If 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
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
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.
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
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
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
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."
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
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
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
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
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
o Independent System Operator (ISO)
o Power Exchange (PX)
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
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."