Legislative Assembly of New Brunswick
Legislative Committees
Home | Franšais

THE CASE OF NEW BRUNSWICK

Generating and distributing electricity in New Brunswick did not begin through a crown corporation. In the early years of electricity, private interests were the first to produce it. They were small producers geared to local markets. Accordingly, new producers set up operations in Saint John, Sussex, Moncton, and Fredericton. Smaller communities also began to produce electricity. The town of Woodstock, for example, had two small electric light companies by the 1880s and the Campbellton town council decided to assume responsibility for the generation and distribution of electricity.
To be sure, communities everywhere in New Brunswick wanted electric energy, but the decision to develop a capacity was hardly a straightforward one. It depended on a number of factors. Much more often than not, however, electric power only became available because a factory required the energy and the firm either built a capacity on its own or had it built by another firm from which it would purchase the required power. The firm would, in turn, sell excess electric power to other firms or individuals.

By 1918, there were about twenty organizations producing power in New Brunswick. There were also no standards to cover rates or services. We are informed that in Saint John, for example, the price paid by a homeowner ranged from a low of 7.5 cents per kilowatt-hour to a high of 15 cents, depending upon location and the amount of power consumed. Lack of uniform price and standards were not the only problems. Various private firms installing the infrastructure to deliver electric power gave rise to an "unsightly maze of poles and wires," which, at least in Fredericton, "caused a public outcry."

By the end of the First World War, it became widely accepted that light and power were necessities of life and a key factor in economic development. It also became widely accepted that government had to play the lead role in the sector. In 1920, the provincial government successfully introduced legislation establishing the New Brunswick Electric Power Commission. The commission was quick off the mark, and within two years, had completed its first hydro electric dam. However, subsequent problems with the dam ignited a debate over which, the public or private sector, was better suited to develop future hydro sites. The debate did not settle the matter and, by the late 1920s, a subsidiary of the International Paper Company was given the right to develop the generating station at Grand Falls.

Four important factors would favour the public sector. First, the demand for electricity increased substantially year after year. Second, the need for maximum amounts of electricity at peak times required an integrated generating system. Third, the war years and the decision to locate important training facilities in the province pushed the government to act. Fourth, rural areas began to apply political pressure to obtain electricity; as recently as the 1940s, many rural areas in New Brunswick were still without electrical service because rural electrification was not economically viable, given low demand and the high cost of stringing electrical lines. If the objective was to promote a uniform level of services and price, then it was felt that only the government could lead the way. All of these forces, together with very limited capacity at the time to develop small-scale generating capacity, would lead decision-makers to conclude that large-scale development was necessary and that only the public sector was up to the task.

This was why New Brunswick turned to a crown corporation rather than to private firms to generate and distribute electricity in the province - it was done largely to ensure that electricity would be universally accessible and at a standard price applicable everywhere. This sums up NB Power's central public policy purpose.
The province's Electric Power Act gives the corporation the necessary authority to pursue its public policy purpose. Sections 32(3) and 32(4) impose important restrictions on the installation of electric power and on extending service of electricity by private interests. In return for maintaining a uniform price and for making sure that all communities in the province have full access to electricity, NB Power enjoys an exclusive privilege. Without the exclusive privilege, NB Power would not be able to maintain a universal system. For some, the reason is simple enough - private firms would concentrate in high density and lucrative markets to turn a profit and ignore rural, isolated areas. Hence the fundamental link between universal service and exclusive privilege. In short, exclusive privilege is the price paid for constructing and maintaining a non-discriminatory provincial electrical capacity.

Understanding NB Power's public policy purpose is key to understanding why it is a crown corporation. Again, the reason is simple enough. The more important question today is whether New Brunswick still needs a crown corporation to generate and distribute electric energy and to meet a public policy purpose.

The economic literature suggests that private firms, free of the restrictions associated with public ownership, are able to adjust more quickly to changing circumstances. We also know that transferring activities from the public to the private sector will reduce demands on the decision-making apparatus of government and often promote important gains in economic efficiency. The British experience with privatization between 1981 and 1985 reveals significant improvements in a firm's commercial activities and in its profitability when public enterprises were transferred to the private sector. The Economic Council of Canada suggests, however, that "to some extent ... these profit increases may be a result of eliminating the firms' public policy obligations."
Thus the two key questions outlined earlier remain. Does the corporation's public policy purpose still hold and do we need a crown corporation to generate and distribute electrical energy in New Brunswick? We know that all regions and all communities in the province now have the required infrastructure to receive electric power. In addition, some observers insist the province could ensure "universal service" and "uniform pricing" without resorting to a crown corporation to do any or all of the required work. The government, they argue, could declare an open market or, in effect, remove exclusive privilege and at the same time establish a regulatory agency with policy instruments to ensure that all New Brunswickers, wherever they live, would have access to electric energy at comparable prices.

Other observers remain of the view that only a crown corporation can properly promote the public interest. They insist that principles of "universal service" and "uniform pricing" are rooted in a public service culture and in the notion that, to the extent possible, everyone must be treated the same. Lest we need to be reminded, there is a world of difference between citizens and clients. Clients are sovereign. They can hold business accountable through their behaviour in a competitive market. In short, clients can turn to the market to defend their interests or walk away from an unsatisfactory firm and turn to one of its competitors. It makes solid business sense for firms to reserve special treatment for their best clients. Citizens, on the other hand, have common purposes. They also expect "common" treatment from government and, by ricochet, from crown corporations. One can imagine the uproar in the legislative assembly and in the media if - leaving aside affirmative action programs - a government program or the services of a crown corporation deliberately discriminated against some New Brunswickers or some communities or favoured certain citizens over others. Albert Hirschman spoke to the difference when he wrote that in the business world "the customer who, dissatisfied with the product of one firm, shifts to that of another, uses the market to defend his welfare and to improve his position." This is neat, tidy, impersonal, effective, and quiet. It also easily lends itself to quantifying success and failure. With government, however, the citizen uses "voice" to express dissatisfaction. Voice is, of course, much more messy than a quiet exit, since it can range "all the way from faint grumbling to violent protest; it implies articulation of one's critical opinions rather than a private secret vote in the anonymity of a supermarket; and finally, it is direct and straightforward rather than roundabout."

The difference goes to the heart of the most important public policy role of NB Power: "universal service" and "uniform pricing." Unleashing market forces, some would argue, could play havoc with these two principles and in time "citizens" would become business "clients" and be treated as such. Government regulations could attenuate the impact, but they insist only up to a point.

At the risk of oversimplication, the public sector or a crown corporation has developed a well-honed capacity to serve all New Brunswickers fairly and to construct a strong infrastructure able to perform well at all times. Put differently, it has built the right infrastructure, albeit at a very high cost. The private sector, meanwhile, has developed a well-honed capacity to make a profit, to respond quickly to marketing opportunities, and to satisfy customers.

Still, an increasing number of observers favour privatization and insist that private firms, through proper regulation, can just as easily pursue a public policy purpose as any crown corporation. There are now a number of studies that make the case that private or market supply is much more efficient than public or non-market supply. One such study looked at fifty cases in five countries, comparing the efficiency of both sectors, and reported that, in at least forty, the private sector was considerably more efficient. Non-market supply appeared less costly only in such cases as veterans' hospitals and garbage collection. In seven cases, the verdict was unclear, because either the results showed no difference or they were too ambiguous to draw any conclusions. In forty cases, however, private supply was more efficient. The study looked at a variety of areas, ranging from insurance sales and servicing, airlines, bus services, cleaning services, banks, slaughterhouses, fire protection, to weather forecasting. In many instances, the differences were substantial, with the private sector being 50 percent more efficient in the case of cleaning services, 200 percent in debt collection, and from 12 to 100 percent in the case of the airline industry.

Privatization is a powerful tool also for those wishing to ensure lasting change. One of the fears of many government reformers is that bureaucracy will, as in the past, simply wait out the political crowd in power and then see to it that things get back to normal. Privatization takes the decision-making from the hands of the bureaucrats and turns it over to market forces, which (the thinking goes) will, by their very nature, ensure more efficient decisions and allocation of resources. It also "attacks the integrity of public sector organizations" by exposing and removing the protective ideologies that government agencies build up "to insulate their over-supply behaviour from external scrutiny or criticism." If public bureaucracies cannot, by definition, operate efficiently, then the solution is to move the bureaucracies into the private sector.

History tells us that governments have not been very successful at reforming their agencies or enterprises from within. Efficiency drives or campaigns only bring at best limited success and this only during the actual period of pressure. One observer explains why. "When the novelty has died, the practices of public supply gradually reassert their effects. The history of the public sector in Britain is littered with the names of consultants who wrought beneficial but short-lived influence from the private sector."

The above suggests that, if the goal is truly to reform public enterprises and to make the reform stick, then policy makers ought to turn to privatization. Failing that, the status quo will eventually prevail. We now have a whole body of literature which argues that government officials intuitively favour the status quo and that many of them have developed a capacity to give the appearance of change while, in fact, moving very slowly or even standing still.

Public enterprises or crown corporations are a hybrid governance structure. Although a crown corporation certainly has the potential to be more businesslike than a government department, it is not a pure business structure nor can it ever be. A crown corporation is designed to serve a public purpose, not a private one. It is also accountable to political authority and not completely to market forces. No matter what type of management improvements one can introduce to the operations of a crown corporation, it remains that the corporation will always lack the discipline of an equity market and clear, quantifiable criteria for success. Lacking such clear criteria and the profit motive, crown corporations will invariably be accused of having inefficient management and lacking in productivity.

Some will make the case that NB Power still serves an important public purpose because it pursues such public policy objectives as "universality of services" and a "uniform price." But, at the risk of sounding repetitive, even these two principles no longer require the existence of a public enterprise. Again, both principles could now be pursued much more effectively by private firms and at less cost.

The exclusive privilege, some observers argue, may well be more useful in paying for costly decisions than in supporting universal service and a uniform price. The exclusive privilege serves to isolate the corporation from the rules and discipline of the marketplace. It also makes it impossible for anyone to assess its performance from a commercial or business perspective. Therein lies the rub - if it is not possible to evaluate the performance of NB Power from an economic perspective, then no one, be it cabinet, the legislative assembly, New Brunswickers, or the marketplace, can hold it properly accountable. We will also never know for certain what ought to be the true cost of electric services in New Brunswick.

The above explains why we cannot talk of electric power in terms of pure public interest. National defence, for example, is a public good because private firms can neither price it or deliver it according to price. Electric power, if left to private firms, could be priced and charged to its beneficiaries in a way military service can never be.
This, in turn, leads us to ask, once again, is NB Power the only way to achieve universal service at a uniform price? The answer is no. The breakup of the AT&T system in the United States and the deregulation of the airlines in both the United States and Canada did not end service to small towns and rural areas. Indeed, the deregulation of the airline industry in Canada has given rise to new, profitable regional airlines serving smaller cities and towns. With respect to telephone service in the United States, we are informed that "AT&T justified its monopoly primarily from universal availability of service at affordable rates. To justify the prohibition of competition, some people argued that competition would result in 'cream skimming,' 'service degradation' and 'service reductions, especially in remote areas'." We are now informed that "since the introduction of competition, however, none of these adverse consequences have surfaced."

In addition, NB Power should no longer speak of uniform price. Indeed, it currently provides a two- or multi-tier pricing system. If, after having privatized NB Power, we would discover that the practice of "cream skimming" is, in fact, taking place and that isolated rural communities are no longer being served adequately, then the Government of New Brunswick could easily introduce a direct subsidy to ensure service is available to all areas of the province. But even this may not be necessary given that, through regulations, the province could require private firms to deliver electricity to all communities in the province, at a comparable price.

NB Power has other public policy objectives. We know that the corporation has been directed, through an order-in-council, to utilize up to 300,000 tons of New Brunswick coal, which is burned at the Grand Lake and Belledune plants. This coal is more expensive than imported coal. This is not to suggest for a moment that creating jobs in Minto is an unimportant public policy objective. But, rather than have NB Power assume the cost, the Government of New Brunswick could provide a direct subsidy to the corporation to purchase Minto coal through the budget process. In that way, the public policy objective would be more transparent.

NB Power is also subject to the provisions of the Public Purchasing and Crown Corporations Acts, which result in added administration. In addition, the process for acquiring goods and services under the acts can impede NB Power to do business in a timely manner. Lastly, NB Power has, as a matter of public policy, pursued the objective of minimizing rate increases for in-province customers. The implication of this objective in terms of debt-to-equity ratio and cross subsidies is obvious.

But the Government of New Brunswick could also pursue the above public policy objectives even if it were to privatize fully NB Power. Again, the government can turn to its budget process to support any public policy objectives, including keeping power rates down.

That said, the status quo holds a number of advantages and we need to review them. But first we need to be clear about what constitutes the status quo. It is a crown corporation given an exclusive privilege to generate, transmit, distribute and market electrical power. Members of the board of directors are appointed by the provincial cabinet. The sale of electricity is regulated and the crown corporation enjoys monopoly status.



Legislative Assembly of New Brunswick
Email | Contacts |
Disclaimer