SUMMARY OF OPTIONS
The government asked us to invite comments on its discussion
paper Electricity in New Brunswick - Beyond 2000 and to submit
a report on options to a Select Committee of the Legislative
Assembly. Accordingly, it is beyond the mandate of this task
force to make specific recommendations or to map out a detailed
course of action. Our task was to survey stakeholders and others
to ascertain whether there was a desire to change the current
electricity system and, if so, in what direction.
The electricity industry is extremely important and complex.
Change must be made with a great deal of thought and after consultation
with stakeholders. It also requires the assistance of professionals
who have been through the process of change in other jurisdictions.
This report deals with the status quo by outlining its advantages
and disadvantages and provides options for change. However, much
work remains to be done if change is to be introduced, if only
because any new plan must be detailed and comprehensive. For
example, one cannot contemplate selling generation assets without
setting out the new regime in which private generators would
operate. If firms wanted to buy some part of NB Power's generation,
they would want to know how they could transport their electricity
to market, at what price it could be sold and under what terms
it could be exported - or, for that matter, could it all be exported?
Accordingly, the whole structure must be clearly spelled out.
While the maintenance of the status quo - NB Power operating
as a monopoly provider of electricity in New Brunswick - is possible,
we believe that it is problematic. The energy world, particularly
electricity, is changing rapidly all around New Brunswick. Based
on what we heard, we do not believe that it is in the interest
of New Brunswickers to try to build a protective wall around
the province. In addition, NB Power is confronting important
financial challenges and uncertainty around its nuclear power
plant. It is for these and other reasons outlined in this report
that we believe that the status quo is fraught with problems
and that it would potentially inhibit future economic development
prospects in New Brunswick. Some of New Brunswick's largest employers,
such as those in the pulp and paper sector, spend a large portion
of their operating budgets on electricity. Electricity for these
firms has always been an important factor determining their competitiveness,
and for reasons outlined elsewhere in this report, the cost of
electricity will become an even more important factor in the
years ahead. All of this suggests that embracing the status quo
could serve to inhibit New Brunswick economic development prospects.
If, however, the Select Committee of the Legislative Assembly
and the Government of New Brunswick decide they would like to
maintain the status quo, then several options should be considered.
NB Power, for example, could be directed to operate like a private
sector entity. Given the financial position of NB Power (including
the contingencies introduced for Point Lepreau), a very substantial
infusion of capital will likely be required. In addition, corporate
governance issues would need to be addressed. To be sure, the
provincial government has taken important steps in recent years
to give NB Power considerable room to operate like a private
business. It should continue this process and provide NB Power
the freedom to operate effectively in a competitive environment.
To do this, the government may opt to incorporate a new NB Power
under the New Brunswick Business Corporations Act and to become
its sole or principal shareholder. The purpose would be to transform
NB Power into a commercial business enterprise with the overall
mandate of maximizing shareholder value. As a commercial enterprise,
it would have to put in place profitability targets, dividends
policy, retained earnings policy and debt coverage action. In
turn, the management would be free to manage as it sees fit and
be held accountable for its decisions, activities and performance.
In addition, in order to ensure that our power can be sold in
other jurisdictions, it may become necessary to provide greater
reciprocity of access together with independently regulated transmission
If, however, the Select Committee of the Legislative Assembly
and the Government of New Brunswick should decide that the status
quo is either not viable or not the best way to go forward, taking
into account changes which are occurring around us, then a series
of options is available. These are outlined below, as items 1
through 10. But, first, we want to review three questions which,
in our view, define the agenda for change.
Public Versus Private Ownership
The debate over whether New Brunswickers can better be served
by the public or private sectors in generating, transmitting,
distributing and marketing electricity can never be settled to
the satisfaction of all New Brunswickers. The debate speaks to
issues of political ideology, history, change and economic interests.
What we can report is that independent studies have been carried
out to determine which sector is more efficient in specific cases
where the activities were privatized. There is no denying that
the private sector comes out on top in the majority of cases
in terms of economic efficiency. But there are other issues,
including level of services and the pursuit of public policy
objectives, which cannot be ignored. We also note, however, that
by its own admission NB Power does not have the financial and
human resource skills (i.e., commodity marketing, retail merchandising,
and energy risk management skills) to compete in a deregulated
It is beyond our mandate to take a position in the debate. That
said, we do wish to point out once again that the original public
policy objective of establishing a crown corporation to generate
and distribute electricity everywhere in the province at a postage
stamp rate has been met. As noted elsewhere, the objective can
now be maintained through regulations.
New Brunswickers can also profit from the experiences of other
jurisdictions that have opted for privatization. Important lessons
have been learned, putting New Brunswick in a position to avoid
mistakes made elsewhere should it decide to privatize the assets
of NB Power, either in whole or in part.
Notwithstanding any mistakes made, we know of no jurisdiction,
which having opted for privatization, is now seeking to reverse
direction. Indeed, it appears that privatization is firmly taking
root wherever it has been introduced.
Last, if the Government of New Brunswick wishes to introduce
a "deregulated and competitive environment" in the
electricity sector, then it will wish to look at selling some,
if not all, of NB Power's assets to the private sector. We believe,
for example, that careful consideration should be given to selling
Monopoly Versus Competitive Market
The overwhelming view presented to us during the consultation
process was that monopoly market structures are much less likely
to result in competitively priced electricity than open, competitive
markets. In a competitive market, participants compete on the
basis of price and service. If the Select Committee and the Government
of New Brunswick decide that a key objective is achieving competitively
priced electricity, then it follows that the market should be
made open and competitive. For generation, this would involve
opening the market to independent power producers, to co-generation
projects and to out-of-province suppliers. For the wires business,
it would involve providing open, non-discriminatory access to
the transmission and distribution lines on a transparent costs
basis. Finally, it would also involve licensing marketers to
compete in selling electricity to all customers in New Brunswick.
Integrated Versus Segmented Industry
The wires business should remain a monopoly business, controlled
by a regulator (which is, in turn, responsible to the government).
The generation and marketing businesses are ideal for competition.
To maximize competition among multiple participants in the generation
segment, it is important that the generation and wires businesses
be owned by separate companies. Allowing generating companies
to control the wires business could preclude having a level playing
field for competitors. It appears to be less important to separate
the wires business from the marketing business. The overriding
consideration for competition is that all participants in the
electricity system should be allowed equal access to the wires
on a transparent costs basis.
Options for Change
Privatizing NB Power's generating assets would involve a number
of issues. It would be important to ensure that these assets
would continue to be available to serve the needs of New Brunswick,
and that a competitive market for electricity supply would be
created. If the privatization of generating assets is pursued,
we strongly urge that further study be carried out to ensure
that the above objectives are met. It seems likely, however,
that sale of NB Power's generating assets to a single buyer would
not maximize competition, even taking into account the competition
which would come from independent in-province producers, from
co-generation, and, through interconnects, from suppliers outside
2. Point Lepreau
The future financial health of NB Power is dependent on Point
Lepreau. NB Power's Business Plan for 1997-2002 assumes an operating
rate at the nuclear station of 85 percent. Based on recent experience,
this rate may well be extremely difficult to attain. And failure
to meet this operating rate could have a substantial effect on
NB Power. The consulting firm Hagler, Bailly has produced a report
on the remaining useful life of the facility, but, as already
noted, we have not seen this report. However, based on reports
of its contents, it appears that NB Power, together with the
government, will need to evaluate the implications for the future
of Point Lepreau. If Point Lepreau does not operate beyond 2008,
$450 million of its capital value will remain unamortized. The
financial implications are significant.
Given these uncertainties and the questions regarding the permanent
disposal of spent fuel, together with the decommissioning costs
of the facility at the end of its useful life, we believe that
it would be extremely difficult to privatize Point Lepreau at
this time. We did hear input regarding how the public sector
elsewhere is dealing with nuclear facilities. In some jurisdictions,
private firms, whose portfolios of businesses involve the operation
of nuclear facilities, are brought in to operate nuclear plants.
The relationship has been to engage these companies to operate
and manage the facilities, taking the risk of operation, but
leaving the existing liabilities with the current owners. The
objective of such arrangements is to reduce operating risks to
the owner and to enhance performance and safety.
The wires business will, in all likelihood, remain a monopoly
and, as such, must be regulated through a government-controlled
regulator. The ownership of the wires business, whether by NB
Power or in private hands, is, in our view, largely a financial
question for the Select Committee and the Government of New Brunswick
to consider. It does not impact the competitive structure of
a new electricity market. A sale of the wires business may generate
a profit which could be used against potential stranded costs.
The benefit of such a profit should be weighed against the transmission
rates that would be necessary to provide a market return to the
new owner. Regulation can be provided through a detailed study
of the operation of the wires business in other jurisdictions.
Regulations could cover rates for transmission within, into,
out, and through the province. This is essential to ensure that
competition can come from both inside and outside the province.
Transmission rates should be based on cost, with the possibility
of premium pricing where demand outstrips available transmission
capacity. Regulation should also require maintenance and the
building of new lines as part of an obligation to provide service.
Returns to the owner of the wires business should be incentive-based
to ensure that the owner is motivated to keep rates as low as
Multiple marketers would enhance competition. Marketers would
need to be assessed (possibly through the Public Utilities Board)
to ensure that they have the financial strength to meet obligations.
All customers should have access to choice. Experience in other
jurisdictions suggests that, should New Brunswick opt for multiple
marketers, it should phase in marketing competition, so that
the system learns to cope as it grows. Large-scale users are
few, and for this reason, many jurisdictions have introduced
competition at this level first. A mechanism must be designed
to ensure there is a default supplier who will serve any customer
on a standard offer basis.
5. Technical Implementation
An Independent System Operator is essential to ensure the electricity
system continues to operate reliably and safely with multiple
participants. In the interests of efficiency, the ISO could be
part of the wires business. But, if the wires business is privatized,
it may be appropriate to have the ISO set up as a government-owned
entity. In addition, a marketplace would be needed for buying
and selling electricity. This power exchange or PX could also
be part of the wires business. Again, if the wires business is
privatized, it may be appropriate to have the PX and ISO as a
government-owned entity. We received very little input on the
question of the PX - whether it would operate on a pool basis
or by matching bilateral arrangements. It is, therefore, an area
requiring further study.
6. Stranded Costs
All participants in our process recognized their responsibility
for stranded costs, if they should arise. Accordingly, such costs
should be borne through the tax system, or as a user cost through
wires tariffs, or, for users leaving the system, through an exit
fee. User fees tend to be regressive and to temporarily distort
energy choice because of the added cost. Income-based taxes tend
to be progressive and do not distort energy choices. If the Select
Committee and the Government of New Brunswick consider the exit
fee principle to be appropriate, the structure should be designed
to ensure that no party is able to gain a financial advantage
by leaving the system before all stranded costs are paid for.
We can hardly overemphasize the importance many of the representations
made before the task force attached to environmental issues.
While a competitive market may address demand management issues
through creative pricing options, the Select Committee should
explore ways to promote demand management more aggressively.
It is probably not wise to rely exclusively on the participants
in the electricity system to promote demand side management.
A number of options exist. The government could ask the Department
of Natural Resources and Energy, or the Department of the Environment,
or, perhaps, it could contract with private firms or non-profit
groups, to provide the service. Participants also made a number
of other important points about energy and the environment and
the reader can review them by reading the environment section
of this report.
8. Cross-subsidization of Residential Rates
Everyone, including NB Power, acknowledged that cross-subsidization
exists within the residential class and flows to the residential
class from all other classes. Cross-subsidization within the
residential class provides for "postage stamp" rates,
ensuring that all residential customers pay the same wires charge
for electricity, regardless of where they live in the province.
All stakeholders in our process agreed that postage stamp rates
should be maintained in an open and competitive market. This
will continue to be possible through the regulation of the monopoly
Cross-subsidization to the residential class, which the government's
discussion paper detailed, is more difficult to maintain in an
open and competitive market. This form of cross-subsidization
is principally based on differential generation costs for each
class of customer because of peak usage requirements. In a competitive
market, the price for electricity (as opposed to the wires charge)
will be set by the market. The PUB has already set an objective
for NB Power to reduce the level of cross-subsidy to the residential
market. While we heard no objections to the principle of reducing
this form of cross-subsidization, concern was expressed to ensure
that it is phased out over time to avoid rate shock.
Finally, if the Select Committee and the Government of New Brunswick
decide they would like to provide cross-subsidies to specific
groups of residential customers, such as low income or disabled
people, the burden for doing so should rest with the government.
It can do so through its own budget process rather than asking
NB Power or the new participants in an open and competitive electricity
industry to do so.
9. Natural Gas
If the Select Committee should conclude that additional energy
sources will enhance competitiveness in the electricity market,
it may wish to recommend that a public process be used to study
how best to introduce natural gas into the New Brunswick marketplace
to the greatest number of customers. Based on the information
which was presented to us, natural gas holds a number of distinct
advantages. It offers environmental benefits over many of our
current forms of generation. It is also the most cost effective
method of conventional production of electricity. Generators
should be encouraged to utilize this method of generation - particularly
to replace aging and environmentally unfriendly NB Power generation
10. Methods of Privatization
If the Select Committee and the Government of New Brunswick 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, a private sale, and an operating
and management agreement. As we noted, the optimum structure
is a function of the objectives of the process (for example,
maximizing value or keeping long-term power rates low). Having
met with a number of professional advisors involved in similar
processes in other jurisdictions, we believe that their creativity
could add greatly to the process. Without the experience of other
jurisdictions, we risk problems associated with "re-inventing