Is this an offer we can’t refuse?

There is a natural resistance to change that resides deep inside every one of us. Researchers indicate that acceptation of change is easier when the decision is fully explained – how it was made, why it was made, what the alternatives were, and how it will impact the corporation (in this case, province) and individuals. Based on public reaction so far, the information campaign of the government may have been deficient.

It’s been difficult for many to “buy-into” the sale of NB Power due to the change in story. For years, NB Power has been praised as a crown jewel, one that contributes greatly to the well being of the province. Now we have the spectacle of the government turning on the company, suggesting that is mortally debt-ridden, that it has been mismanaged for generations, and we need to sell it off. If the first story is now a lie, then is the present story actually the truth?

The demonization of NB Power may have merit to some extent, or be necessary to provide the “why it was made”, but it is at the political level where the buck should stop. It is the political classes who have insisted that necessary rate increases be rolled back, that their friends be hired, or not generally allowed professional management.

If NB Power is operated as a business, then it cannot respond to political influence and it’s only benefit to the province is via lower rates. On the other hand, if it submits to the chicanery of political influence, then it becomes ineffective and perhaps a burden on the public by its indebtedness. This is the classic conflict of the capitalist versus state-owned enterprise. While either can work, the principal difference is that financial discipline imposed by the state is less rigorous than the private model.

What is interesting is the path of two public utilities. In the 60’s, Quebec Hydro became the sole developer of new hydro facilities, started nationalizing the patchwork of power companies and created a huge state-owned revenue generator for their province. In 2008, HQ paid a dividend of $2.25 billion built on the wealth of hydro power.

Here, in New Brunswick, we have been on the downhill trail financially for the past thirty years for a number of reasons. In a number of instances, starting with integration of Lepreau into the rate base, inadequate rate increases encouraged debt to soar. There is a saying by mechanics that you can pay me now or pay me later. Well, we’re at that “later” time, it seems.

Our government has been negotiating with Quebec for the better part of a year and recently unveiled a framework for an agreement, called a memorandum of understanding (MOU). It is now signed and further discussion will bring forward a detailed agreement for signature in the spring of 2010.
So let’s talk about the deal as it has been presented to us. HQ proposes to pay us $4.75 billion dollars for the assets of NB Power that it wants. This includes the hydro plants such as Mactaquac, among others, the transmission and distribution system but not the thermal plants such as Dalhousie, Grand Lake and Courtenay Bay which will be closed. Coleson Cove (heavy oil) and Belledune (coal) will remain the assets of New Brunswick but be contracted to supply power at the request of HQ when needed. When judged no longer necessary, they will be decommissioned at New Brunswick’s expense.

What brings some real benefit to New Brunswick is that HQ will sign a supply contract to deliver two blocks of power annually – firstly, 4.5 Terrawatt-hours for industrial customers above 100 kW minimum demand (HQ rate M), and above 5000 kW (rate L). The existing rates would drop about 30% upon signing (6.99 cents to 4.79 cents per kWh), and follow HQ increases for the first five years
After five years, the rate increases would be determined by several items. The energy component would rise by the New Brunswick Consumer Price Index (CPI-NB).

Although the CPI has typically run at 1.9% in recent years, it could rise considerably higher in inflationary times. Given the printing presses pumping out US dollars south of the border, we could be in for significant inflation in the near future.

As well, any power usage greater than the 4.5 TWh heritage pool would be supplied by prices bid in a competitive process governed by the EUB, our public regulator. We don’t know much about this process but we can safely assume that the price would tend to increase rates of the original pool. The transmission and distribution component of the rates would be determined by the EUB based on giving HQ a return on its investment in those facilities. How much will this add to the “1.9 %”? Given that we must upgrade the links with HQ, it could be significant.

We do know that the savings in the first year to industries is $91.6 million or roughly 80% of the benefit, according to a CBC report. According to the President of HQ, Thierry Vandal, it was New Brunswick who decided how the division of benefits would be accorded. If we were to consider only the industrial benefits package, this would indeed be an offer quite difficult to refuse. But there is much more to this story.

It’s all in the Performance

Recently, a small industrial owner asked for advice.  He was thinking about converting equipment from oil to electric as a way of saving money.  A quick look at his electric bill indicated that his average cost was 16 cents per kWh, which is relatively high.  His rate for furnace oil was actually lower than his kWh rate and conversion to electric would only worsen his situation. Although most business people are very smart, few understand the complexities of the small industrial rate and the variable first block.  NB Power’s rate design is intended to flatten demand but does it achieve anything but costing some customers more money? The solution chosen by this industrial customer was to reduce the size of compressors and install ground source heat pumps for space heating.  This case made me reflect about NB Power’s lack of progress on rate reform and much more.

In the rarified altitude of NB Power’s 9th floor, there are bigger fish to fry than rates today.  The Lepreau refit, with fuel costs at $1 million per day, must be weighing heavily on David Hay’s mind.  It’s now three months late or $90 million over budget.

His salary and bonus has been in the news virtually every day.   Over at Nova Scotia Power, their CEO is paid $600,000 per year.  Remember Jim Hankinson, the well-respected CEO of NB Power from 1996 to 2002?  He’s now working as CEO at Ontario Power Generation for $1.6 million a year.  That’s one of the companies generated when Ontario Hydro was broken up by the privatization / de-regulation ideology prevalent several years ago.

Although his salary is high by New Brunswick standards, perhaps we should be asking another question – Is David Hay doing the job that he is hired to do in a competent manner? And to be fair, how are the groups directly associated with NB Power playing their roles.  – The Energy and Utilities Board, The Department of Energy and Efficiency New Brunswick.  Are they doing a good job?

The Minister of Energy Jack Keir is ultimately responsible for NB Power.   Mr Keir has indicated that he wants to have NB Power run as an efficient business and operate at arm’s length to the government.   Let’s take the issue of company structure, something that is really outside the domain of CEO Hay.  The previous Conservative government split the corporation up into 5 units and incurred multi million dollars costs for no obvious benefit.  This Liberal government has given no clear direction to NB Power to re-integrate the corporation and reduce costs.  A report was commissioned back in July 2008 with Bill Thompson and Bill Marshall as the authors.  Has this report been given to the minister?

The Department’s major interests are the new refinery and private sector financing and building a second Lepreau unit with power to be sold to New England states.  There are a few problems blocking this project: inadequate transmission capacity south of Maine, no long term contracts signed from US utilities, an unfinished design for the new ACR-1000, and an uncertain future for AECL.  As well, the earliest in-service date would be 2017, the construction cost could be $7.5 billion dollars, and the possibility of cheaper photovoltaic energy being available to customers before that date may be the financial ruin of utilities who buy into the deal.  Aside from these immense obstacles and uncertainties, apparently it’s going well.

If we look over at the EUB and it’s predecessor’s performance over the past twenty years, most objective observers would agree that it has failed to reform and regulate rates.   A couple of examples – Any rate increase below 3% is not subject to review and the revenue-cost ratios are consistently out of the range suggested by the EUB.  Large customers get better rates than small customers and on it goes.  Our energy watchdog is just a cute poodle but it’s not all their fault.  Let’s face it, government wants it that way – An agency with responsibility but little authority.

The folks at Efficiency NB want to see more efficient use of energy and that’s exactly what we need both for NB Power and the citizens of this province.  Roughly three years into their mandate, we see little solid evidence that the agency is achieving its goals.  What percentages of homes in the province have been upgraded?   1%?  2%?    Their annual reports are astoundingly short on detail and context.

So, are EUB, DOE, ENB, NB Power doing a good job?  Respectively, how does ineffective, incompetent, ineffective and not good enough, sound to you?

May I make a few quick suggestions?

1) Give the EUB authority or eliminate the EUB and roll its functions into the Energy Department.  Without real rate reform, we have no incentive to conserve.

2) Premier Graham needs to accept that the energy hub is unlikely to produce anything of value, and re-task the Energy department to do its real job. A maybe solution in 2017 doesn’t cut it.

3) Efficiency NB has not lived up to its mandate.  It has no sense of urgency, and requires attention from government.

4) The Energy Minister should be the chairman of NB Power’s board of directors.  Recombine the corporation into one business unit.

Our modern society provides amazing benefits that result from the incredible energy of liquid fuels such as oil.  Our level of usage is not sustainable and change must begin immediately if we are to re-organize our very survival. The Graham government needs a complete energy reboot.  The question is whether he will press the button or whether the people will do it for him in 2010?

Are we being fuellish?

A NB Power meter reader leaving a truck running while reading meters inspired a citizen to contact the Moncton Times and Transcript.  A story complaining about the choice of vehicle and the apparent lack of concern for the extra cost of fuel drew mixed responses from readers.   Of course, running a business is complicated but energy should not be ignored especially when we are nearly at peak oil.

Utilities know that the day of the meter reader is nearly over.  The number of “smart” meters is increasing each year both at NB Power and Saint John Energy, or it should be.  Apparently, NB Power has 100,000 of these time and energy savers.  One definition of a “smart” meter is one that can measure various quantities like kWh’s, and transfer that information wirelessly back to the utility. There are various technologies that suppliers use but the idea is the same – accurate billing at a lower cost by using new technology with less manpower, vehicles and fuel.  NB Power’s technology requires only that an employee drive by the neighbourhood to receive the signals.

Saint John Energy has an interesting advantage due to compact geography permitting the smart meters to talk directly to the office giving kWh, indication of voltage level and indirectly, whether the power is off at a particular location.

So what is the business case payback now for a massive changeout program? Certainly it is less expensive to simply replace old meters when they are outmoded or broken.  Should we proceed at a faster pace given the cost of fuel and greenhouse gases?

Over the past year, large increases in the cost of fuel for meter reading have likely improved the economics.  Secondly, a 20% decline in the price of crude this month shows that conservation will lower prices.  In fact it doesn’t take a huge reduction in volume to greatly affect what we pay.   Could an accelerated change in meter reading system be a part of an effective conservation effort?  The cost of West Texas intermediate crude averaged $72 in 2007 and may average $119 or higher in 2008. This is a difference of $47 a barrel or a $1.47 trillion dollars increase in cost for the people of the world.  The people of Canada are paying $34 billion more this year as a direct result of inadequate conservation putting pressure on lagging production levels. (2M barrels a day x 365 days x $47)

Could NB Power by itself drive down the world price of oil?  Unlikely, although they do burn a large amount of oil and fuel.  The effort has to include each of us, including companies like NB Power, making serious efforts to choose a smaller footprint.   When I once asked a vehicle coordinator why NB Power was supplying half tons for some employees, the answer given was trucks have a better resale value.  Well, that doesn’t appear to be the case now.  Michel Losier notes that NB Power has 11 hybrid vehicles.  What percentage would that be among the hundreds of vehicles in their fleet?

There are other examples of a lack of recognition of the importance of conservation – An employee lives in one city, but travels morning and night to work in another city at company expense.

Rainy days have seen NB Power’s larger vehicles cruising around burning diesel instead of being parked.  This is a productivity issue, as well as lack of respect for the world’s non-renewable resources. NB Power indicates that they are doing their best to encourage the proper use of vehicles, fuel, and productivity.  These are serious issues no doubt, and pose a number of million dollars in savings each year.  But these are small potatoes really when you look at the cost of coal and oil rising like a meteor.

An interesting commentary came from the Energy and Utility Board on June 26 of this year.  In a report to the minister, they virtually threw up their hands stating that the information provided by NB Power did not permit them to offer a valid opinion on whether the recent 3% rate increase was justified.  What is it between NB Power and the EUB that they can’t transfer needed financial data in a simple and understandable way?  Is NB Power running a shell game or is the EUB a poor communicator of their needs?

The Minister of Energy indicated that he doesn’t have a solution yet for this company that acts as an integrated utility but is legally split into several companies.   It would be interesting to have an Energy minister who addresses this and other serious problems, but more and more, it appears we will have to wait until 2010.  The EUB might think about adding regulation at Saint John Energy, where there are some issues similar to NB Power.

* Minister Jack Keir announced on Friday that “two experts”  William Marshall and William Thompson will study the situation related to NB Power’s corporate structure and make recommendations in a month.  William Thompson was Deputy Minister of Energy overseeing the breakup of NB Power from an integrated utility.   …. It’s nice to be trusted to fix what you broke.

A little transparency, please … on nuclear power

Our present board of directors, Shawn Graham, Jack Keir among others, have come up with a creative proposal in the energy hub concept – a second nuclear power plant at Point Lepreau. However, the shareholders of the province, have not being given much information and no alternatives are being discussed.

In previous columns, I have discussed the urgent need for conservation, and for substitution of NB Power’s oil fired generation, with nuclear being one of the possible options. We are within a few years of the peak of world oil production, supplies are tight and prices are rising. In the current year NB Power will spend roughly $300 million dollars on heavy fuel. Within a short time, the cost of heavy fuel will be extremely expensive and we will have to replace that three million kWh’s from another source.

A privately owned consortium, Team Candu, proposes to construct an 1100 MW nuclear plant adjacent to the existing Point Lepreau reactor on the Bay of Fundy. As part of the “energy hub” developments, we would see Team Candu provide energy to the Maritime Provinces and sell into the export market in New England with the plant operated by NB Power. Team Candu is a consortium of Babcox and Wilcox, GE, Hitachi Canada, AECL and SNC Lavalin who would be the engineers, suppliers of the material, and provide the financing for the project.

What will it cost to build?
If the project were a strictly private merchant power plant, the cost wouldn’t affect us. However, because NB Power will be a major buyer of power in a long-term contract, it does matter greatly. The cost of the original Lepreau station was $1.4 billion in 1983. In present day dollars, that would be $2.8 billion. Although no cost has been officially published by the government, some reports indicate the 4-5 billion range. There hasn’t been a Candu built in Canada for many years so we don’t really know what the ultimate cost might be now. As well, the ACR-1100 is new technology, and design changes during construction could happen, raising costs.

Due to a lengthy licensing process, and since the design process is not yet finished, the roughly four-year construction schedule takes us six or perhaps 8 years to completion (2014 or 2016).

Some concerns arise
Where are the ownership ambitions of the Atlantic utilities? Has AECL nationalism trumped economics? Will the federal government kick in a significant subsidy to compensate for the first build of the ACR class? Does the proposed technology offer the lowest cost construction, and overall simplicity of operation and maintenance? Remember the $25 million maintenance mistake of plywood being left in the piping. Whose responsibility is the waste fuel down the road?

The government approach might raise some flags. As the ultimate owner of Lepreau, only one bidder has been chosen to use the site. (Atomic Energy of Canada – AECL) How will we know the fixed cost construction figure and resultant kWh price from Team Candu is the best deal that we could have received and reasonable value? What value does New Brunswick receive for the use of the Lepreau property?

I do worry that a non-competitive bidding process may leave the door open to charges of “special deals” and that is something that nobody wants, given the volume of dollars involved. A long-term contract with Team Candu will commit NB Power for 6 to10 billion dollars.

The cost of the new plant would be between $3600 and $4500 per kW of capacity ($4 or $5 billion /1100,000 kW). A figure of 500 employees is suggested as the staffing level for the new nuclear plant. Given that the existing plant employs roughly 800 people, one might imagine significantly lower levels due to gains from commonality of function.

Are there alternatives?
One viable alternative could be the proposed Lower Churchill Falls hydro plant at Muskrat Falls and Gull Island, which is estimated between 6 and 9 billion for an output of 2800 MW’s. Even allowing for a lower capacity factor and a submarine cable, the cost is lower or equal to the nuclear option. Operating costs for hydro plants are typically very low and remain almost immune to inflation. Power is expected to be available from the first of two plants in 2015. The cost of power from the original Churchill Falls, which was finished in 1971, is now approximately ¼ of a cent per kWh. The typical life of a hydro plant is 75 to 100 years.

Ironically, it’s another high tech solution that may be one of the competitors eventually for our electric dollars. According to an October article in Fortune magazine, solar has a sunny future. The present cost of 25 to 30 cents per kWh will descend to meet with rising grid power price in the 2015 timeframe. What impact might cheaper solar power have on the sales of a completed nuclear plant?

The MZ consulting report on a second nuclear power plant in New Brunswick has not yet been released to the public and the Team Candu report will not be open to public scrutiny. It may turn out that a second Lepreau unit is a wise investment. One can hope that a little more information would eventually be made available to the general public before we are committed to a multibillion-dollar kWh purchase contract.

Oil Crisis calls for innovation

In previous articles of this series, I suggested that high oil prices are a significant danger to electrical rate stability and we need to take energy self-sufficiency seriously. A big tilt towards high efficiency, low emission wood burning is a start. There are many other ideas, some with little or no cost that can make a big difference. You may find some items a little boring and technical so just skip over any items that don’t interest you.

2) Institute a province wide changeout of Christmas lighting to LED technology. Based on the figures in my article of January 07 entitled “The value of thinking small”, NB Power could save up to 35,000 barrel of heavy fuel oil a year ($2.8 M @ 80 / barrel). In addition greenhouse gases are reduced by 18,000 tonnes a year (worth $450,000 @ $25 / ton)

The cost of a changeout program would be about $5 million with a payback of less than two years. Saint John Energy made a start in this direction in November 2007

3) Advance legislation on light efficiency from 2011 to 2008.
Going from incandescents to higher efficiency lighting isn’t rocket science. It doesn’t cost a lot to government either. The government of Shawn Graham has indicated that it will legislate the issue in 2011. Why wait for 2011? Ireland is implementing legislation in 2009.

The value of conversion to higher efficiency lights is probably in the range of 188,000 barrels of heavy oil but could be more or less. The annual fuel savings to NB Power could be as high as $15 million. Subtract lower kWh sales of $9.3 million and you have a net benefit to NB Power of $5.7 million.

4) Introduce Electric Thermal Storage (ETS) furnaces or heaters similar to those used in Nova Scotia or Quebec. Supplying electricity poses some difficulties because the demand changes greatly over the course of 24 hours. There is very little demand at night when people are sleeping and much higher when everyone showers or is getting ready for work in the morning. Peak load timing may vary depending on the components of commercial or industrial load.

Utilities meet the varying load curve with the lowest cost generation first, such as nuclear or hydro, followed by coal, with natural gas, oil and diesel being the last to run. The sequence may vary somewhat depending on the cost structure of each utility. Not surprisingly, flattening the load curve can pay big dividends. The ETS device turns on and stores heat in a ceramic brick core during the night when the electrical load is low and releases heat as required during the day. Nova Scotia has implemented a time of use scheme where the power rates are much lower at night facilitating these devices.

Not every building will be converted off electric heat. This technology has a place in the mix of solutions. This EUB may wish to investigate.

5) Revisions to demand charges on commercial and industrial customers.

Utilities like NB Power introduced a demand charge to certain classes of customers to entice customer to flatten their load. In most cases the result has been less than satisfactory. The demand meter records the monthly peak and a charge per kW is added on the bill. Although the customer cannot mathematically reduce his demand below the average demand he is charged between 0 kW and the average demand.

A better approach would be to charge demand on only the difference between the peak and average monthly demand because that is what the customer could actually affect. Done with a higher $ / kW and a revenue neutral approach, it would actually encourage more customers to invest in load control. This may interest the EUB.

6) Review the specifications for wind turbines supply contracts.
The use of wind turbines has the potential to reduce the use of heavy fuel oil in the province. However, there are some technical problems to overcome before more than 10 or 15% of the system load can be supplied by this technology.

First, most types of wind turbines are induction motors, which cannot supply “vars” to the system and create stability problems under certain conditions. One company at least, Enercon, builds a synchronous generator with no direct coupling to the power system. Power electronics simulate the attributes of a typical power generator including var supply. This might permit higher system participation assuming the other issue of scheduling of the wind can be resolved to some degree.

Not the last or the least of ideas is the use of combined heat and power (CHP), which will be the subject of an article soon. But the journey of a thousand kilometers begins with the first step. We are ready to take that first step but in what direction? The Department of Energy has, as its prime function, the security of supply and the reasonable cost of the energy supplied to the citizens of New Brunswick. There is little spare oil production capacity in the world according to some OPEC sources.

Our department seems to hold the belief that the near doubling of crude oil prices has little significance and that the market system will soon correct the temporary supply problems. From the outside, it appears that the principal departmental activity is marketing the energy hub concept – exporting of power or energy.
The recent appointment of Shelley Rinehart, whose expertise is in marketing, would seem to confirm that.

The government is 17 months into its mandate without an up to date energy policy. The issue of rising oil prices and particularly heavy oil cost for NB Power may become an albatross around the neck of Shawn Graham, his own “Hurricane Katrina” on a scale that will mark his legacy.

Rising Gas rates: A painful proposition

Enbridge Gas NB ran into some serious opposition this week with a proposed rate increase for the large commercial accounts.   Although they represent only 1% of the customers of the gas company, they have big political pull.  EGNB is proposing that the distribution charge for this group of customers would be increased from $2.39 to $4.54 per GigaJoule, which is still less than the other classes.  This is a substantial increase of between 10% and 18% based on the volume that the customer uses.

The natural gas franchise was authorized in 2000 for New Brunswick but it takes time and a lot of money to build a network like we see in other provinces like Ontario. Roughly seven years later, they have 8000 customers while NB Power still has a substantial, roughly 60% of the heating market, which translates into perhaps 190,000 electric heat customers. Its not unusual that Enbridge shows up at each rate hearing for NB Power insisting that electric rates classes should by modified and the rates raised. The more electricity you use, the cheaper it gets. This isn’t fair to the environment or the poor.

Enbridge is supposed to make money from its gas distribution system as a fixed rate of return. It also adds onto the bill the actual cost of the gas commodity itself, which includes the cost of transmission from Sable Island to NB on the Maritimes and Northeast pipeline.

Enbridge obtained approval from the EUB in 2000 for a market-based rate system commonly used to build a customer base. The company ensures that the price of natural gas is always lower by a certain percentage than oil, which provides the incentive to switch. This incentive required may vary between classes and Enbridge has taken considerable losses to do so. The worst case is when the price of natural gas is high and the cost of oil is low. The best case is  when oil is high (like now) giving the company room to raise rates and still have a competitive product (10% savings for this class over light fuel oil).

In 2006, EUB document filings indicate that Enbridge NB lost $4.3 million dollars, and increased its regulatory deferral account by $19.2 million – effectively losing $23.5 million. This increased that account to a total of $102 million dollars in 2006. This account shows the shortfall between revenue and the cost of service. The company has until 2040 to recover the debt in the deferral account from rates. If we assume that 2007 continued with a loss of $20 million, then the deferral account is now $122 million in the hole. The development period was extended to 2010 at a hearing in 2005. It can be seen that Enbridge NB is in a difficult position with inadequate customer base for its fixed cost, rates that do not recover enough revenue and a large deferral account.

The EUB will be faced with considerable pressure to moderate the proposed rate increases in the industrial rate, but oil is at $90 and not likely to retreat. This rate increase was based on $80 oil so a further increase may be justified in 2008. OPEC, by refusing to increase oil supply, essentially indicates they consider $90 as the floor price.

What is the effect of the rate increase on industrial customers on the products they produce? I considered two cases with gas at 10% or 40% of an industrial company’s total expenses. The rate increase affects customers from 10% to 18% based on volume of usage, as the commodity cost is a fixed value. Multiplying the figures gives a range of between 1% and 7.2% in product cost.

Is a 1 % increase acceptable? Is 7.2% too much? What kind of pill will the EUB prescribe for the patients complaining of increasing and severe gas pain? Will they require a cost of service review as part of the examination? Part of the hearing may require the industrial customers to provide financial information to back up their claims. After all, the price of energy is rising in other jurisdictions. At some point the end consumers of the products have to pay for the real costs to manufacture.

A question that might be asked is how long the parent company of Enbridge NB will allow mounting losses to accumulate before calling it a day. The large volume users have been allowed a bypass by the Gas Distribution Act – the single end user franchise for a mere $50,000 a year. In addition, there are provisions in the Act for a LNG franchise (Irving), which will give considerable latitude in serving large industrial concerns and perhaps others. On the electrical side, will the EUB insist on the abolition of the declining block rate at NB Power ordered by the PUB well over a decade ago? Should the EUB pursue the merging of the general service rates as suggested by its PUB predecessor?

The industrial companies, Enbridge Gas NB, and NB Power are in a zero sum game. What helps one hurts the other. Enbridge is ailing from a Catch 22 situation – lack of customer base and rates too low to support it. If they raise rates too much, they lose customers. NB Power wants to raise rates to reduce its heavy debt but the political heat is too great to get more than 6% at the moment. Their low rates and declining block structure cuts Enbridge off at the knees.

Will the EUB be similar to a doctor who would like to, but dares not prescribe the medicine that is required? There is a strong possibility that we will to see the same patients back at the clinic on a yearly basis looking for a fix.

All the King’s horses

The upcoming rate hearing for NB Power is sure to generate a lot of controversy, but not necessarily for the right reasons. If you are really brave the documentation can be found on NB Power web site under regulatory affairs. There are hundreds of pages of information guaranteed to make you yawn and scratch your head.

Unless they are fibbing, revenue will be inadequate by $112 million and higher rates are required to operate the business. We can’t change the past so the new EUB should spend some time encouraging transparency on the part of NB Power. The previous government put the generation power purchase agreements off limits in the 2006 hearing for some strange reason. Generation accounts for 75% of the cost of your power bill. This first hearing will be the litmus test for the effectiveness of the new chairman Raymond Gorman. If the EUB fails to obtain all of the information it requires, then it should adjourn the hearing in the same way that John Major did when the federal government was not providing him with information for the Air India hearings.

The all-new EUB might prepare for the hearings by reading the previous PUB decision that was essentially set aside by the Conservative government.

The old PUB had been asking for rate re-design to eliminate the declining block structure for 10 years or more. Presently, kilowatt-hours become less expensive as your usage goes up. Going to a flat rate can be done on a revenue neutral basis and is one of the prerequisites to good energy conservation and social justice for the small apartment dweller who is often impoverished. A good argument can be made for reducing or eliminating the service charge on the bill instead of increasing it.

What is not shown in the rate application or in the corporation annual report is the kWh generation provided by each plant and the annual costs of that plant. In other words, the production costs so that the EUB can evaluate whether management is doing a credible job. In a province like New Brunswick, a lack of transparency is a symptom of someone hiding either incompetence or a sweetheart deal. To those who suggest a requirement for proprietary secrecy, I would ask – “where is the competitive market”?

According to the application, the cost of natural gas and heavy oil for generators will rise by $120 million between 2006 and 2008. Are the Non Utility Generator’s (NUG) natural gas plants in Saint John still a good deal for the people of New Brunswick? Are they properly defined as base load units in the “PROMOD” power simulation software that determine which plant gets scheduled? I don’t know. It may be a great deal but there is just no information available to the public or the EUB.

The self-sufficiency task force indicated the need for an independent study to determine the balance of cost allocation between industrial and domestic users of electricity. One would hope that the EUB would commission this study as it falls within their mandate.

Yet to be clearly defined is the latitude to be given to the EUB and what activities will be retained by the Department of Energy.  An activist government may be tempted to manage NB Power directly as in the past.  It has plans to develop a second nuclear plant, a second coal plant at Belledune and remove barriers to co-generation and green energy. The result will be collisions between the Energy Department, the NB Power board of directors and the EUB. A confused and ineffective NB Power is the result.

As the group responsible for long term energy policy, the department of Energy should cut its links with NB Power and manage, via the EUB, with written regulations under the electricity act or by policy papers published on its website.  To influence on a day to day basis is not acceptable.

The EUB requires direction on a number of issues.  The first is whether a competitive market for electricity should be built or removed.  The present situation of being halfway pregnant is not reasonable and presents inefficiencies at NB Power.

The second is the displacement of oil generation at Coleson Cove.  The eventual decline of world oil production and subsequent escalating price of fuel is likely within five years. Stabilizing rates requires investments in other projects of a renewable nature that will be in service by roughly 2012.

And there are other issues but the greatest is the lack of a holistic vision integrating NB Power into the constantly changing world. Existing debt at NB Power is $4 billion with virtually no equity. The total debt after Lepreau refurbishment is expected to be $5 billion before looking into other generation projects for export or Coleson Cove replacement. Virtually continuous political mismanagement since the days of Richard Hatfield to the present has taken its toll on the corporation.  Can we expect the new EUB and the Energy Department to put Humpty Dumpty together again?  Not based on past history. Will Jack Keir succeed where others have failed?  There are some promising signs and some signs of failure.  For the moment, I reserve judgement.

The future of Saint John Energy

A ‘muni’ is an industry acronym for a municipal electric distribution company. There are three in New Brunswick. (Saint John, Edmundston, Perth Andover) For 325,000 of New Brunswick’s power consumers there is a review process. The Energy and Utilities Board (EUB) asks questions about rates, policies and procedures. Finances are probed and judgements made. We have considerable reason to doubt its efficacy due to political meddling in the past with its decisions. The minister of Energy Jack Keir tells us that the government will not veto the new board with respect to the upcoming rate increase and one would hope that the board is empowered to investigate all aspects of the power utility business. NB Power presently has a debt of close to 4 billion dollars.

The other 41,000 utility customers in Saint John, Edmundston, and Perth Andover do not have that review process. We have to assume that the part time board members of these utilities have the expertise and the time to set direction for management and ask the right questions. This is unlikely to be the case and they are only fulfilling a part of the necessary tasks. We could ask the question in another way. Why is it important for the EUB to regulate 9 customers when the 10^th is not scrutinized?

Certainly, excessive regulatory costs could be a concern but there should be a way to hold hearings with these distribution utilities at a reasonable cost.

The very fact that we have more than one electric distribution utility in the province raises an interesting question. Since it costs less to distribute power in an urban center, Saint John with its own utility, can sell power for roughly 10% less than NB Power, even though the power is generated at the same plants. This is because of the compact nature of cities and the reduced investment in poles and transformers per customer. Should the citizens of Saint John or Edmundston buy kilowatt-hours cheaper than the average New Brunswicker? The question could be rephrased. Why should the residents of Fredericton, Quispamsis or Moncton agree to subsidize power costs to rural areas of New Brunswick when the citizens of Saint John do not? Should they have their own electric utility as Bill Belliveau of Moncton has suggested?

In the past year the City of Saint John has had financial stress for several reasons and has been claiming that ownership of Saint John Energy is vested with the City and not the ratepayers of the utility. The purpose of the sudden interest in SJE is not controlling oil wells or to bring democracy to the workers at the utility. It is more likely that the planners at the City have designs to liberate some of the cash flow from the utility to improve the financial position of the city. This seems to be a magician’s trick to put $250 onto your annual utility bill and slide it into another pocket. We have to pay for the decisions of City Hall in some way.

According to its annual report, Saint John Energy has no long-term debt. If the ownership issue is settled in favour of the City, then it could have a sale price ranging from a low of $70 million based on synergies to a high of $180M if the rates were synchronized with those of NB Power. The possible purchasers would be companies like Emera, Fortis or perhaps NB Power, who would derive benefits from a larger direct customer base in the south of the province. Or it is possible that an annual dividend could be paid to the City by the utility. A regulated utility would require EUB approval to pay the City. What seems fairly certain is that a change from the present status would mean higher rates for electricity.

There is another third alternative to the conservative status quo or the “sell Dad’s company and party time” option. The use of Saint John Energy as a developer of green power such as wind and small hydro could be a start towards sustainable development. Combined heat and Power (CHP) projects for developments in the city core would provide high efficiency use of fuel. The redevelopment of Musquash Hydro and construction of a water treatment plant could be accomplished by the utility without even working up a sweat. Some municipal utilities are providing lower cost citywide wireless Internet or fiber to the home to enhance the city lifestyle and productivity. Attracting people to live in the City requires benefits that overcome the higher taxes. All this and much more is possible with the necessary vision, leadership and cooperation between the City, the Province and Saint John Energy.

The University of New Brunswick is to be congratulated for their “Lets Talk Saint John” initiative. This is a grass roots collaborative project (with members of UNBSJ and the broader community) that encourages open and honest discussion of current and future issues that affect the region of Saint John. This issue could be raised at a future public meeting. Further information on “Lets Talk Saint John” can be found at http://letstalksj.ci-fi.net/ltsj/index.cgi

Other venues for discussion could be an EUB hearing or Saint John Energy holding an annual meeting with the ratepayers (the owner of SJE) or perhaps a town-hall type meeting organized by the city (the owner of SJE). After all, a municipal election is scheduled for 2008 and this is an issue of considerable importance to the electorate. The beginning of rational debate begins with a transparent and open process that honestly discusses the facts and likely outcomes of each alternative. It is not a quick process and it requires discipline and patience on the part of all concerned.

Things go better with “Coke”?

Recently NB Power came to Saint John to talk about the use of petroleum coke as a way to reduce the cost of heavy fuel oil for Coleson Cove now that Hugo Chavez of Venezuela has said no to an Orimulsion contract. A recent $750 million refit was based on the cheaper Orimulsion fuel paying for the upgrade. A significant part of the cost was to install environmental controls and according to the annual report that I picked up: SO2, NOx, and particulate rates have decreased greatly, by roughly 75% since 2005.

NB Power indicated to the assembled group that by using a mixture containing 20% petroleum coke, the savings could be in the vicinity of $60 million per year. This would tend to moderate upcoming increases in power rates. On the negative side, the “pet coke” has more carbon content and CO² emissions would rise by 5% but would be offset by the introduction of wind power and reduced generation by oil at Coleson Cove.

Almost no one in the audience was receptive to a fuel that wasn’t clean and environmentally friendly. To tell the truth, Saint John is renowned for the large number of emitters of contaminants and CO². Recent talk of an energy hub means that a proposed new refinery, an LNG plant and other possible projects has those who consider the environment to be of primary concern going into “sensory overload.” The number of people on the environmental side of the argument is increasing every day and the existing dynamic is changing.

When it was indicated that Coleson Cove would be reduced in output as a result of wind power, it was surprising to hear that shutting down Grand Lake plant, which has limited environmental controls and burns low quality coal, wouldn’t be the first choice. The answer is twofold, as Grand Lake supplies a cheaper production cost and the unspoken reason – retention of jobs in the Minto area.

Certainly it is a good idea to put the finances of NB Power in order and a less expensive fuel would seem to be a good way to do this. However, when reading the annual report of NB Power, I was left with some questions regarding environmental and financial items: For example, what is the present day and proposed corporate CO² output in the coming years? Are there any reasonable possibilities for co-generation with existing plants to raise efficiency? These are issues that concern many people. 2005/06 was the first year in a while where export sales actually started to make money with higher revenue of $74 million. Better hydro production brought in an extra $54 million. This being the case, one would expect a good year but government withdrew an extra $50 million for Electric Finance Corporation. There may be a good reason for this. There are also the questions about the contracts with third party power supply agreements that cost $150 million in natural gas. The old PUB was not allowed to examine those contracts in the last hearings.

The annual report seems to skip over many important details or prevents the direct calculation of fuel costs for certain plants. The division of the company adds to the confusion with little apparent benefit. The debt jettisoned onto Electric Finance Corporation, an arm of the government allows the government to put its hand into NB Power’s pocket without a clear accounting for the results. The sooner the real debt of NB Power is returned, the sooner we can really see how the company is doing. A banker once told me that it doesn’t matter how many horses you own if you leave the barn door open. All things considered, there is a considerable lack of transparence in the financial operations of NB Power.

Our electric company could save money by using “pet coke” and this would help them financially in the future. However, unless the new government is willing to shine a bright light onto NB Power and it may plan to do so with the new Energy and Utilities Board, then it will become an accomplice to the political games of the past and the money saved may be squandered.

NB Power should be congratulated for their clear presentation of what they plan to do with “pet coke” and the improved environmental controls at Coleson Cove. However, we have come to a moment where we are jaded by “spin” that is out of control, coming at us from all directions. Wouldn’t it be unique to hear the absolute truth from an organization like NB Power? (The good and the bad) How can there be confidence instilled in the people of Saint John and the rest of the province until environmental concerns and the structural deficiencies of the organization are clearly examined?

Recently, Robert Gates sailed through confirmation hearings to become the new US Defence secretary. People were astounded that he actually voiced the truth when asked about the Iraq war. In a similar vein, the recently elected Liberal government has a window of opportunity of less than a year to clear up the problems of NB Power. Insisting that NB Power cooperate transparently in all areas with the EUB would be a good start.

Will Keir heed the PUB?

                                        First published Telegraph Journal  November 10, 2006               

Paraphrasing Shakespeare “To PUB or not to PUB? That is the question. Whether ‘tis nobler in the mind to suffer the slings and arrows of government indifference or to take to hearings against a sea of troubles”.

The former King Bernard, fearing the slings and arrows of voter outrage, virtually ignored the June 19th, 2006 decision from the PUB as being too controversial before an election.

The new royal in town is Shawn Graham, who campaigned on “a chicken in every pot”. Energy is high on his agenda. The terms of the existing PUB board members were extended several months and will not lose their heads until January.

Shawn Graham’s choice of Jack Keir as energy minister seems very appropriate. Although Jack admits that he has much to learn, his keen interest in the energy field and background in business will provide a basis for sound economic decisions. He supports the conservation of energy by insulation of our housing stock and the establishment of a solid foundation for NB Power.

But what about the PUB decision of June 19^th? Certainly, being the first full hearing on rates since 1993, it has been costly, likely in the range of $10 million of direct and indirect costs. The decision, shown at the website www.pub.nb.ca/Documents/Decisions is 103 pages of information that will put 90% of the general public to sleep faster than counting sheep. For those who are interested why the electric utility seems to be in a financial mess, it makes interesting reading. It appears as though past governments, whether Liberal or Conservative, have been afraid to make difficult decisions on rates over the years. A government decision to allow NB Power to avoid an appearance before the board by limiting rate increases to 3% has delayed the inevitable where losses due to inadequate revenue has led to an insolvent utility. The previous government decided to introduce competition, but not really allowing a workable system, has confused the public utility, the PUB and the general public.

The recent PUB decision has been about reducing subsidies between groups of customers, and changing rate design signals to encourage the wise use of electricity. Changes are required so that the PUB can properly examine the costs of NB Power generation, which represents 80% of the total cost of your power bill. One can only speculate on what the former government wished to hide. The new government has a choice to be transparent via a PUB with teeth or continue in the cover-up process.

Some have suggested that if real competition is desired, NB Power must be forced to sell a majority of its generation assets to outside interests. This is not necessary and in fact is a danger to rates. All that is required to start a competitive process is for NB Power to declare its cost of generation per hour for each of its plants to the New Brunswick System Operator (NBSO) for the next five years. Any private interest that wishes to provide kWh’s to the NBSO would submit a bid for long-term supply. Supply contracts would be awarded by order of economic merit; for example a bid of $65 per MWh would be accepted before a bid of $75. The NBSO would dispatch units to cover the load and the cost per hour of submitted bids by NB Power and private generators would provide the basis for payment of power supply. An audit by the PUB would ensure that the hourly bids of NB Power generating units have no cross subsidization and that the proper order of economic merit is chosen by the NBSO. At the end of the day, all that is required for competition to start is that one private generator has a cost that is lower than the cost of one of NB Power’s units. To ensure a level playing field between fuels, a carbon tax evaluation would be applicable to all generators using fuel that create CO² gas, and a tax level adjustment factor to equalize the advantages of NB Power.

My congratulations to the PUB board and staff for an excellent decision document. I agree with 90% of the recommendations. In the next months, the Liberal government may decide to make the PUB a vibrant participant in the energy process or it may stumble on the many issues that must be dealt with. I am betting that Jack Keir will inject some common sense into the process.