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.

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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.