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.

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One comment

  1. Don · December 1, 2009

    It is unfortunate that our government fails to see the real ramifications for what they are about to sell away. The long-term impacts will be significant. I know I will remember this government for a long, long, long time, and it won’t be for greatness.

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