The sale of power assets and The anatomy of a debt

Just when I think I’ve heard it all. It’s hard to imagine a stranger scenario than the present storyline. NB Power was originally being sold to pay down its $4.75 billion debt, but now the sale will be for $3.2 billion. At the same time, Premier Shawn Graham has been running provincial budget deficits consistently and intends to do so until 2014 for a grand total of $3.8 billion. These figures can be found in the public accounts 2009 and the budget speech 2010 on the government’s website.

So, it’s pay down debt and then incur larger debt? What doesn’t make sense here? What most people may not understand is that replacing a funded debt with an unfunded debt is a small distinction that will cost them dearly.

Higher debt means higher taxes at some point. Paying for the new $3.8 billion debt will take about $300 million in additional revenue or service cuts by 2014. That could mean a tax increase of $400 for every resident of New Brunswick or, for a family of 2.2 persons, $880 per year.

Now, are the savings from foregone power rate increases significant enough to counteract the new provincial debt being incurred? Well, the full debt arranged by Premier Graham and the full savings implied by the sale won’t be in place until 2014, so let’s examine at that date. Energy savings for the typical household are 15.92 per cent in year five, or $473, but the additional tax burden for the average family of 2.2 people is $880. So, the net effect of government policy will be an increased tax burden of approximately $407 a year. Not so good an idea. The effect on apartment dwellers is worse, as their energy savings are minimal.

Perhaps you think that large industry, the big winner in the 2010 rate sweepstakes, might contribute towards these taxes. Based on historical precedents, we probably won’t see them at the front of the line to pay any portion.

A previous column mentioned another inconvenient fact – lost revenue streams that could reach as high as $200 million dollars per year would erase the value of this deal, such as NB Power’s “in lieu of taxes” disappearing, reduced jobs at NB Power and related tax revenue. Expressed as dollars per year, that’s another $266 per person ($585 per family).

Politics is the fine art of kicking a problem down the road to the next guy. It is also the art of misdirecting the audience. Lower energy rates here, and nobody notices the higher taxes there.

We have a bad habit of giving a leader two terms. The present occupant plans to get finances under control by 2014, when his second four-year term ends. Any new premier will inherit a fiscal mess to deal with either in 2010 or 2014.

A recent Telegraph-Journal commentary by Toby Couture made an important distinction between energy politics and the larger framework of energy policy. Lacking a rational energy policy, we might be tempted to embrace this deal, and there are indeed attractive elements. However, the numbers don’t support the framing of this deal as a “money saving” experience for residential and commercial customers.

What will likely happen is that the loss of revenue streams will negate the benefits, at least for residential customers. And quite co-incidentally, the premier’s lack of fiscal control will increase net costs to New Brunswickers for taxes and electric energy.

The idea of lowering the cost of energy is fundamentally flawed. Conservation and innovation happens with higher energy prices, and waste occurs with low prices. By choosing this approach, we ignore reducing energy usage for homes, make renewable energy policy next to impossible, and we risk losing control of our energy costs in the long term.

There’s a real alternative out there, and perhaps we can save the best aspect of Shawn’s initiative. More to come..

No information available from Government on sale of NB Power

Weren’t we promised a public debate about the merits of the NB Power sale? So far, the debate is rather stale with questions being spun, or not answered on the government web site.

The Province hired a public relations team called Hill and Knowlton to sell this deal. Are they doing a good job with so many people upset and without answers? Is that the intent?

So far, this deal presentation reminds me of the way that parents, at some point in time, take the easy way out when dealing with their children. You give the child two choices, one terrible and the other becomes the one that you want the child to choose. Then, you pressure the child to decide quickly. That makes the con work better.

Are we seeing that tactic is this case? NB Power – bad, big debt, unmanageable, uncertain future with never – ending power rate increases. On the other hand, sell to HQ – good, lower debt, managed by others, great stable power rates. Oh, and by the way, the deal is closing in March. Why do I feel like I’m being spun like a top?
Here’s three questions I sent to the Energy department over three weeks ago. While I wait, maybe one of my readers can answer me.
Question 1 – Will Saint John Energy be receiving a freeze in the wholesale rate they pay to NB Power? Or some discount to allow them to provide the proposed discounts to their industrial customers. Moosehead, served from the SJE system is not on the list of 41 companies released by the government. Are they going to receive the significant industrial rate discount like their competitor Molson from Moncton?
The MOU qualifies “direct or indirect industrial customers in the Province of New Brunswick who would qualify for the HQ “L” or “M” rates if in the Province of Québec” and class M is for customers above 100 kW demand. One would think there could be hundreds in this province. Are they not included in this deal? Perhaps some clarification is in order.

Question 2 – How does the Quebec regulatory system that we are being asked to install in NB differ from the EUB now in place in New Brunswick. More on this later.

Question 3 – I requested a copy of the background spreadsheet for the NERA report so that I could review some of the assumptions that compose the $5.6 billion rate savings. Later, I read in a news report that it doesn’t exist. We’re talking about big money here. We really should have something other than fifteen pages of words saying it’s a good idea.

One of the bigger questions that we haven’t asked ourselves: What are the economic impacts of having a takeover of a local industry?(NB Power) We are reassured that nothing will change, yet experience tells us differently.

The eventually reductions in personnel of perhaps 1000 employees at NB Power are left unspoken. That’s a normal occurrence with a takeover. Synergies will be found between the nuclear plants at Lepreau and Gentilly, Quebec. Back-office items like accounting, engineering, customer service, accounting may be relocated and about $100 million annually in payroll savings will impact on the New Brunswick economy. With income taxes and spinoffs it could be twice that.
Another stream of revenue that will slowly disappear are some contracts to local companies to provide services to NB Power. Some of these may to migrate to Quebec in-house expertise or contractors from elsewhere. It’s a natural process. Call this figure conservatively $25 million.

A third reduction is “income taxes” of $50 million charged annually to NB Power and the $25 million loan guarantee fee that will no longer be obtained.
Taken together, we could see a reduction of economic activity and revenue in the province of $200 million annually. Over a period of 20 years, the present value of that series of losses is $2.3 billion (at 6%).

Then we could add in a few one-time items like the decommissioning of thermal plants at $125 million (just a guess) and future discounts on oil from Venezuela settlement, valued at $147 million. This gives us a negative impact of roughly $2.5 billion or more.
Since a lot of the $5.6 billion in rate savings is back-end loaded, the proposed benefits of the deal would be erased in the first twenty years by negative economic impacts related to the takeover process. How will we really know if we don’t have a full and open discussion?

The process of answering questions is flawed and prevents serious debate on the bigger issues. There is no forum for serious discussion and eventually public consent to a future path. Without that public consent, Quebec undertakes serious risks related to contract legitimacy that were not present in their Newfoundland deal on Churchill Falls.

8 hours after this article was published in the Telegraph Journal, I received what I like to call a “non-response” or a “response with little useful information” from a government spokesperson.

1- The background spreadsheet to which you refer is an internal and proprietary financial model which is not available for general consumption or review. However, the report highlighting the conclusions of the spreadsheet is available online. ( ROY’S COMMENT – I GUESS THIS MEANS “TRUST US, WE GOT THE MATH AND ALL OF THE ASSUMPTIONS RIGHT”

2- The possible impact of the proposed agreement as it relates to the municipalities in New Brunswick continues to be under negotiations between the Provinces of Quebec and New Brunswick. ROY’S COMMENT – HERE WE ARE ALMOST A YEAR SINCE THE BEGINNING OF NEGOTIATIONS AND WE DON’T HAVE THE BASIC WHOLESALE RATE FIGURED OUT FOR SAINT JOHN ENERGY?

3- It is important to note that Quebec’s regulatory system is more stringent than ours. For example, Hydro-Quebec must go before its regulatory board if seeking a rate increases, regardless of the amount. In New Brunswick, rates can be increased by three per cent without the approval of the Energy and Utilities Board. ROY’S COMMENTS – MINOR CHANGE

As well, Hydro-Quebec must follow the regulations of the U.S. Federal Energy Regulatory Commission to continue to export energy into the United States. Those regulations require that New Brunswick operate an open transmission system, just as it does now, that allows all jurisdictions to bid for any excess transmission capacity. ROY’S COMMENTS – NO CHANGE FROM OUR PRESENT SYSTEM

For New Brunswick, a heritage pool is a new concept. The regulatory framework in Quebec is designed around a heritage pool which would become an important part of New Brunswick’s electricity system as well therefore our regulatory framework would have to reflect that.