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IS THE STATUS QUO VIABLE?

O
ne 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 Brunswick.

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 company."

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 its services.

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.


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