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..

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5 comments

  1. kz1000guy · January 26, 2010

    Is there someway we can have this type of thinking taught in the school system. People need to know things that are just not taught anymore, and by the time you learn it the hard way, it’s too late for most. Keep up the good work.

  2. richard · January 28, 2010

    “reduced jobs at NB Power and related tax revenue”

    You are making quite a few assumptions here. GNB is making an implied assumption that keeping power rates low will help generate economic growth, thus increasing govt revenue. That would seem to be as likely and as valid as yours.

    You are correct that GNB is getting into difficult fiscal straits, but that is true regardless of this deal. Neither GNB nor an unrestructured NBP would be in a position to refit the thermal stations; the alternative would be power buys from HQ, that would still require hikes in power rates.

    “The idea of lowering the cost of energy is fundamentally flawed”

    Certainly that is true where all the costs are being deferred. However, if the movers and shakers behind the No campaign would like to stand up and say to NBers that their power rates are way to low and need to be increased, pls go right ahead.

    Still waiting for your review of the current status of NBP and what that would mean for power rates over the next decade. Perhaps you have a draft?

  3. roymacmullin · January 28, 2010

    Richard,
    What I found deliciously ironic is the government stating the reason for the sale of NB Power was the debt and when I added up the debt being incurred by Mr Graham, it was quite extensive.

    Let’s be frank here, this is really a permanent “wall street” type bailout of the entire large industrial sector (50 companies) whether they asked for it or not. For example, the oil refinery is certainly a profitable industry in the past few years. Let’s give them a large subsidy?
    Secondly, the Premier had one good idea here and that was buying some power from Quebec. The idea that there are only two options is a construct of the PR campaign and we shouldn’t be restricted in our thinking.

    Certainly, NB Power needs to be re-structured and I don’t defend the status quo either. However a give away of public assets at fire sale prices is not a constructive approach either.

  4. richard · January 28, 2010

    “The idea that there are only two options is a construct of the PR campaign and we shouldn’t be restricted in our thinking.”

    Ok, then, lets see the other options, along with the price tags. I have heard noises from your colleague Gagnon but no real numbers of price tags.

    Seems to me there are two questions:
    1) how bad is the situation at NB Power, and what does its current config mean for power rates and utility debt over the next 5-10 yrs?
    2) what are the viable alternatives to the status quo (with proce tags attached).

    I have yet to see a price-tagged alternative to the sale. Wrt to the costs associated with the status quo, the only analysis with numbers attached is the NERA report. Its been sneered at, but their NB Power status quo analysis has not been rebutted.

    ” stating the reason for the sale of NB Power was the debt and when I added up the debt being incurred by Mr Graham”

    Ahh, can we agree to either lump NB Power debt with GNB debt OR keep the two separate?

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