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.

NB Power sale to Hydro Quebec – The jury is still out

Like a few brave souls, I haven’t yet made up my mind on the possible sale of NB Power. To me, one should listen to all of the facts first.

Most New Brunswickers have one concern about the proposed sale of NB Power to Hydro-Québec: what will the impact be at their power meters?

Last week, it wasn’t immediately clear to me what motivates the Hydro-Québec purchase of NB Power. After all, we’ve been next door since forever; we’ve traded power back and forth (mostly towards N.B.) and I’m sure it’s been good for both utilities. So why the purchase proposal at this point?

Since then, I’ve done a little research – looking into Hydro-Québec’s strategic planning document on their website. They foresee an 8.5 terawatt-hours reduction of sales to industry and business based on the recent economic downturn. That figure is equivalent to 60 per cent of NB Power’s total annual load. Most interesting is that 25 per cent of the reduction is from the pulp and paper sector in Quebec (2.2 Tw-h). Industry in New Brunswick sees the lower priced energy coming from HQ as part of the solution to their survival. In the Quebec example, lower power rates alone do not guarantee survival.

According to Hydro-Québec, with upcoming expansions in their capacity, “by 2013, we will have nearly 24 TWh at our disposal.” The plan is to export more to Ontario, New England and even into the American Midwest. Now New Brunswick will feature more significantly.

Close to 40 per cent of Hydro-Québec’s profits come from export sales. That’s only natural when your average cost of production is presently 2.2 cents per kWh and the retail cost of energy in New England is roughly between 15 and 20 cents U.S. for residential rates. However, the average retail cost of energy in New Brunswick is only 9.5 cents, giving a lower return than in the U.S. Perhaps New Brunswick is an export road to New England – or, as Newfoundland suggests, perhaps this is a way to tie up existing capacity through New Brunswick.

Historically, N.B. has exported considerable power through its major tie line with Maine. Seeing further possibilities, it constructed a second line in coordination with U.S. utilities in recent years. According to new rules by FERC, the regulatory agency of the U.S. government, utilities must provide access to other utilities to transmit power across their network (for a regulated fee, of course). The auction of capacity on the new line was reserved by Hydro-Québec in 2008 for an annual fee of $10 million. Bingo – the new transmission line blocked off, even though it is little used at this moment by Hydro-Québec. Now, if the proposed sale of NB Power goes through, the original export transmission line is in the hands of Hydro-Québec.

The first benefit to Hydro-Québec is that N.B. will serve as a flexible market for Quebec’s hydro power, ramping up or down local plants as required by Quebec system operators to make the most profit. Plants like Coleson Cove, which burn expensive fuel, will be under contract to Hydro-Québec, probably for winter peaking power. Theoretically, it should operate fewer hours, and that’s a good thing.

Secondly, the proposed agreement would secure a large part of the New England market for Quebec hydro power. That means that P.E.I., trying to export 500 MW of wind power, or Newfoundland with dreams of the Lower Churchill project, will be at the back of the bus. One exporter to New England means no pesky competitors to drive down margins.

Newfoundland could request more capacity from New Brunswick (as per FERC rules) and it would eventually happen, but south of the border, it could be blocked in by a lack of transmission capacity in the U.S. There have been numerous examples of public opposition stalling lines, causing bottlenecks across the U.S. – ironically demonstrating how U.S. law may be more effective in Canada than in their own country.

Perhaps the most significant impact, by delaying transmission paths for Newfoundland either through Quebec or New Brunswick, is the financial uncertainty that accrues to Newfoundland’s financing of the Lower Churchill project, a project that could cost up to $10 Billion and provide 2800 MW’s of power (16.7 TWh).

The legacy of the original Churchill contract between Newfoundland and Quebec remains until 2041. It’s a complicated story, but suffice to say that nobody has disputed Danny William’s assertion that $22 billion of the benefits have gone to Quebec and $1 billion to Newfoundland. The business purists among us would say that a deal is a deal, but shouldn’t we, among provinces, brothers and sisters, search for a greater justice than simple legality? Can I feel comfortable as a Canadian if either Quebec or Newfoundland were unjustly mistreated?

Quebec deserves great credit for their vision and perseverance to develop the hydro resources of its province. However, the lessons learned by Newfoundland have relevance to any contract that New Brunswick may sign with Quebec. As well, for us to sign a contract without ensuring that the aspirations of Newfoundland are fully addressed is detrimental to my vision of a just Canada. In the absence of leadership from the federal government, it remains crucial that Premier Graham modify this agreement in a way that respects all members of this confederation.

What is tragic in this energy competition is that we (in Atlantic Canada) will need all of the hydro power that we can find in coming years to replace fossil fuel for heating homes and businesses in New Brunswick (20%), Nova Scotia (65%), PEI (80%) and Nfld. We burn 1.4 billion litres of furnace oil each year in Atlantic Canada. That’s equivalent to 12.7 TWh or close to the output of the proposed Lower Churchill Falls project. The needs of Atlantic Canada could use most of it’s output before even sending it south of the border. It’s not a case of whether we must have only one winner, Quebec or Newfoundland. We need both and right now.

My next column will look at the deal being offered.

Let’s look at the facts

The announcement of the tentative agreement to sell NB Power is a game changer on the Atlantic Canada political scene, with severe reverberations hitting Newfoundland and to a lesser degree, Nova Scotia. Only Quebec, the originator of the storm, seems immune. Of course, Quebec is 10 times larger than New Brunswick, so the $4.75 billion proposed purchase of NB Power is relatively small potatoes compared to Hydro-Québec’s debt of $35 billion. With total assets of $67 billion their debt-to-asset ratio of 53 per cent is quite healthy.

One of the facts of business life is that most businessmen don’t make difficult choices until it becomes absolutely necessary. Shawn Graham, as CEO of this province, is no different. Nearing the end of his first mandate, he has two financial problems looming – first, the provincial deficit is ballooning and $1 billion may be added for the current year.

Secondly, delays in the refurbishment of Point Lepreau have delivered extra costs to NB Power for the purchase of replacement power. This would make a rate hike unavoidable, and certainly unwelcome before an election.

Given that discussions began early in 2009, it is likely that a sale of NB Power was seen as the neutralizing agent to fix these potentially fatal electoral roadside bombs.

Let’s look dispassionately at the proposal. What is the reality, what is just spin and what is just not true? There are many talk radio shows going on and I’ve listened to a few. Citizens are concerned and want answers.

One of the recurring themes of callers is the idea that Quebec is suspect and their hydro company cannot be trusted to provide power to New Brunswick. We might call it fear of the unknown or fear of significant change in our lives, xenophobia or in some cases Francophobia.

Leaving aside the Quebec-Newfoundland issues related to Churchill Falls for the moment, most observers would say that Hydro-Québec is a well run-utility that is professional and technically competent. Like all large organizations within the state sector and often the private sector, the productivity of employees may leave room for improvement. This also is the case at NB Power, which has consistently avoided making those tough management decisions. (NB Power does find the time to address and implement management bonuses.)

Hydro-Québec regularly delivers power or contracts with utilities south of the border and one doesn’t hear of broken contracts or poor performance. In fact, given the worst case of a separate Quebec outside of Canada, wouldn’t it be extra important for credibility of the new state to fulfill all contracts signed by state organizations like Hydro-Québec?

Could we set aside the Quebec-baiting or fear factor and understand that our own failure to manage NB Power is not the fault of Quebec or their utility?

A second theme mentioned by the government and by some citizens is that NB Power’s debt is unmanageable and we would be unable to reduce it. Not so. For example, under the management of Jim Hankinson between 1996 and 2001, NB Power reduced net debt by $423 million. There is a natural pattern of capital expenditures on new plants in some years and subsequent debt reduction in following years. It happened again after the Coleson Cove rebuild. What remains crucial is good operational cost control and that ongoing capital costs are cut to allow debt to shrink quickly after a major project.

If we compare NB Power’s rates with many others, we can see that the rates are very reasonable. Residential rates in N.B. are 11.66 cents; N.S. is 12.88, and P.E.I. at 17.3 cents; Calgary charges 12.13 cents and New York, 25.3 cents. Only the provinces with significant hydro power, such as Manitoba, B.C. or Quebec, are lower. The same is true for large industrial rates. Ontario charges a cent and a half more than N.B., and who has more industry than our Upper Canadian brothers?

Let’s not fool ourselves that debt at our utility was the reason for the sale or the most important factor. But ever since the building of Lepreau, we haven’t wanted to pay the real cost of electric power, and political leaders from Richard Hatfield down the line wouldn’t bite the bullet and allow rates to rise to lower the debt level. As well, management at NB Power hasn’t controlled costs on a consistent basis. The debt is high but manageable on every level but political, it seems.

We’ve only begun the peeling of this particular onion. This story is quite complex for one column, so let’s look at the self-sufficiency agenda, emissions, peak oil, Newfoundland and lower power rates, on another day. Hopefully, our eyes won’t water too much when we discover the rest of the story.

Be… in this place (without a doctor)

Respect is a universal requirement. We all need it. Country songs bemoan the lack of it. (“Take this job and shove it”). Aretha Franklin had a song called “RESPECT.”

Doctors are suing the New Brunswick government for reneging on a tentative salary deal. According to the president of the N.B. Medical Society, “The proclamation of Bill 93 is a bitter reminder of the Shawn Graham Government’s total disrespect for the negotiations process.” Unfortunately for the doctors, a serious decline in government revenue forced Premier Graham to consider a wage freeze.

There is a delicious irony that recalls the NB Power v. Venezuela case. We insisted then that a deal which had been negotiated, but not officially signed, was valid.

Is Premier Graham trying to have it both ways? It seems so.

So, what’s the point of this lawsuit? It’s about the money, of course. The negotiated settlement of $35.6 million would have brought each doctor a $24,000 increase, on average. That’s an eight-per-cent wage increase. The final contract will not ensure that all citizens have a family doctor. It won’t provide for creative and sustainable solutions to medical care.

One in every five health dollars goes to pay doctor’s salaries. The 2007/2008 global wage budget of $455 million, shared by 1,482 doctors, gives an average salary of $304,000 per year. Typically specialists make more and general practitioners make less. To be fair, there are expenses for a receptionist, office and related things. But all in all, far from poverty wages.

Eight per cent of the 750,000 New Brunswick residents don’t have a family doctor, the gatekeeper for entry into the health care system. Those 60,000 people aren’t too happy that governments didn’t act on the demographically predictable aging of physicians.

The province is presently served by 723 general practitioners and 759 specialists. The College of Family Physicians suggests that each family doctor should have approximately 1,200 to 1,500 patients. If this is true, we should have between 500 and 625 GPs. Theoretically, we have enough but emergency room doctors, those in management or semi-retirement perhaps make the difference.

The government is committed to adding 50 doctors in the next few years, which should fix the problem. The question for many people is, when?

Couldn’t we bring doctors in from Cuba or Mexico into New Brunswick on a temporary basis to fill the gap until we train other doctors? We do that with welders or many other trades. Talk to anyone out in Alberta.

Logic would say yes, but the doctors’ union is very tough. Canadian immigration permits a foreign doctor into Canada based on credentials, but provincial medical societies refuse to accept those same credentials in many cases. Better that they drive a cab for a year or two to gain Canadian experience. Should Canadians die from no treatment, or have a foreign-trained doctor examine them?

You, like me, may be one of the 20,000 people on the Regional Health authority waiting lists for the next available doctor. There’s a recording, “Leave your name and number.” Several months after I left my name and number, someone called me, but that was a long time ago. No explanations and no personal touch. The whole system radiates lack of respect.

Recently, I called an after-hours clinic to schedule a prostate exam. Apparently, they don’t do that. They said I should go to the emergency room at the hospital. That is too funny! I instantly had this mental image of me trying to explain to the triage nurse what I wanted. Her response would probably be, “This kook will wait here for three days.”

So what are eight per cent of New Brunswickers to do for the gaps in our medical needs? Continue to pay our taxes for medical treatment we don’t receive? I could have prostate cancer developing and wouldn’t know it until too late.

Perhaps we should look south at the experience of Cuba. According to some evaluations, “Its public health indicators are consistently similar or superior to those of wealthy, industrialized nations such as the United States and Japan. Cuba’s per-capita GDP, however, has more in common with Third World countries such as Indonesia and Bolivia. Their solution has been built using low-cost, high-impact techniques in preventative medicine, primary care and community education.”

Cuban society is fairly egalitarian but poor. People make roughly the same amount of money. Doctors make $20 a month, which is $240 a year. Put another way, the average Canadian doctor works less than two hours to make the annual salary of the Cuban doctor. Cuba has sent doctors to Venezuela and other countries as a way to earn foreign exchange. I suspect they could provide 50 doctors to New Brunswick until we train more local students. Alternatively, Mexico has doctors who could fill in for a short term.

Doctors are better respected than most in our society. It would be nice if that respect was extended to those paying for Medicare but not having access. Is it time for us to organize politically to ensure that the situation is solved quickly?

Develop an energy strategy that serves New Brunswick

Building a new oil refinery with a price tag of $8 billion was never going to be an easy task, but saying goodbye to a project where millions have been already spent must be quite difficult.  Collateral damage may include employees losing work and the investments made by individuals in the community expecting a boom.

There is always a risk of becoming emotionally invested in a concept, whether it’s private or public sector managers.

According to news reports, Irving Oil now sees declining customer demand for gasoline “from 2015 out for the next 25 years.” They didn’t divulge the reason for the decline, despite an expanding U.S. population. One likely cause is the reinvigorated corporate average fuel economy standards (CAFE) in the U.S. gas market and hence in Canada. The new refinery would have added capacity into a declining market.

But looking beneath the surface, rising oil prices in 2007 and 2008 made it clear that we are reaching a tipping point in world oil supply. About 40 of the world’s 54 oil producing countries have passed peak production and are declining. Reduced supply means fewer refineries, as I noted in a previous column from 2007.

Has the present government become so emotionally attached to its self-sufficiency agenda and “energy hub” job strategy that they reject the reality of an oil production decline in coming years with its consequential economic chaos? Or is it just saving face until the next election?

Self-sufficiency, as proposed by Shawn Graham, was fatally flawed from the beginning.

It was based on growing a larger population, a strong industrial economy and sufficient cheap energy, all of which are unlikely in the next decade.

With the passing of the refinery project, the “energy hub” seems an empty shell.

There is talk of an Irving wind power export project, which is like assembling Lego blocks made elsewhere – few construction jobs, and few or no permanent jobs. A related concern: do we want to use the best wind sites for export power rather than local use? A proposed natural gas plant is comparable, giving some short-term construction work but few permanent jobs.

The fallout from the refinery decision means expected tax revenue will not materialize.

Based on reduced revenue expectations, one would hope that the expenditures of government (both capital and ordinary) would be reviewed. As an example, New Brunswick’s latest budget proposes spending $160 million on new technical schools and programs, which were partially intended for training of refinery construction trades.

Demographic forecasts of a 20-per-cent reduction in student population in coming years and with more distance education, would see significant spare capacity in existing“bricks and mortar”institutions.

Does this expenditure still make sense? Perhaps lowering tuition would keep the institutions filled in coming years.

Having misunderstood the threat of an impending energy crisis, it’s time for Premier Graham to return to the basics of government.“Government intelligence” could produce an energy policy that meets our needs.

Should new homes have to meet an energy code? Is Efficiency NB making a serious impact on heating costs for existing homeowners? I recently talked to a hard-working woman in the process of being cut off from electricity. Due to misfortune and remarkably high bills, she couldn’t catch up from the high winter costs. This is real life for the less fortunate among us.

What is the role of wood in New Brunswick for heating homes? Why can’t NB Power reduce its winter peak? Should NB Power be consolidated and work on improving operational efficiency and reducing costs? Should new appliances sold have to meet energy efficiency standards? Since we are facing an impending crisis of very high gasoline prices and energy shortages in the near future, should we be setting a floor price for gas to encourage the purchase of high-efficiency vehicles? Would incentives help us? What about mandatory standards for vehicle mileage or speed limits?

These are but a few of the questions that I would ask the premier. Will he change course? What will be his legacy? His three years of power have shown little progress in setting a new course on energy. Considerable time was occupied in the energy department marketing the “energy hub” idea.  Being a strategy for job generation, it should have been handled by Business New Brunswick.

Who are the losers with three years of an energy policy abyss? The people of New Brunswick, who won’t be prepared for hard times.

But it could be worse, I suppose. Mexico is again facing large decreases in government revenue, as their oil exports declined 14 per cent during the first half of 2009. That decrease of 200,000 barrels a day amounts to $4 billion less revenue for Pemex, the state oil company.

Why solar thermal energy still shines

Is the sun a renewable resource?  Well, technically it isn’t, as it will burn out in about five billion years.  But for all practical purposes, 5 billion years is the same as a renewal source.  In contrast, world oil production started in 1859 and will start declining sometime in the next five years.  So, what’s the most reliable natural resource to provide our hot water from for our homes? The sun, oil wells, or electricity?

Remember that electricity in New Brunswick is roughly 60 per cent from fossil fuels.

If you chose the sun, you may be on to something sustainable.  People thinking about solar energy systems may confuse solar thermal with solar photovoltaic (that provides the electricity for your calculator).  One of the types of solar thermal uses a liquid, propylene glycol, to avoid freezing concerns while effectively transferring heat from the sun to your hot water.

A typical collector consist of a number of black-painted aluminum fins or plates bonded to copper tubing in a box that’s covered by a tempered glass cover. The glycol is pumped through the collector on a roof or wall, absorbs heat and transfers it, through an exchanger, to a storage tank for use when required. The interesting part is that there’s no charge for the energy provided by the sun, so it’s inflation-proof.

At the surburban home of Gordie Smallwood of Moncton, you can find a solar thermal system he’s built with reclaimed collectors. The collector area on his roof is 160 square feet (roughly 8 x 20 feet). That’s bigger than your typical system. His hot water is totally solar heated, with the excess going to partially heat the house.

As Gordie explains, “this is not rocket science. The technology has been around for a long time and there are lots of good manufacturers out there.” The day I saw his unit, the collector output was at 140 degrees Fahrenheit.

I also spoke with Gordon MacDonald of Harvest Energy Solutions about solar thermal. He suggested that people take all of the energy conservation steps that they can as a first step to energy independence, being the biggest bang for your dollar. Each site has challenges as the building may not have a good southern orientation, the angle of the roof may be less than optimum and shading may exist. The roof structure should be in good physical shape to support the weight of the collectors, and space is required for the storage tank, among other considerations.

The cost of a system will vary depending on your requirements – how much heat can you effectively use? For example, the heating demand of a home varies greatly in a winter and is not required at all in the summer. However, hot water heating requirements are relatively stable throughout the year and therefore more economic to design for.

Apparently, commercial and industrial users of large quantities of water are the big winners with solar thermal, as the economies of scale kick in and many companies use hot water only during the day, minimizing storage requirements. Paybacks are quick.

So, if there is an economic advantage, why aren’t more residences and businesses using solar thermal? Very simply, initial installation costs are in the thousands of dollars, and you can rent an electric water heater from N.B Power for less than $10 a month. Which would most people logically choose? Lower first cost wins almost every time. In addition, there are few installed systems in New Brunswick to serve as comfort for those of us who only believe in what we see. Lastly, with a small number of retailers and trained installers, you may understand why solar hasn’t heated up our interest.

The federal government has several programs that reduce payback time and stimulate the industry. The EcoEnergy Retrofit program provides $1,250. The temporary Home Reno Tax Credit has a maximum benefit of $1,350. And there may be others. Be careful to ensure that you qualify and that you follow all the right steps.

In Kingston, Ont., the utility will provide a two-panel unit for $49 a month. Larger sizes are slightly higher. You can also purchase the system for $5,000, not including installation. Other utilities in Canada are getting involved as well, including Manitoba Hydro, Enmax and FortisBC.

What could New Brunswick do to encourage solar water heating? NB Power provides hot water tanks that use electricity at a monthly rental rate. That electricity mostly comes from non-renewable sources (oil, coal, and natural gas). The province could require NB Power to lease solar thermal hot water systems, as well. At 10,000 new systems per year, that’s 20,000 collectors or more. These could be produced locally if we chose to do so.

If you include all of the installation work, you have the start of a new green industry in New Brunswick.

Canada needs lower interest rates

If you look around you can always find someone worse off, and by comparison, you’ll feel better about your own situation. The New York Times recently borrowed $250 million dollars from the Mexican billionaire Carlos Slim. The interest rate: a whopping 14 per cent. Times are tough for the newspaper business, with ad revenue down considerably in the recession and challenges from the Internet. Carlos Slim is betting that the better brands will survive.

Fortunately, the average cost of borrowing for the province of New Brunswick is lower than that, presently 8.3 per cent, down about half a per cent from several years ago, due to the trend of lower interest rates and the rise of the Canadian dollar. Former Premier Bernard Lord isn’t happy with the rising provincial debt strategy taken by Premier Shawn Graham’s government, according to a recent news report. A combination of higher capital spending and lower personal taxes will be financed by debt. The auditor-general indicated in March that the province’s debt could surpass $10 billion by the end of 2013. That’s approximately 52 per cent higher than the legacy of the previous administration.

If the interest rate on the provincial debt remains the same, the annual payment for that $10 billion debt could be $830 million annually, or $253 million more than 2008. To be fair, a higher debt is not necessarily a bad thing, if the money borrowed results in future increased revenue to pay the higher debt interest. For example, if the spending increased economic prosperity, or if our population would increase to provide higher tax revenues – not likely based on our recent history.

There is an historical precedent for this strategy that comes to mind. What country consistently deficit-financed budgets, lowered taxes over the past 30 years and now finds itself in a financial minefield? While Zimbabwe may have a terrible debt to GDP ratio at 240 per cent, the country I was talking about is the United States. It’s at 85 per cent and will hit 97 per cent in 2010.

Canada’s ratio is slightly less than 30 per cent but will rise in the next few years as we follow the Keynesian expenditure bandwagon suggested by the Obama administration.

So where is these story going? Well, the U.S. makes a link between oil prices and the economy. “Another spike in oil would have consequences in terms of world recovery…” explained Steven Chu, the U.S. energy secretary in Rome at a meeting of energy ministers.

Italian Economic Development Minister Claudio Scajola called for an alliance between the private sector and governments to spur investment. “When the crisis is over, the risk of insufficient energy supply exists, and as a result high and unstable prices.”

From these statements, it appears that some governments finally recognize a precarious situation in oil pricing and supply when they see one. There’s a book that just went on my must read list, “Why your world is about to become a lot smaller – Oil and the end of globalization.” Jeff Rubin, formerly CIBC’s chief economist, foresees future recessions caused by oil price spikes in triple digits.

We’ve seen that recessions lead to reduced government revenues. A logical thought progression would suggest that provincial governments could benefit from lower borrowing rates to help adjust to difficult times in coming years. How could this be done?

The mandate of the Bank of Canada could be enlarged to include purchase of provincial bonds as deemed advisable. Perhaps these funds could encourage an off-oil agenda by conservation and green power construction. At the moment our central bank provides assistance to chartered banks and administers national monetary policy. The short term funding to chartered banks can be as low as the bank rate, presently .25 per cent.

One intent of monetary policy is to limit inflation to around 2 per cent and definitely avoid deflation. Over the past few years, the growth in the money supply has varied between 7 per cent and 12 per cent and depending on which money supply indicator you use, it increases by a double digit and sometimes triple digit billions each year. A portion of this money could be used. The key question is, how the chartered banks would view this type of change?

Simply reflecting on a statement from Senator Dick Durbin of Illinois brings doubt: “we’re facing a banking crisis that many of the banks created..  are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

In Canada, Finance Minister Jim Flaherty’s proposed revision of credit card law doesn’t lay a glove on the chartered banks. There’s no cap on maximum interest rates.

Let’s see if I’ve got this right. The banks have access to billions of government capital at .25 per cent, your deposits for virtually nothing, and they loan it out to us at 19 per cent interest? That’s quite a spread to work with, Jim.

The banks may not own Jim Flaherty or Stephen Harper, but they certainly have a good hammerlock going and didn’t someone just cry uncle.

N.B. is still hooked on building highways

Frank McKenna began the trend of large capital expenditures with the Trans Canada Highway. He took us into the four-lane world, just like the big provinces and states. And it seemed like a good idea at the time. There were a number of deaths caused by collisions, and didn’t we deserve highways as good as Quebec and Ontario?

That’s what politics is all about – finding a leverage point with the masses and using it to lengthen your run in power. The projects were extremely expensive and one section was contracted to the private sector, with tolling as part of the annual payment. In 2000, Bernard Lord removed the tolls and arranged compensation for the road contractor. He continued down the path of road construction.

Our present premier, Shawn Graham, has proposed spending $1 billion to bring route 11 between Shediac and Miramichi to four lanes as well. But before betting the farm on highway construction, perhaps we should examine the implications of this adventure. The existing book value of our highways is now $4.2 billion and requires an annual interest payment of $394 million. The gas tax provides $199 million and motor vehicle registrations bring in approximately $100 million of annual revenue. That means that we are short of revenue to pay for highways by $95 million, if highway users are to pay for roads. As we use 1.5 billion litres of gas and diesel each year, the gas tax should be 6.3 cents a litre higher. It’s a strange twist of fate that Premier Graham removed 3.8 cents of gas tax after he was elected and now we are short of revenue.

Now supposing that the premier succeeds in persuading the feds to cost-share his billion-dollar baby of four lanes between Shediac and Miramichi, then the province will go into debt only $500 million more. That means $47 million extra in interest, which should translate to 3 cents more gas tax. So, it looks like we can expect a total of 9.3 cents per litre increase in gas tax – or perhaps we can just layoff 1,800 teachers and nurses, or increase the HST.

No matter how you slice it or dice it, there is no free ride.  Federal cost-sharing programs are always popular with politicians. The funding is mostly allotted among provinces on a per capita basis. There’s an economic term “opportunity cost” meaning that choosing one alternative negates another choices. If we use the $500 million federal dollars and $500 million of our own money for an expense like highways, then we get a short-term high with employment building the road in exchange for many years of interest to be paid. Cost – $47 million every year.

A simple alternative would be using the money to pay down debt. Benefit – $47 million reduction in government’s interest expense every year. Another distinct opportunity would be investing the money in energy efficiency in homes, or perhaps installing wind turbines to get us off oil. For example, a 1 MW turbine costs roughly $2 million dollars and produces roughly 2,200,000 kWh per year. At 8 cents / kWh, that’s $175,000 per year per turbine, or $87 million per year gross revenue. Benefit – with maintenance and interest costs subtracted, it’s a $35 million return every year, and increasing as power rates rise.

The worst is yet to come as world oil production peaks in the next few years, increasing fuel costs and hence lowering gas tax revenues here in New Brunswick. If we have $4.7 billion in highway debt, we will have a gigantic problem. The economist James Hamilton suggests that oil prices are to blame for the current recession: “The evidence to me is persuasive that, had there been no oil shock, we would have described the U.S. economy in fourth-quarter 2007 to third-quarter 2008 as growing slowly, but not in a recession.” If this is true, then peak oil will cause further recessions in the near future. Without significant restructuring of the province’s finances, we risk slipping into a deficit-financing spiral. How do we cut the health and education budgets?

Unfortunately for the residents of New Brunswick, Shawn Graham has become a weapon of mass financial destruction, busily building roads to lead us into poverty. If you’ve ever been to Cuba, you may have noticed the empty roads with few private cars. There’s little chance of an accident when you pass a horse driven carriage or bicycles ambling along major highways. A similar fate awaits us when peak oil affects the world’s economies, except we’ll have four lanes.

In fact, if Premier Graham were serious about self-sufficiency, we would spend the very least possible on roads and the most we could on getting off oil and improving energy efficiency.

Is the road upgrade plan another hint from Francis McGuire for Miramichi residents to commute to Moncton jobs?   Wow, that’s real energy efficiency.

Can our society avoid the next ‘Black Swan’

We’ve been getting a little refresher recently on what an economic contraction feels like.  Canadian figures show that our GDP increase dropped from 2.7% in 2007 to .5% in 2008.  The US economy contracted by 5.9% and Japan felt a staggering 12.7%.    We can expect further contraction in 2009 based on job losses and declining consumer confidence.

The optimist in me believes that the economy will recover as the toxic loans and derivative products are spun out.  In 2010, confidence could return and people may open their wallets for purchases.  But is there a perfect storm waiting for us after that?

Nassim Nicholas Taleb describes black swan events in his book entitled naturally “The Black Swan”.  World War I or the September 11 attack, are examples of how unexpected events can dramatically change human history.  Taleb suggests that a black swan is a complete surprise but afterwards is ‘explained’ by hindsight.  Wouldn’t it be nice to predict a perfect storm / black swan event and hopefully divert the course of history.

Fact 1 – The population of the world is increasing at slightly over 1% per year or roughly 80 million new inhabitants crowding onto the planet every year.  These people all want the good life with a car and other typical consumer items. Greater population with level or declining oil production means 1% more competition for that oil each year.

Fact 2 – The president of Total Oil, Christophe de Margerie recently predicted that world oil supply will peak at 89 million barrels per day, a rather astounding admission from an industry source.  A significant number of analysts think that production has either peaked or will in the next few years.  At the very least, everyone agrees that the era of cheap oil is over, with new offshore developments costing between $60 to $80 dollars a barrel.  Although $40 oil helps our present economic woes, the low price forces cuts in oil discovery and development budgets and also renewable energy projects.

Over the last few years production capacity has flattened out at roughly 86 million barrels / day so his views seems closer to reality than most oil company leaders are willing to publicly admit.  The International Energy Agency now predicts a production peak 10 years earlier in 2020.  Expect further adjustments to their prognostications are reality shakes their irrational exuberance.

So why does world oil production matter anyway?  Very simply, oil equals economic growth.  Without oil, there is no economy.  We can print all of the dollars we want, but they won’t power a car or a backhoe, or a ship to deliver goods around the world, unless oil is available and at a reasonable price. Declining oil means economic contraction with higher oil prices – the worst of all possible worlds.

A possible black swan starts after an economic recovery in 2010 when oil demand recovers and supply tightens.  By 2011 a rapid price spike similar to 2008 occurs.  The economy weakens again and the oil price slips briefly.   Supply, weakened by under-investment and natural depletion, no longer meets demand.  This cycle of spikes and economic slippage proves fatal for our economy.  Our growth economy changes to a continual decline economy.  Further stimulus programs are out of the question as no willing lenders such as China can be found.  Our 2009 stimulus funds were spent on frivolous issues like four lane highways.

As with any sad story, there is a happier version where the wise leader directs and encourages a transition to a sustainable localized resilient community.  Significant investment is made in localized food production and manufacture of goods.  Conservation of energy in homes and business is made a priority, and shifts off-oil to other renewable supply is promoted.

Is it already too late to save our society? The list of missed opportunities is endless.  The Lower Churchill hydro project would take six years.  Photovoltaic cells won’t be ready for prime time economically for several years.  The present rate of retrofitting our existing homes could take 50 years.  We don’t even insist on an energy code for new buildings.

England now requires that all homes being sold have an energy performance certificate and by 2016 all new homes must be zero carbon.

In the courtroom drama “A few good men”, the lawyer Tom Cruise interrogates the Colonel, played by Jack Nicholson shouting, “I want the truth.”  Jack responds “You can’t handle the truth.”

Are we ready to understand a truth that globalization without adequate oil is almost impossible? Unless we’re ready with sailing ships, nuclear powered or coal burning ships.  Approaching is the perfect storm of population growth, energy decline and economic fragility, but our leaders won’t tell us the truth or help us get ready.  Perpetual economic growth requires increased supply of oil.  That party is over.

Could we adapt prior to a “declining oil / permanently contracting economy” black swan and avoid the end of our modern society? Maybe. Try renewable energy and extreme conservation.  If spent wisely, stimulus funds or routine capital expenditures could begin that transition.  At the moment, only Barack Obama “gets it” to the extent of spending billions on rail transit.  For Canadian politicians like Stephen (energy superpower) Harper, it’s just business as usual. Energy leadership in New Brunswick is equally unimaginative and bleak.

Avoiding “The Long Emergency” in Food Supply

The Mayas of Mexico and Central America created amazing temples, pyramids and palaces, all constructed by hand.  We don’t know precisely why, but the Mayan civilization suffered a serious blow in the 8th and 9th centuries when drought, disease or overpopulation caused the abandonment of the lowland cities.  The Spanish invasion later finished off the remainder of the Mayan civilization.

They used several calendars but the Mesoamerican 5000-year long count calendar generates some controversy today.  A number of new age mystics have come to the belief that the world ends in 2012 since that calendar also ends.  Mayan scholars, of course, insist that the ancient Mayans meant nothing of the sort.

We can easily dismiss the idea of the world ending, but we might examine why Mayan society ran into trouble, or why the Roman Empire collapsed if we want to understand the serious threats to our present day society.  Reasons suggested for the downfall of Rome vary from overtaxation of agriculture to support a massive military necessary to retain the outer limits of empire, foreign invasions and political instability, a dissolute economy incapable of production, and many more.

Some of those conditions, such as a feeble Canadian agriculture sector, American overexpenditure on military to maintain the empire, exist today in our society.  I might add that we have an unprecedented energy decline coming very shortly on the horizon.

The “banksters” of Wall Street have really sabotaged the world’s financial system, not from intention, but from structural greed.  Who dislikes a bonus?  Previous to the credit crisis we had a diversion of corn supply to ethanol and rise of food prices to the world.  Products like rice also rose in price and countries hoarded supplies.  Now, we have the tightening of trade of agricultural goods between countries, although temporary.  Will the tightening of credit apply to world farmers and affect our available food in 2009?

Security of supply is a matter of extreme concern.  The food supply chain is dependent on cheap and available fuel, and there is probably only three days food in the local supermarkets.  Food travels thousands of kilometers across the world – melons from Mexico, bananas from Ecuador, lettuce from California, oranges from Florida, water from Italy or Fiji and on it goes.

The World Trade Organization (WTO) sees the narrow viewpoint of industrial agriculture, ignoring security of supply or the plight of the small farmer around the world.   Food is not a discretionary product like a video game but we treat our farmers as unimportant elements in an ordinary production process.  It is an article of faith that we will always be able to ship food around the world by air or truck.  Unfortunately, that is not going to be the case in a few years as fuel supplies trend down.

The higher price of food today has many in the Maritimes thinking of growing a garden in their yard.  As well, there are citizens across North America pushing for the right to have some farm animals in their urban garden.  This “chicken in the city” movement is gaining converts.  Locations such as Victoria BC, Los Angeles, Atlanta, Baltimore, New York City and many other locations permit chickens.

The rules typically permit 3 or 4 hens, but no roosters and may specify other conditions such as size of coop or distance from residences.  Here in the Maritimes, the city of Moncton bylaws allows rodents, rabbits, Vietnamese potbelly pigs, but only if they are pets.  Unfortunately, no chickens are welcome.

Recently, I had the pleasure to meet a young couple who would like to add chickens to their backyard urban farm.  They look for the eggs that chickens would provide, as they are vegetarians but not vegans.  Being very aware of their ecological footprint, they give me some hope that we can turn around our society.

Writer James Howard Kunstler gave a talk at Mount Allison University this week.  The author of “The Long Emergency” has a vision of our future that is bleak, but entirely possible.  He considers that energy independence and being car-dependent are mutually exclusive.

According to Mr Kunstler “We have to get off of petro-agriculture and grow our food locally, at a smaller scale, with more people working on it and fewer machines. This is an enormous project, which implies change in everything from property allocation to farming methods to new social relations. But if we don’t focus on it right away, a lot of people will end up starving, and rather soon.”

James suggests that we will know if the world wants to survive when it starts to rebuild the train system for freight and passengers.

On the other hand, Shawn Graham is suggesting hundreds of millions of dollars on four lane highways such as route 1.  You might think about the Atlantic Gateway as a boondoggle, socializing the costs to you and privatizing the profits to someone else.

There should be a law to stop the wasting of our money in such a cavalier manner.  Oh wait, there is one! – The voting act.