Where is Canada’s energy security?

Am I smarter than a fifth grader? I haven’t seen the TV show and do I want to know the answer? It could be embarrassing. I do know that it’s human nature to think that a person who agrees with our views is intelligent. If I’m wrong, then the person may be as dumb as I am. However, give me the benefit of the doubt on this one. A recent news item was brought to my attention about the lack of a Canadian energy policy which will impact on your energy security in the coming years.

On May 10th the House of Commons International trade committee imploded when Professor Gordon Laxer made a presentation suggesting that Canada’s energy security should be of primary concern instead of automatically exporting all new oil production to other countries. The subject under discussion by the committee was the Security and Prosperity Partnership (SPP), a White House initiative to harmonize and integrate the economies of North America to improve energy and security concerns. A major part of this initiative is the energy security concerns of the United States and increasing flows of gas and oil is part of the solution for American energy planners. The Professor believes that “North American energy security” really means “U.S energy security”.

The chairman of the committee, Leon Benoit, ruled the professor out of order and walked out trying to shut down the hearings. It becomes quickly evident that the supply of oil east of Sarnia is of little concern to the Harper government. With world oil production reaching its peak and a decline starting sometime in the next five years, can we expect to see a sequel of “Let the Easterners freeze in the dark?”

The good news is that the wealth of Canada will insure that we outbid other countries less fortunate and Eastern Canada will have enough oil for the short term until we adapt. The bad news is that it will be very expensive, possibly as high as $260 per barrel. Furnace oil will be at $3.20 per litre or close to $3000 for a tank of fuel to heat your home.

Canada imports 310 million barrels of oil annually into Eastern Canada. This means that $19 billion is flowing out of Eastern Canada consumers pockets to offshore oil producers to pay for oil (at $60/barrel).

In contrast, the money flowing into Western Canada from oil sales is $55 billion annually at current prices. Supposing that an initial price spike of 4 times existing levels would last for perhaps three months, then Eastern Canada would pay an extra $14 billion above and beyond the normal cost. Western Canada would receive an extra $40 billion from sales.

The already strained links in Canada between a wealthy Alberta and an impoverished eastern Canada hit by manufacturing shutdowns caused by a oil induced surging dollar will be broken as energy reaches absurd prices with no relation to cost of supply.

To avoid a total shutdown of the “other than oil economy”, Canada will have to move away from the market price of oil. However difficult this may seem from an ideological viewpoint to some, declining world oil production year after year leads to virtually continuous prices at levels that cannot be supported by the economic structure and individuals. The result of stratospheric prices is a global economic meltdown.

The Harper government is not entirely to blame for the present course of events. One can say that the Alberta government and the Harper administration have been tireless promoters of economic activity in the classical historical pattern where natural resources are used up at a rate that is not sustainable. To be fair, a previous government set the National Energy Board on its present “laissez faire” course? (More will follow on the NEB in a future column)

Over in Iraq, their government is being pressured to approve new oil laws that will allow production sharing agreements (PSA’s) with American and British oil companies. PSA’s are a method of oil field development that will turn over vast revenues and control of oil fields to the occupiers. Here in Canada, the government is promoting significant new exports of oil to feed the market south of the border. We must assume that Steven Harper and the Alberta government have not resisted the pressures from business and the US government.

The energy clauses in the NAFTA trade agreement that we have signed will force us to share any shortfalls in production. If we ship less to the United States then we have to accept proportionally less oil for Canada. Eastern Canada can’t expect any special oil deliveries from Western Canada in time of need.

How many conservative MP’s would it take to implement a new energy policy for Canada? Just one and his name is Steven Harper. The problem is that Steven Harper doesn’t buy into the decline of oil production. For an economist, supply and demand can solve anything.

Is Steven Harper smarter than a fifth grader? That’s not the right question. Is Steven Harper properly positioning Canada with an energy policy that puts us first? Will we end up paying dearly for this oversight?

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.

Take a different path, and cut costs

The output of the task force on self-sufficiency has provided a sensory overload due to the incredibly rapid completion of its work and the scope of its mandate. In three months, a total of three reports, a consultation schedule and final report have been completed. The chairmen as the authors of the report, provided a ready-made solution. A large number of ideas have been suggested that will dramatically impact this province with very little proof that the end result will be positive. Donald Savoie, an economic guru to the Provincial government indicated “we will never know until we try” and ” the alternative is not attractive”. I find this an underwhelming endorsement. Although the wordsmanship on this report is gorgeous, we are being asked to buy a pig in a poke.

My previous column suggested the mathematical folly of expecting large increases in employment after investing only a billion dollars. Government revenue comes from taxes, which are based on a small percentage of sales or income. Therefore, reducing government spending by a dollar is the equivalent to creating between $4 to $7 in new job income. It seems apparent that achieving the task force goal by reducing expenses of government is more effective than spending money to create jobs. If you were consistently spending 22% more than your budget or borrowing from a rich uncle, the banker would insist that you cut expenses. The following three ideas tackle the expense side of the question, which is virtually ignored in the report.

First – Get rid of the provincial debt right now! The Premier could eliminate a $365 million interest charge annually by the following means: the debt of New Brunswick is roughly $6.6 billion dollars. An agreement with the government of Canada to pay off the provincial debt immediately in return for an annual reduction of the equalization payment by $1 billion for the next seven years coming would remove interest payments on the debt. This would be a sign of confidence from the Premier that he believes his plan will work and it puts a fire to the feet of the government. We can only expect real change when we have a burning platform and we have to jump.

Secondly, Canada’s federal and provincial government structure was designed in an era when mail took weeks to deliver and telephones did not exist. Over time what we expect government to do has grown and although efficiency has improved, the basic structure prevents large savings by total re-engineering. Let’s use an example – your driver’s license. You can legally drive across Canada with it. Every province issues them with 10 different departments of motor vehicles, office buildings, computer systems, IT people, managers and so on. If we were building a country today would we do it the same way? Do we really care if it is issued by a particular province? Or perhaps the driving license becomes just an attribute associated with a national identity card. And we can find hundreds of examples and departments where large savings could be made. Canadians are saddled with inefficient government and it costs us dearly.

Imagine a virtual government where all back office functions (accounting, planning, research, management, etc) are centralized in various provinces and increase efficiency. The major banks implemented this type of consolidation to compete globally and they now make billions. The use of technology can permit almost equivalent service with many fewer people. The banks are not a perfect example as the central locations in this case would be in different provinces, not Toronto. Each province would retain the necessary frontline healthcare workers, teachers and others groups close to their citizens. The participation in this consolidation would be voluntary and the benefits would flow to the provinces, in the degree that they participate. There is a real possibility that New Brunswick could serve as the catalyst for total Canadian governmental re-engineering.

New Brunswick has an annual government payroll with benefits of $2.2 billion and over 31,000 jobs. If 20% of these jobs could be eliminated as a result of re-engineering, then perhaps $335 million ($440 million savings annually minus lost government tax revenue) could be eliminated. A portion of the retained back office jobs would be situated in New Brunswick. The massive retirement of baby boomers is imminent and this consolidation could provide a partial solution.

Thirdly, if the province were to review and reduce operating expenditures by only 5% ($300 M), then a total reduction of these three steps would be $1 billion which equals the cut in equalization and the province would have no debt as a bonus.

As a fourth step for growing the economy, NBIMC (the NB provincial pension fund manager) could increase its investments in new and growing New Brunswick companies, perhaps through the provinces economic development agencies, with a reasonable return to NBIMC. This is not a tax increase or a debt funded government spending initiative. It is simply the use of some pension fund money in New Brunswick instead of elsewhere in the world. With $8 billion dollars under its wing, a transfer of $1 billion should be feasible without jeopardy to the fund’s integrity. The alternative to this method would be to use the liquor store bond idea and increase debt. Need I say more?

New Brunswick has a high population density for Canada – 10.5 people per square km versus Canada’s average of 3 but a small total population base. Provinces with larger populations can support a provincial government structure better and a good natural resource base helps as well. The consolidation of provincial back office functions seems to be an excellent way to reduce the cost of government. These concepts would permit Shawn Graham and Steven Harper to cooperate on a grand scale, working above politics and providing them with the opportunity to define statesmanship.

Premier Graham should be commended for opening the debate on the governance and direction of this province. Unfortunately, a limiting question and abbreviated timetable has sabotaged the effort.

We would have been better served by asking – How can New Brunswick foster a culture of entrepreneurs and build a sustainable economy for the future that we are likely to face? – A future that will be vastly different from the past 25 years. And how can we repay the environmental deficit that we have created in a credible way?

The Task force asks us to believe that New Brunswick is the best and most dynamic place to work. “Branding” and dramatic change is necessary. Our confidence might be increased if the Premier thinks a little further outside the box and endorses a program that is designed to work. Let’s check the road map and put the car into drive before stepping on the gas? Otherwise we may end up in reverse on a dead end road.