly owned and privately owned utilities?
No difference at all should remain between them. Whether they be publicly or privately owned, they should have the same rules, same level playing field for everyone. That's true here and that's true in the States. And I think we're heading that way very rapidly here. We have been preparing, like Hydro Québec has never prepared before, what is called a 'rate case'. I have experienced them at the gas distribution company of course. But we never had the experience here, so we are preparing to go for the transmission and the distribution. We have to go to the public board to have rates established. It's quite an undertaking for a company which has $52 billions in assets and has never done that. In fact, we have been working for the last five months preparing for those two rate cases, and we have reorganized. Things are changing a lot.
We have completely reorganized Hydro Québec. We have separated not only transmission, but production, completely from the rest. We could call them divisions because they have their own accounting, their own everything. And the three divisions, as I call them, have to develop their own market. Like our man in transportation, I think he goes to the U.S. this week or next week to meet with customers, with other producers. I don't think everyone knew that was going to happen here six months ago. That's quite a turn. That's something like one hundred and eighty degrees from what they have known before.
And that's quite all right. Our people in production will not be involved of course. Not at all, in that process. Our man responsible for transmission does not come to this room with the others any more. It's a different management team, completely different. So I think there is a lot that can be done rather rapidly. If it's true for us, the only hypothesis I make here is true for the others, either in Canada or in the States. To change the way we used to manage those companies.
Will the politics of Québec have a major impact on Hydro Québec during deregulation?
I don't think that politics will have as much impact on Hydro Québec as it did in the past. It's going to be less and less. I've been here for six month and frankly I think there is not a relation between us and the government as close as one would expect between a company and its shareholder. You are here in the board room of Hydro Québec. And I do report to a board that essentially acts in the very same way as any of the other boards in North America.
The time has come and everyone fully realizes that in Québec, Hydro Québec has to live as Hydro Québec Inc. And not any more as something else, although it's very difficult to define what that something else was exactly, because there has always been a distance between the government and Hydro Québec I think. It's going to be in these days the same and even larger distance. Again, I am running this place, and I have been hired to manage this place, like a private company.
Hydro Québec doesn't have a lot of stranded assets. Might that lead to political problems in the US, where many power companies are less fortunate?
There is a possibility there, so we have to be careful. And being careful means preparing to work with others -and the plural here is essential. Deregulation means that our coming into the U.S. energy market is meaningful not only to us but to our neighbors. We want to work in a most cooperative way possible and to make good partners. That means, for instance, that we will be very open to all of the players in the U.S. market. All of them -- large, small, and medium sized U.S. players. We're not going to go only one way here. And we're not going to try to disrupt anything in the process. We will be very careful about what we are doing.
The best way is to establish good relations. That's why I was so interested in the Smithsonian initiative. It means a lot for us. It's not only because you asked and that we've accepted. We have to learn, and I have found it most interesting to sit with the others you have put around the table, just chatting about these issues, in order to make sure that we act in the best way possible. We fully realize that our acceptance on the market place depends on how we act. And we are prepared to act as our size commands that we act.
But I see all of this as being very positive. I worked in the gas industry [and] I was fortunate enough to be on the board of the American Gas Association (AGA) for five years. I learned how to relate with the gas businesses or companies there, because one third of the members of the AGA were also electricians. So I got to know many of them and that's why the last time I was in Washington there were people I knew around the table already.
Are NAFTA and other changes making you truly part of a single economy or are there still significant barriers?
I think we will be in a very close tie with only one economy. We're almost there. It's only one true economy. And others will join into this as they develop. Mexico, for instance, and other countries in South America. But as far as relates to North America, I think there is only one economy and we're all a part, we're all North Americans. We found our way here through very similar channels as you know.
What is Hydro Québec's new environmental policy, and future environmental plans?
We want to achieve the status of renewable resource. We want to completely comply with the concept. We're very close to that now, maybe 95% of the road to being perfectly renewed or renewable resource. There was this debate on how big a reservoir has to be to move from renewable to non-renewable resource. I think that the large reservoirs are beautiful human realizations. To me there is not a size where it's not renewable, because you and I walking on the dam will not find out when exactly you move from renewable to non-renewable.
But nevertheless, I think no power source is fully renewable at this time or can assure full renewability, and that's what we want to achieve. There's R & D to be done there. We want those human constructions to be to the service of the population forever and fully to be integrated. And there are questions that come easily to mind when you put this in perspective. In 100 years, in 200 years, what is it going to be like? So there are questions that need to be answered now, it's kind of prospective research. I like that very much, by the way, so I may get involved directly.
I think our future development has to be done in full cooperation. That is, [what] we want to achieve --the means remain to be defined. But we want to achieve the perfect fit of interests between us and the local population. We want to achieve a full cooperation status, and in order to achieve that there is a need to make sure that the interests are the same. Not partly the same but in totality the same.
If, with the knowledge and expertise that we have developed here in Québec constructing those huge power facilities, we can achieve a complete fit of interests, we will be in a situation to ensure 100% renewability. That's the concept, and we will be in a situation where we can complete what potential there is to complete, and also for all of the population no matter their origins--to achieve a situation in five years where we will be able to export to other countries this knowledge and expertise that we have developed.
I can foresee that in some countries in South America, a hydro-culture will develop. The "N Hydro-power Generation Company" where we would be involved with South Americans. With international bankers as well, we will achieve 100% renewability. We will achieve a fusion of culture. It's not only a matter of going and developing power stations and large reservoirs in other countries. It's a matter of being there and achieving a presence, a presence that will be wished by the people. And that is really to the 100% renewability concept.
Is your hydro-electricity plant efficient enough? How can you increase the efficiency of your current technology?
First of all, I think our hydro-assets are the best in the world. I am convinced about that. And it's been very, very well developed. I am very proud of the environmental activities and all the environmental care that we had in developing this company. It's performing well. All the equipment is there and up and running, as it will for years and years.
I have to remind you that I was the deputy minister of environment at the time that we started building the big James Bay development. I did authorize some of those dams and power stations. I was the administrator of the James Bay convention with the local population. We're very proud of that obviously. What we have achieved is something that is number one in the world. And not only on the productive side, but on the environment in relation with the local population as well.
But of course we are still interested and still investing in order to improve the production of electricity through hydro-power. We are conducting a large R & D program, which accounts for 3% of total sales per year. It's between 100 -215 millions of dollar per year that we invest to develop better transportation techniques to improve the quality of the product. Most of the people think electricity is one product, but it has a quality related to the quality of the electrical wave, because electricity is a vibration.
We can still improve in the environment field as well. We do conduct research in the environmental field. There's a lot to be developed on how to approach a watershed and how to optimize the production of power. How to optimize the relation between production of power and the local population, environment, and so on. So we do quite a lot of research because I am convinced that what we have been doing in North America, here in Québec, we will be doing abroad (that is outside North America, in the developing countries), in the years to come.
Starting in five years time I foresee that most of the growth of our company here will come from foreign markets. I can foresee that Hydro Québec will be implemented in South America, Southeast Asia, China, and other place in the world where there is a large growth in the energy demand. Nowadays the growth in many of those countries is above 10% per year. As opposed to what we see in developed countries like ours and yours, where the growth is between 1 and 2% in the demand. So our knowledge, our expertise, will find its way to those developing markets. And we will certainly be working very hard in order to achieve that.
Are you considering other renewable resources? For example, distributed photovoltaic?
Yes, and they are present already. The photovoltaic, the solar power as well as the wind power. We will conduct a pilot project related to wind in Québec, in the next five years. And we will continue, in parallel of course, our R & D efforts to develop what will be I hope Québec technology related to production of power using wind. Though at this time I see we have no pilot project in plan, we have an R& D project related to photovoltaic solar power.
Our trademark is renewable resource, and will remain a trademark, we won't [disassociate from it]. Not only in North America again but around the world. We are the specialist of the renewable resource. Obviously we have achieved such a status related to hydro-power and what needs to be done now is to achieve the same kind of status related to wind and solar power.
We will be involved in natural gas because I think this is the most preferable fossil fuel there is, and fuel that is largely present in the world. Natural gas reserves are much more than oil reserves and so we're working with natural gas. But it will always remain that our trademark is renewable resource, and natural gas is not because it's fossil fuel [even though] it is the best of the fossil fuel. After all, I have been the CEO of a gas distribution company. Convergence of electricity and natural gas, I do believe, is something that will be achieved in North America. By the way, Hydro Québec has bought an interest in the natural gas distribution and transmission company in Montreal. We have a 46% stake in the company.
How will this convergence, and other novelties such as bundled services affect less developed countries?
If you look abroad there are some countries that do have large hydro-power potential. Therefore they will use that hydro-power potential. But there are some that have large natural gas reserve and not much hydro-potential, so convergence will mean a lot to them and I have no doubt that there will be countries where you will find a very active presence of both Canadian and U.S. companies, because the convergence will be demonstrated in North America. I am 100% convinced the Europeans are not as close as us to this achievement, because the gas and the electricity companies have been kept on an independent basis one from the other.
Although I think it's going to be developed in North America, the convergence between energy utility and the telecommunication utility will come in the developing countries first. Because people will ask right at the start for electricity. They will not go using natural gas first and then converting to electricity. They ask for modernity and modernity right now. Electricity is the most modern way to transport and deliver energy to households for obvious reasons. Therefore they will go directly to electricity. (I don't know why, but I'm more pleased about that than I was six months ago.) And they will ask at the same time to get access to telecommunication, television, everything we have here in North America, that the people enjoy also in Europe.
In the Philippines for instance if you're talking about transmission lines for electricity, the people will talk to you at the very same time about the optic fiber installation. And of course there is the savings you can make if you install both at the same time. That's why I'm interested in keeping an arm in the telecom business. I have an interest in a telecom that can work with us in the international market.
If you go downtown in the Philippines, downtown Manila and ask the people, "How would you like to be served for your energy needs?", they'll answer "electricity," and at the same time, "please, I'd like to have a phone." So you better have means, not only in power production and transmission but also in telecom if you want to make something in the global market place.
And you believe home services should be the kind of business that Hydro Québec should be in?
Some of it, depending on the definitions we put to it. As I said, partnering is essential and if we are to get involved in that new business sector, of course we will have to partner with others. We may very well be a minority partner into that new business, leaving to someone already present (for instance a telecommunications business or a telephone company)the majority because they are closer to home services, as we will define them, than we are. We will be very happy to join with them in order to do it. If you had today - say - financial services at home, financial services may become part of what's called home service. And then it may be the large companies in the financial services business will be the leaders. So we might join with them rather than the telecom. It may be that the good partnership will be among them, the telecom, and us.
Once you are serving the people at home you have to relate to them. Either on an independent basis or joining with others. But you always have to define yourself, define the mission of your company, as it relates to that market. Because that market will develop whether you do X, Y, or Z. So what you really need to do, whether you're small or large, is to define yourself in relation to that up-coming market. That's what we are currently doing.
What do you think Hydro Québec will look like in ten years ?
Hydro Québec will have five or six independent divisions - production, transmission, distribution, energy services, the marketing arm, and other businesses. Hydro Québec will be a little bit greater, 10% larger as far as production capacity. It will be selling in the States and in other Canadian provinces as an independent business. The production company or division will have assets also in the U.S., not only in Québec.
The transmission company also will have assets both in Canada and into the United States. It's going to be an independent division run by its president with its own board. Well, that will be before ten years because we will put in place in the coming weeks an advisory board for that activity. And the challenge here is to maintain the company to the level it is now. Amortization is 500 million Canadian dollars per year and the total asset is 16 billion. So in order to maintain the level of economic activities we'll have to not only be active in Québec, but also abroad.
The distribution company, will be a Québec distribution company. We'll sell a little bit more than now because there is this growth between 1 and 2% we expect to continue for the next five to ten years. We'll be strictly involved with distribution.
The marketing arm may end up in the home services repackaging. The services to the customers will include repackaging production, transmission and other services, security services, financial services, telecommunications services.
The other business division will have an international base--that is, it will own assets in South America. We will have a work force that will include Canadians and South Americans. They are, of course, the majority of the people working for us, owning and operating production, transmission and distribution assets in South America, in southeast Asia, in China and maybe in eastern Europe, although it's not very clear to me how the situation will unfold in eastern Europe.
So that's what Hydro Québec is going to look like. Our strategic plan for Hydro Québec is being prepared right at this time. And the objective is to find our way to growth for the next five years. Essentially in North America, and growth after the turn of the century abroad in developing countries. To make sure that the knowledge and expertise that has been developed, starting at the turn of the 19th century, is put to bear (as you say in English) in developing countries. And that our people, either in the gas or the electricity business, find a professional career working with Hydro Québec.
I think that we are very proud today of what this company is. Hydro
Québec Incorporated. We are very proud and I think our successor
will be even more proud. If it was not so far, I would take you right away
to James Bay, show you what we have done, what we have really done. You
would understand why I am so proud and why if we can export that knowledge
and expertise then our successor will be even more proud of what they are
doing in the world. That's, I suppose, a way of seeing in the future. It's
certainly a way to live in the future.