IS THE STATUS QUO VIABLE?
One can easily appreciate why some New Brunswickers
would want to embrace the status quo. For one thing, change is
never easy and many will intuitively avoid it. We also know that
New Brunswick has, comparatively speaking, low electricity prices.
NB Power is also able to offer stable, well-paying jobs in a
province always on the lookout to create new employment opportunities
or to secure existing ones. There is also no denying that the
corporation enjoys a solid track record in providing stable and
reliable service. As noted above, it also performs a number of
public policy roles, including ensuring that all New Brunswickers
have access to electricity at a "postage stamp" rate
so that residents in small remote villages pay essentially the
same price and enjoy the same quality service as residents in
larger urban areas. By all accounts, NB Power has developed a
strong capacity to serve "all" New Brunswickers in
"all" communities on an equal basis. In addition, NB
Power has been able to export electrical power for some time.
At least on the face of it, things are going well and one can
understand why someone would wish to embrace the status quo.
As the old saying goes, "if it ain't broke, don't fix it."
For all of the above reasons, members of the Select Committee
will wish to give proper consideration to the status quo and
its advantages. But, while it is beyond the scope of our mandate
to recommend continuation or doing away with the status quo,
we do want to point out important problems with it.
Powerful forces are at play just below the veneer of the status
quo. These forces are such that many insist the status quo may
well be untenable over the medium and longer term. We hasten
to add that we fully recognize that one may or may not consider
these forces to be positive or even desirable. But, in many ways,
this is beside the point. The forces are there and they are not
about to go away. The International Brotherhood of Electrical
Workers, for example, reported that it "recognizes that
deregulation is probably inevitable." It added that "what
is important is that safeguards be put in place to ensure that
affordable energy supply is guaranteed to all New Brunswickers,
regardless of location or the amount of supply they need."
Globalization has already shifted and continues to shift national
and regional economies towards a more deregulated, competitive
and market economy. One does not have to go to London, Tokyo,
or New York to see the shift. Our neighbour, Nova Scotia, recently
decided to sell all of its electrical power assets to the private
sector. New England is fast becoming an open economy in the electric
generating and distribution sector. We are also informed that
three Canadian utilities, namely B.C. Hydro, Trans Alta, and
Hydro Quebec, have obtained electricity marketing licences from
the U.S. Federal Energy Regulatory Commission (FERC). To secure
the licences, all three agreed to open up their own markets to
some level of competition.
Ontario is also introducing important changes to its electricity
systems. In its document, Direction For Change, the Government
of Ontario makes it clear that it fully intends to make the "move
to a competitive electricity market." It explains why: to
create "new jobs and a robust economy, provide the lowest
possible costs while safeguarding a reliable, safe, environmentally
sound electricity supply, restore the vitality and financial
soundness of Ontario's electricity system and ensure a level
playing field for all participants with an independent regulator."
Are all of these developments misguided? Perhaps. But one thing
is certain - the steps are designed to reduce the cost of energy
and the most successful jurisdictions will be in a superior position
to promote economic development and create new jobs. Why do businesses
locate where they do? And what do they need to prosper? We would
not suggest for a moment that energy is the key to economic development
in all sectors. It is not. But it is extremely important in a
number of sectors, including forestry, mining, and manufacturing.
NB Power has advised us that about 50 percent of their electricity
load comes from large industrials. They also report that this
is the largest percentage of any jurisdiction in Canada. The
price of electricity in the province is, accordingly, highly
relevant to the cost of goods exported from the province (pulp
and paper, oil products, and mining products). It only takes
a moment's reflection to appreciate that these sectors are vitally
important to the New Brunswick economy. In short, the cost of
energy matters a great deal to firms operating in the province's
key economic sectors.
Assuming that deregulation and the shift to competitive markets
continue to take root in other jurisdictions, one can assume
that the price of electricity there will drop or remain stable.
The question then is whether maintaining the status quo in New
Brunswick can produce stable or lower energy costs for New Brunswickers
and the business community.
Whether one agrees with the direction or not, there is no denying
that the shift away from the status quo elsewhere is well on
its way and gaining momentum. We know, for example, that some
states in New England are introducing retail competition and
customer choice. In addition, New England utilities have been
divesting at least some of their generating assets. Buyers of
these assets are well-financed and well-run independent power
producers. Hydro Quebec acquired a 40 percent interest in Gaz
Métropolitain and formed a joint venture with Gaz de France
to promote natural gas-fired cogeneration projects. It also agreed
to a marketing agreement with Enron to initiate a gas-electricity
and multi-energy marketing pilot project in New England. Natural
gas is expected to be available in the Maritimes and New England
in late 1999. Nova Scotia Power, now a private firm able to raise
capital on the equity market, has decided to establish a joint
venture with another private firm to establish a capacity to
distribute natural gas in Nova Scotia.
In the best of times, it would be extremely difficult for New
Brunswick to maintain the status quo in the energy field. As
is well known, there is nothing more dangerous than standing
still in a world that is changing.
But these are not the best of times for NB Power. NB Power informs
us that it is carrying a debt load of "C$3.57 billion, representing
a debt ratio of 88.8 percent. Because of changes in interest
rates and the foreign exchange rates, the estimated fair market
value is about $400 million higher, making NB Power's debt reaching
as much as C$3.98 billion." NB Power added in its presentation
to the task force that "to sufficiently capitalize NB Power
to compete in the deregulated marketplace - with a benchmark
debt/equity ratio of 60:40 - requires a substantial capital infusion.
It is unclear if the provincial government, the principal shareholder,
will provide such an infusion." It is important to note
that, if it were not for the release of reserves, NB Power would
be losing money. Over the last three years, NB Power has lost
$212 million. It made up the loss through the release of $226
million from its reserves. Those reserves are now largely allocated.
The Dominion Bond Rating Service reported that, in 1996, NB Power
lost .67 of one cent for every kilowatt-hour sold - the only
government-owned utility in Canada to sell electricity for less
than it costs to produce. NB Power's business plan for 1997-2002
predicts a return to profitability. But the plan is based on
rate increases and a trouble-free Point Lepreau.
NB Power faces other important challenges, as the world around
us adapts to a deregulated marketplace. There is a great deal
of uncertainty surrounding the future of Point Lepreau, a situation
made more difficult, given NB Power's weak financial position.
By its own admission, NB Power also does not possess the necessary
"commodity marketing, retail merchandising, and energy-risk
management skills or the infrastructure required to successfully
compete in the deregulated marketplace. Nor does it have the
financial resources to build such [an] infrastructure or recruit
the required skills."
Thus, to have any chance of maintaining the status quo, New Brunswick
would have to build a protective wall around its border and the
provincial government would have to introduce a series of measures
to place NB Power on a proper financial footing. Erecting a protective
wall, however, may not be a viable option for any length of time.
The marketplace for electricity, as already noted, is changing
rapidly everywhere. Power producers will no doubt lobby regulating
agencies to open up markets. One can easily speculate, for example,
that power producers in the United States will apply pressure
on their regulating agency - FERC - to ensure reciprocity. One
can assume that New Brunswick will not be able to continue one-way
shipment of electricity without reciprocity. It is also highly
likely that new generation capacities, which will be introduced
in the United States in the coming years, will produce electricity
at very competitive prices.
Quite apart from the changing marketplace, attempts to maintain
the status quo would require substantial financial changes. If
NB Power were a privately held corporation, it would be experiencing
substantial financial difficulties. To remedy the situation,
NB Power needs to introduce important rate increases and reduce
its debt through a substantial infusion of capital.
It is also important to stress that the electric power industry
has evolved greatly since the mandate of NB Power was conceived
in the early 1920s. The change has been particularly evident
in more recent years. As explained earlier, the reasons the government
decided to establish a crown corporation to generate, transmit,
and distribute electrical power were compelling.
But the public policy purpose of providing continuous supply
of electric power to all regions of the province has been met
and it can now be maintained through means other than the status
quo. The availability of natural gas and new technology are also
combining to reshape the energy sector. Private firms will soon
be in a position to generate their own electricity more cheaply
than buying from others. The Economist, for example, reports
that "smaller and smaller concerns - housing developments,
office blocks, hospitals - will switch to on-site power. Allied
Signal, which is investing heavily in small gas-fired turbines,
believes it can sell micro-turbines as small as 75 kilowatts
(about enough for a fast-food restaurant) and go to as little
as 40 kilowatts (suitable for a small office building). It expects
a 75 kilowatt unit to sell for $35,000 to $40,000 in 1999 and
for $25,000 or so by 2002.... By 2000, Canada's Ballard Power
Systems expects to be selling a 250 kilowatt generator at prices
competitive with the grid to shopping malls and the like."
In addition, there is less of a need now to build generation
capacity for peak demands. Building this capacity is expensive
because the facilities are not producing revenue around the clock.
Meanwhile, financing and depreciation charges are running around
the clock. New Brunswickers can now rely on others to build the
facilities which can allocate electrical power around North America
and meet the peak demands of other jurisdictions which do not
match ours (e.g., seasonality demands and different time zones).
In brief, electricity is becoming a commodity product. It is
important to stress, however, that it differs from oil and natural
gas, because it entails special transportation and storage issues.
In addition, it is important to maintain the province's electrical
system in balance between supply and demand at all times. In
brief, the province's electricity system is a highly complete
and complex system. Still, because of experience in other jurisdictions,
one can now make the case that New Brunswickers no longer need
to build generation capacity to ensure adequate supply.
This is not to suggest that it was wrong for NB Power to invest
in its current mix of assets. Indeed, one can understand why
NB Power did what it did. New Brunswick is not blessed with large
deposits of oil or natural gas and we have pretty well tapped
all of the province's hydro potential. Thermal generation is
the most expensive, with oil-fired capacity being extremely expensive.
We know that, historically at least, natural gas was not available
to NB Power.
In our discussions of the status quo, we would not want to suggest
that NB Power has been standing still for years and has been
unwilling to promote change. Our definition of the status quo,
as we already noted, speaks to the existence of a crown corporation
to generate, transmit, distribute and market electrical power
and to prohibiting others to produce electrical power in New
NB Power has, in fact, introduced important changes. A few years
ago, it established three business units - generation; transmission
and distribution; and marketing and customer service. Each business
unit has its own income statement, as well as performance and
financial targets. An employee of NB Power writes that "the
principal objective behind the business unit organization structure
is to help sharpen business acumen at NB Power and to inject
a new corporate culture into an otherwise staid and business-as-usual
The marketing and customer service unit has also introduced a
number of initiatives to strengthen service delivery. It has
established performance targets for service delivery, increased
hours of operation, introduced new products and services and
established account managers for business customers. All to say
that, within the ambit of the status quo, NB Power has been able
to make important improvements in the quality and delivery of
But, in the larger context, it will be increasingly difficult,
if not impossible, for New Brunswickers to maintain the status
quo in the electricity sector. Therefore, it is important to
identify the options available to the province as it looks ahead
and contemplates change and the best possible avenue for generating,
transmitting, and distributing electricity. That is the purpose
of the next section.