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CHANGE ISSUES

I
f the Select Committee and the government decide that change should be made to our electricity system, a number of issues will arise. Of all the issues brought to our attention through this process, the one which gives the greatest pause for reflection is the complexity of the electricity system. In many respects it acts like a fine Swiss watch. If one small piece is out of balance, it does not work. Customers have invested in and hooked up equipment to the system which can be destroyed in fractions of a second by improperly regulated electricity. It follows that, when one integrated company is responsible for the operation of the whole system, there is a greater chance that all the pieces will work in harmony, minimizing system problems.

The direction most jurisdictions have taken in changing their electricity systems is to separate the component parts of the system by function and, further, to have those functions performed by different companies. In some circumstances, these changes have resulted in a serious decline in the operation of the system. We were told of problems in Auckland, New Zealand, where, after privatization, that city experienced a month-long period of failures and brown-outs, forcing customers to rely on their own diesel generators. Electricity is too important a service not to get it right. No modern society can operate without a stable, reliable electricity system.

The decision made by jurisdictions where change has taken place is that the benefits of privatizing and introducing competition into the electricity system outweigh the "teething' problems associated with that change. For the jurisdictions which have gone first in this process, the issues have been greatest. For the jurisdictions which go last, the delay in benefits puts an unnecessary risk on their global competitiveness. In New Brunswick, we have the ability to strike a balance between the two extremes. If change is made, it should be made with the benefit of understanding the issues which have arisen for those who have gone before us. The purpose of this section is to raise some of those issues.


1. Rates
While participants in our process differed on the exact calculations, everyone, including NB Power, agreed that NB Power is selling electricity for less than it costs to produce and deliver. In the short term, therefore, it appears unlikely rates will be reduced, either with NB Power or under a new system. Short-term rate issues may also be exacerbated by stranded costs and, for residential customers, by the reduction of cross-subsidization from other classes.

In the medium term, the expectation is that the efficiencies associated with privatization and the introduction of competition - if the government pursues this approach - should make our rates more competitive. During the transition period, it is important that any rate changes be managed over time. Rate shock must be avoided.

One participant in our process made a very important point. Customers on the economic margin are not in a position to absorb large rate increases. These customers, least able to afford rate increases, are often relatively greater users of electricity. In their circumstances, they are often unable to afford insulation upgrades or other capital improvements to reduce electricity consumption. An argument was made for "A" and "B" residential rates to accommodate the constraints of this customer class. While we do not believe that we should break down residential customer classes, we do believe that this constitutes an important public policy concern. If the government believes it to be an appropriate public policy, the government, not NB Power, should put in place measures to assist low income New Brunswickers to deal with any power rate increase.

2. Stranded Costs
New Brunswickers (citizens, businesses, and all users of electricity) have rightly demanded a world class electricity system. That objective has been achieved. And it has not been easy to accomplish. Forecasting future demand is a mixture of science and intelligent guessing. The timetable which has been historically necessary to build a new generation facility (involving a review of alternatives, environmental review, financing and construction) has been very long. In addition, you cannot add to the system one megawatt at a time. For example, when the decision was made to build the generating facility at Belledune, that 450 megawatts plant was in the size range the rest of the world was building. In other words, power producers have always tended to overbuild in large steps, and then wait for demand to catch up. In New Brunswick, delayed decisions could have resulted in an inability to provide the power which the province's residents have demanded and have a right to expect. We must be careful not to judge decisions of the past with the benefit of present knowledge and technology. All New Brunswickers have benefited from, and are responsible for, NB Power.

Stranded costs are usually associated with generating facilities. By way of analogy, let us assume you purchased a car to last for ten years, financed it with a ten-year loan, and then, at the end of five years, decided to change to a new, more fuel-efficient car. What is the old car worth now that new, higher fuel-efficiency cars are available? The difference between the current fair market value of the lower-efficiency car and the unpaid five-year balance of the loan is a "stranded cost." Who pays it? In a monopoly situation, NB Power would keep running the car, making whatever improvements are necessary, until the loan is paid off. Since no competitor could offer a new car because of the monopoly, stranded costs would not arise.

Stranded costs are therefore often a by-product of opening an electricity system to competition. In our case, NB Power, as the monopoly provider, made investment decisions based on a continued monopoly which would allow them to amortize their investments over their useful life, without fear of a competitor introducing newer and more economic generation. In a competitive environment, private operators, particularly with the introduction of natural gas, can build new, more efficient generation facilities. A private marketer, given the choice of purchasing cheaper electricity from the new facility, or from the more expensive older facility, will make the obvious choice. Through this change, the older facility becomes "stranded." In essence, the difference between the book value of the facility and the fair value of the facility in an open market today is the amount of the stranded cost.

Conversely, certain of NB Power's assets, notably the hydro electricity generating facilities, may well be worth considerably more than their book value in an open market. In addition, if the wires business is privatized, it may well be valued above its book value. It is the difference between the overvalues and the undervalues of all of NB Power's privatized assets which will determine whether there are any stranded costs associated with introducing a competitive market. If the assets are sold, the marketplace will put an actual value on the stranded costs. The discussion below, on process and timing, also has bearing on the potential for mitigation of stranded costs.

Co-generation, in which a company generates its own electricity, can also lead to stranded costs. As noted earlier, if a current customer of NB Power wants to co-generate electricity rather than purchase from NB Power, construction of the co-generation facility will result in excess capacity in NB Power, which, if that power cannot be sold profitably, will be a stranded cost to NB Power. Given that the facility was effectively constructed by NB Power to provide electricity to that customer and others, we need to ensure a mechanism is put in place which allows the benefit of co-generation as a competitive element in the new system but also charges that customer who exits the system with its pro rata share of the stranded costs. This "exit fee" would be based on the charges the customer would have paid, had it continued to buy power in the same quantity through the wires system. Concern was expressed to us that no customer should be able to gain a financial advantage by leaving the electricity system before all stranded costs are paid for.

Recovery mechanisms for stranded costs vary. If there are stranded costs, they could be borne through an additional charge in the wires tariff. It was noted, however, that a wires levy tends to distort energy choice by making electricity relatively more expensive compared with other energy sources, during the period over which the costs are recovered. In addition, as a user fee, this form of recovery tends to be regressive - charging all customers the same amount per kilowatt-hour regardless of their ability to pay. Alternatively, the government could elect to take direct responsibility for any stranded costs and finance their recovery through general revenues (i.e., taxes). Like the taxation system, this form of recovery would be progressive - putting marginally more cost on higher income taxpayers.

All participants in our process acknowledged their responsibility for stranded costs, if they arise. However, some participants did make arguments relating to how to recover those costs, and indeed as to whether all costs were properly recoverable. It is our view that all stranded costs should be borne by all users of the system prior to the change, or by all taxpayers, depending upon the recovery method used.
Users who are able to finance themselves may opt for either a single payment for their share, or at least a short recovery period to get the problem over with sooner rather than later. Users who are more cash-constrained would prefer a long recovery period to minimize the impact. Even if a long-term recovery approach is taken - say ten years - a mechanism could be designed for those users who would like to pay earlier, using a formula to calculate the equivalent present value amount.

In looking to precedents in other jurisdictions, we were told that, despite years of study, Ontario has yet to identify the appropriate route to recover stranded costs. In New Brunswick, further detailed study is needed to estimate the potential amount of any stranded costs and then to identify the most equitable way of recovering those costs.

3. Cross-subsidization of Residential Rates
Cross-subsidization occurs when one customer pays more than cost for electricity and another pays less than cost. Cross-subsidization exists within the residential class (i.e., among customers of the residential class) and to the residential class from all other classes. The latter form of cross- subsidization was identified in the government discussion paper, Electricity in New Brunswick - Beyond 2000. The paper reveals that residential rates amount to 0.86 (i.e., revenue/cost ratio) compared to 1.30 for general service. (Residential customers, for example, pay $.86 for a dollar's worth of electricity, while general service customers pay $1.30 for the same amount). Cross-subsidization within the residential class was not quantified.

Cross-subsidization within the residential class has been used to create "postage stamp" rates. Like postage stamps for the delivery of letters across town or across the country, rates for the delivery of electricity to residential customers have been made the same. That is, the wires charge for the delivery of one kilowatt-hour of electricity is the same, regardless of where in the province a customer is located. Through regulation of the wires business, the government can still require postage stamp rates for residential customers. It was clear in our discussions with stakeholders (the view was unanimous) that postage stamp rates for residential customers was the right thing to do. This is an example of how government can still implement public policy, through a regulator, in an open and competitive market.

Cross-subsidization to the residential class is more difficult to maintain in open competitive market, as the price of electricity will not be regulated. Much of this kind of cross-subsidization is based on differential costs in generation. Residential customers tend to have high peaks in their consumption of electricity and generation facilities were built to accommodate that demand. Because they do not operate all the time, these peak generation facilities are expensive. If they are for the benefit of residential customers, then their costs are properly allocated to those customers. But at present, much of the cross-subsidization to the residential class occurs because the peak generation costs are shared by industrial and general service customers to a greater extent than their usage justifies. In a competitive market, the charge for electricity (as opposed to the delivery charge for the wires) will be set by the market. The Public Utilities Board has already set an objective for NB Power to reduce the level of cross-subsidization to residential customers so that revenue/cost ratios for all classes are in the range of .95 to 1.05. We heard no objections to this principle. Many participants did, however, suggest phasing in the reduction of cross-subsidy. Further study is necessary to design mechanisms to do so and avoid rate shock.

4. Environmental Issues
Virtually everybody who made a presentation to the task force spoke to the importance of the environment both in general terms and as it relates to energy. Some insisted that environment concerns should permeate all discussions regarding the future of electricity in New Brunswick. More specifically, one participant argued that New Brunswick should consider articulating a code of environmental principles to be respected vis-à-vis energy as New Brunswick moves toward 2000 and beyond. A number of participants also insisted that New Brunswick not build another nuclear plant, at least until the problems associated with decommissioning and disposition of spent fuel rods are solved. Still others argued that New Brunswickers should be given the opportunity to purchase green power in the future.

We asked NB Power if it had defined green power and if it had any plans to promote its development. It reported that it has made no attempt to define green power, nor does it plan to construct green power sources within its system. NB Power, however, reported that California has defined green power in this fashion: "Only energy provided from wind, solar, geothermal, biomass, landfall gas and small (less than 30 megawatts) hydro power plants constitute green power." Meanwhile, Australia defines it as "photovoltaics, solar thermal, wind, biomass, geothermal, wave tidal and hydro from existing dams."

NB Power does insist that it has introduced important environmental protection measures in recent years. It is worth quoting at some length from its presentation on this point. It reports that it has installed new equipment, improved monitoring, training and awareness and environmental management system benchmarking. It adds: "Equipment installation included items at the newer facilities such as flue gas desulphurization systems, precipitators, waste water treatment systems etc. at Belledune and Dalhousie; and water treatment and waste water treatment facilities, air quality network etc. at Millbank and Sainte-Rose. At the older facilities, improvements include items such as coal pile runoff and air quality monitoring upgrades at Grand Lake; continuous monitoring system installation and waste water treatment system improvements at Courtenay Bay; ash disposal upgrade and waste water treatment system improvements at Coleson Cove; and debris removal and fishway improvements at the Hydro facilities."

A good number of those who made a presentation before the task force stressed the importance of "demand side management" (DSM) and argued that the approach should be promoted with more dedication. DSM includes plans to reduce overall electricity consumption and to shift time use of electricity to better utilize existing generation facilities and to avoid building new ones. David Folster writes that big industry will look after demand side management quite on its own "in the interest of saving money, but the question remains: who will promote DSM and conservation to small business and residential customers? Probably not wise to entrust it to the generators or to the marketers. Who then? Again, the Department of Natural Resources and Energy looms as a possibility, or the Department of the Environment. Perhaps it could be done by subcontracting with companies to provide the service, or even with non-profit groups.

It could be paid for as a special levy on the wires charge. See Ontario, Vermont, California. California calls it a Public Purpose Programs Charge, and it also includes low-income assistance. In New Brunswick, the Environmental Trust Fund is another potential source of funding."

5. Taxes
Because NB Power is owned by the Government of New Brunswick, it does not pay any income taxes on profits. Currently, NB Power is not making profits, in part because it is subject to public policy objectives, which are to maintain power rates at as low a level as possible. If private operators purchase and operate pieces or the functions of NB Power and, as would be normal in the private sector, operate at a profit, taxes will be paid. The provincial portion of those taxes will remain in the province and be used on behalf of the province. However, the federal portion of those taxes will, for the first time in connection with NB Power, be sent outside of the province, with only a portion being remitted back to the province. This could result in a transfer of wealth out of New Brunswick. Careful consideration must be given to this eventuality. Even if a public entity is used (for the wires business, for example,) we would argue that tax equivalents be levied on that entity to ensure comparability with private sector financial targets. The tax equivalents would be payable to the provincial government.

6. Natural Gas
Competitively priced electricity can result from a restructuring within the electricity industry. It can also result from the introduction of a new and competitive energy source, such as natural gas. As one participant said in its submission: "Experience in a wide range of jurisdictions and circumstances suggests that competition between energy commodities and between suppliers of particular commodities is the most effective force available to minimize energy costs and protect customers so far invented."

Like co-generation, the ability of customers to make choices concerning the source of their energy will put pressure on the incumbent suppliers of energy to the benefit of all users. The government's discussion paper makes the challenge clear: "Although it is believed that natural gas will initially challenge fuel oil in these markets, it will go head to head with electricity shortly thereafter."

While it is beyond the mandate of our report, we believe creation of a broad-based natural gas distribution system is important if the government wants to create a competitive energy market through the introduction of natural gas. Another participant indicated to us that, without the support of a distribution levy on all users of gas in the province, creation of a natural gas distribution system to serve residential as well as industrial customers would not be economic. Given the importance of the introduction of natural gas to overall price competition, the government may wish to use a public consultation process to consider the distribution of this imminent new energy source for New Brunswick.

7. Heritage Assets
Even if a decision is made to privatize certain of NB Power's assets, some New Brunswickers may consider particular assets to be placed in a special category so that they would not be privatized. For example, in Ontario, the government's white paper on electricity restructuring takes the Niagara Falls generating facility out of the privatization agenda. Consideration should be given as to whether any of NB Power's assets fall into such a category.

8. Process and Timing
Many factors are conspiring to impact on the options which are the subject of this report. In urging a "measured and responsible" approach to proposed fundamental changes to their electricity industry, the staff of the Virginia State Corporation Commission warned of the "current momentum for change," which they felt was prevalent in the U.S. marketplace. Their caution brings to mind another similar adage: "I don't know if we are on the right road, but we're making good time."

Through our process, we have been educated in the great number of "roads" which the restructuring of our electricity can take. While many people refer to the change in the electricity industry of Nova Scotia, on a closer review it is apparent that their restructuring resulted in change of ownership of the monopoly electricity system (which may prove beneficial for reasons cited earlier regarding advantages offered by the private sector), but it did not open the markets to competition. "Good time" is not the objective. The "right road" is. Changes in the electricity industry could have an enormous effect on our province. The wrong direction could be a tremendous setback, but the right direction will lead to competitive advantage.

Within the time and resources afforded this task force, we believe we have narrowed the range of options which are appropriate for New Brunswick. We have not, however, been able to clarify important details to implement those options. When the Select Committee has, in conjunction with its hearings, identified the option that appears best for New Brunswick, a tremendous amount of work will still have to be done to ensure that details are worked out before implementation. As noted earlier, many jurisdictions have embarked on change, and with the benefit of hindsight, would vary the route they took. When New Brunswick chooses its route, careful review should be done to ensure that we identify areas requiring further work and that we learn from the mistakes of others. We do not need to be first, nor do we, at this time, risk being last. Care, caution and the appropriate use of professional services are necessary to make the fundamental changes being discussed, without creating unforeseen problems.

Problems could occur if an attempt is made to privatize NB Power's assets without first creating the rules for the new electricity environment in which those assets will be used; at the very least, uncertainty would reduce the price achieved for those assets. Our obligation is to ensure that, consistent with creating a system which will result in competitively priced electricity, we mitigate any potential stranded costs. We were strongly cautioned that failure to create a clear future environment will diminish the potential value of privatized assets.

As a counter to the message to take the time necessary to get it right, we were also advised that the restructuring taking place in the U. S. marketplace, combined with the generation constraints currently existing in the U. S. Northeast, is resulting in a "window of opportunity" to sell generation assets. Very substantial prices have been paid for generating assets - prices which, according to experts who met with us, have significantly exceeded the vendor's price expectations. It is not a message to be ignored. New Brunswick is strategically located to service that market. The question of the value of our generation assets in the North American electricity industry will only be answered if and when those assets are sold. The premium pricing being paid for generating assets in the U.S. Northeast results from the present high margins on electricity sales in that marketplace because of a supply/demand imbalance. It is expected this imbalance will gradually diminish over the next five years as new generation is built. Thus, the "window" for the sale of generation assets will close over a somewhat shorter period of time. While this argument is persuasive, particularly in light of potential and significant financial problems related to Point Lepreau, it should not be accepted without critical review. If today's premium pricing of such assets is based on high-margin electricity sales, and if our generating assets are largely needed for New Brunswick's own requirements, how could these assets be used to sell high-margin electricity in the U. S. Northeast? In the absence of such sales, would a purchaser pay premium prices? The marketplace for these assets will ultimately provide the answer.

The timing issue is further complicated by the imminent introduction of Sable Island natural gas to New Brunswick. As we were advised, natural gas, used in the latest technology combined-cycle generation facility, is the most cost-effective method of generating electricity and the current method of choice where natural gas is available. Moreover, recent developments in this technology have made generation cost effective on a much smaller scale than previously imagined. Accordingly, the advent of natural gas will be a great benefit to the province.

NB Power has recently announced two potential projects using natural gas and involving partnerships with the private sector (Belledune, with Tractebel, for export electricity; and Courtenay Bay, with Westcoast Energy, for NB Power's winter electricity requirements). In part, these projects are dependent on the government's plans for gas distribution in the province, particularly as it relates to industrial distribution charges, and on the questions posed by the discussion paper about the future of electricity in New Brunswick. In particular, the Belledune project is dependent on guaranteed transmission of the electricity generated at Belledune to the U. S. Northeast. But one question that must be resolved is the allocation of NB Power's transmission capabilities. Transmission charges for such use may be subject to bidding to maximize value and usage. Second, there is some question regarding the ability of a player to export electricity from the province into the U. S. Northeast, without effective reciprocity (as discussed above, issues relate to access, transmission rates and transmission capacity).

A potentially large domino effect hangs over the decisions which will define the rules of the new electricity industry, the viability of new generation projects, the probability of lateral gas pipelines leading off the main line, and the commitment for gas which might otherwise bypass New Brunswick for markets in the U. S. Northeast. There is, therefore, a need to proceed expeditiously with redefining the rules for the electricity industry. But, in our haste, we must be extremely careful not to commit ourselves to a path to suit one objective that will also set the path for other decisions which may not be in our collective best interest.

9. Market Structure - Regulator, ISO, and PX
With change comes the requirement to redefine the market structure under which the new system will operate. A redesigned market would include:
o Regulator
o Independent System Operator (ISO)
o Power Exchange (PX)

Regulator
Under the status quo, the regulator (which is the Public Utilities Board) has an oversight role. The PUB and NB Power are both instruments of the government. Through them, the government can control and continually make adjustments to the electricity industry.

In a restructured electricity market, private operators, for reasons already outlined, will not have the same motivations as government. They are interested in profits on behalf of their shareholders and interested in service insofar as it affects their ability to make profit. Without ownership of the generation and marketing functions (and possibly the wires business), the government will no longer have direct control over all participants in the system. It will, however, retain control over the monopoly wires system - which all participants in the electricity system need to use - through regulation. As a monopoly function, the wires business must be regulated by the government. Accordingly, the role of the regulator becomes very critical.

The rules governing all players - generators, wires operators, marketers, and users of electricity - need to be well-defined to provide the predictability necessary for participants to make the long-term decisions which are essential in the electricity industry. In defining the regulations, the government should take care to set clear rules, but also to reserve the right to change those rules so as to be able to adjust the system as it moves into this new competitive world, and into an ever-changing marketplace.

The regulator's role in a restructured electricity market is to act as an independent "referee" among all players. As noted, this is particularly important where monopoly services are still provided by the wires business. All participants in the electricity system must have equal access to the wires. The regulator must, within the confines of the regulations the government puts in place, create and referee a level playing field so that all generation companies and all marketing companies can use the wires on a competitive basis. Only if all participants have equal access to the wires system will true competition occur.

The regulations should also require the wires company to maintain the wires system and to extend the system as appropriate, for both transmission and distribution. New customers must be connected to the grid for a cost-based fee. This would cover the public policy mandate of access to electricity for all New Brunswickers. Co-generation users should also be able to access the wires system to get the ancillary services which are necessary for the efficient operation of their co-generation facility. Again, a cost-based fee should be regulated for such use.

The rates which the wires company charges for use of the wires should be based on the costs of maintenance and extension, plus an appropriate return on capital. In addition, where demand for transmission capacity exceeds availability, the rates should reflect costs, plus a premium for market demand. The return should be set in accordance with similar businesses around North America. To encourage a continuing drive for efficiency, it may also be useful to reward the operator with incentive-based rates (i.e., base them on costs plus some portion of the efficiencies which are achieved by driving down costs). The benefits of efficiencies will flow to all users of the wires system. We should be prepared to apportion those benefits among customers and the operator. Without that incentive, the operator may be less likely to drive towards new efficiencies.

If the wires business remains owned by the government, it should be capitalized and operated as a private business (with appropriate management targets). The profits should be charged tax equivalents and government could use the money raised, together with profits from the business, to enhance the provision of electricity to New Brunswickers. The government may wish to use the money to support demand management education programs, provide supplements to disabled persons, support green power projects and other public policy programs directly related to electricity. It could also be used to reduce any stranded costs.

Pricing of the wires services for different users can get extremely complex. In part it becomes an issue of fairness, in part an issue of plugging New Brunswick into the North American electricity grid. In creating a regulatory framework to set rates for transmission (within the province, into the province, out of the province, and through the province), we must be aware of the rules of other jurisdictions so as to ensure access for power generated in New Brunswick to those markets. We cannot operate in a vacuum. The North American system is changing rapidly, and if we want to take advantage of those changes, we must design a complementary system. If New Brunswick decides to privatize all or some of NB Power's assets, a great deal of the efficiency of the new electricity system will come from the private sector and from the efficient transport of the electricity around the grid. Currently, much of the inefficiency in the electricity system relates to back-up requirements, and the difference between base load and peak load. Base and peak are generally time-related (during the day) and seasonal. The ability of a North American grid system to balance energy needs and demands could result in fewer generation facilities, with consequent cost savings for all users. These could be significant savings. Regulated transmission rates go to the very heart of an open system. We should design a system which both maximizes the benefits to New Brunswick, and allows us to access the benefits of the emerging North American grid.

We were not provided with any evidence which would dissuade us from the idea that the current PUB structure, with the necessary enhancements, could be used to provide the regulatory system described. We did not, however, receive much input on this point.

Independent System Operator (ISO)
Acting as operator of the system, the ISO principally balances supply and demand. In a restructured environment, no single entity ensures the whole system operates. As stated above, proper balance is critical. In the new system, the Gencos want to supply electricity to the system, the wires business moves the electricity from the generation site to the users, and the marketers strike the deals under which users purchase electricity. The ISO orchestrates the process in a way that ensures safety and reliability. In addition, the ISO must ensure that the wires and ancillary services to the grid are in place to maximize efficiency. Again, we must emphasize that New Brunswick is no longer an electrified island unto itself. As a prerequisite to becoming part of the North American grid, our electricity and our system must meet certain quality requirements to ensure that we do not cause problems to others beyond our borders. Indeed, once connected to the grid, electricity knows no borders. The whole system becomes balanced. The ISO is critical to ensuring that the electricity system in New Brunswick meets standards.

The ISO, like the wires business, is a monopoly service. In an ideal world, the ISO would be set up as an independent government-owned entity. In the interests of efficiency, and in the absence of privatization of the wires business, consideration should be given to combining the ISO and wires businesses and regulating them by an enhanced PUB. The costs of both functions would form the basis of costs to be passed along to users of the wires.

We are fortunate that NB Power has, within its system, the basis for an ISO. NB Power's Energy Control Centre (ECC) in Marysville currently provides most of the services necessary for this function.

Power Exchange (PX)
In a restructured industry, a requirement exists for a marketplace through which providers of electricity (Gencos) can sell to intermediaries (the marketers). Again, we were provided with little input on how a PX should operate. We understand from NB Power that the Marysville ECC has the capability to handle a great number of power exchange functions. In a new electricity environment, the rules under which such transactions take place would have to be provided by regulation.

The electricity marketplace is one of the most critical functions to ensure competitively priced electricity. It can operate on a bilateral basis (agreements between a generator and a marketer) or on a pool basis (the ISO selects generators based on cost and marketers buy out of that average cost pool). Again, we were strongly urged to review the systems being put in place in other jurisdictions - each with benefits and pitfalls depending upon the mix of available suppliers and customer requirements. In certain jurisdictions, committees have been set up with users to work through the practical issues relating to the PX. This process reduces the risk of creating a system which does not meet the requirements of the participants in New Brunswick.
In an ideal world, the PX would be set up as a separate government-owned entity. In the interests of efficiency, and in the absence of privatization of the wires business, the PX could possibly be combined with the wires business.

10. Technical Implementation
Creating a competitive environment has extensive technical requirements. In the opinion of NB Power, it would take at least two to three years to create the substantial infrastructure needed to support a competitive retail market.

Overall, we believe it would be wrong to attempt to implement full competitive marketing before technical support is in place, tested and ready to handle the transactions which will arise. We see no reason to differentiate between wholesale market competition and full retail market competition. However, moving from wholesale to full retail will result in a volume of transactions increasingly difficult to handle. New metering systems and computer billing systems are part of the necessary infrastructure. We suggest that, if full competitive marketing is to be implemented, it should be done on a staged basis, as the technical support becomes available and the system is tested to handle each level of competition. We would not, however, recommend delay for non-technical reasons. The issue has been raised of whether the incumbent marketer will have the expertise needed to operate in a competitive market, but we believe this concern is offset by the advantages the incumbent has simply by being the incumbent, as noted above.

11. Methods of Privatization
If the Select Committee and the government decide that privatization of all or part of NB Power is appropriate, there are a number of ways that the sale (or sales, if privatized in parts) could be effected. These include: an initial public offering of shares, an income trust, private sale, and an operating and management agreement. As we noted, the optimum structure is a function of the objectives of the process (e.g., maximizing value or keeping long-term power rates low). Having met with a number of professional advisors, we believe that their creativity could add greatly to achieve the objectives of the process. They had all been involved in similar processes in other jurisdictions and, as such, their expertise is well founded. Without the experience of other jurisdictions, we risk problems associated with "re-inventing the wheel."



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