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REPORT OF THE
SELECT COMMITTEE ON ENERGY

ELECTRICITY RESTRUCTURING IN NEW BRUNSWICK

 

Fourth Session
53rd Legislative Assembly
of the
Province of New Brunswick

May 1999

 

FINAL REPORT OF THE
SELECT COMMITTEE ON ENERGY

 

ELECTRICITY RESTRUCTURING IN NEW BRUNSWICK

 

Members of Committee


Peter LeBlanc, C.A., Chair
M.L.A., Kennebecasis
David Olmstead
M.L.A., Mactaquac
Jane Barry, Vice-Chair
M.L.A., Saint John Lancaster
Jeannot Volpé
M.L.A., Madawaska-les-Lacs
Hon. Greg Byrne, Q.C.
M.L.A., Fredericton-Fort Nashwaak
Milton Sherwood
M.L.A., Grand Bay - Westfield
Hon. James Lockyer, Q.C.
M.L.A., Moncton South
Peter Mesheau
M.L.A., Tantramar
Paul Duffie, Q.C.
M.L.A., Grand Falls Region
Elizabeth Weir
M.L.A., Saint John Harbour

Fourth Session
53rd Legislative Assembly
of the
Province of New Brunswick


Legislative Assembly of New Brunswick / Assemblée Législative du Nouveau-Brunswick
P.O. Box 6000 / Case postale 6000
Fredericton, NB / Fredericton (N.-B.)
E3B 5H1
Tel: / Tél : (506) 453-2506
Fax: (506) 453-7154

May, 1999

To The Honourable
The Legislative Assembly of
The Province of New Brunswick

Mr. Speaker:

I have the pleasure to present herewith the Final Report of the Select Committee on Energy.

The report is the result of the Committee's deliberations on electricity restructuring in New Brunswick.

On behalf of the Committee, I wish to thank the many individuals and organizations that appeared at the public hearings or submitted written briefs.

I also wish to express my sincere appreciation to the members of the Committee for their contribution in carrying out our mandate.

This report, together with the Committee's first report on natural gas, effectively concludes the work of the Committee.

Respectfully submitted,



Peter LeBlanc, C.A., MLA
Chairman


TABLE OF CONTENTS

EXECUTIVE SUMMARY

I. Introduction

II. Why Restructuring?

The Electric Industry in New Brunswick Today
How Electricity is Produced and Delivered
Characteristics of the New Brunswick Electric System
The Need for Change
The Challenges Faced by New Brunswick
The Goals of Restructuring for New Brunswick
Electricity Restructuring - What Has Happened Elsewhere
Electricity Restructuring in Canada
Alberta
British Columbia
Ontario
Quebec
Nova Scotia
Other Provinces
Electricity Restructuring in the United States
Electricity Restructuring around the World
Description of Alternative Policy Options Considered
Maintain the Status Quo
Managed Transition to Wholesale Competition
Full Retail Competition and Privatization

III. Policy Recommendations

Elements of a Managed Transition
Specific Changes
Summary of the Role of Each Crown Corporation
NB Generation
NB Distribution
NB Transmission
Debt Issues
Poing lepreau
Self-Generation and Wholesale Generation
Regulation
The Transition Period
Environmental Issues
Conclusions

IV. Conclusions and Action Plan

Action Plan
Market Power Subgroup
Generating Asset Sales Subgroup
Environmental Quality Subgroup
Consumer Access and Affordability Subgroup
Competitive Bidding Subgroup
Performance-Based Regulation Subgroup
Transmission Pricing and Access Subgroup
Rate Design Subgroup
Governance Subgroup
Monitoring and Evaluation Subgroup
Schedule

Appendix 1: List of Presenters at Committee Briefing Session

Appendix 2: List of Presenters at Public Hearings

Appendix 3: A More Detailed Review of Electric Restructuring Elsewhere

FIGURE 1

EXECUTIVE SUMMARY

In recent years, the electric utility business has been undergoing restructuring in many parts of the world. Central to discussions surrounding this process have been questions of whether existing monopolies should be broken up or "unbundled," whether wholesale and retail competition in providing electricity to customers should be permitted, and who should be involved in that competition, whether public or private entities, or both.

Because keeping electricity available at competitive rates is essential to sustaining New Brunswick's economy, and to the well-being of its people, these changes in the electricity industry are highly relevant to the province. Accordingly, the Government of New Brunswick asked the 53rd Legislative Assembly to create a Select Committee on Energy and gave it a broad mandate. The committee was asked to examine the future of the electric utility industry in New Brunswick and, because of the imminent arrival of natural gas, to consider the implications of that new fuel for the province.

Beginning in November, 1998, the committee engaged in extensive consultation and discussion, using as its departure point the discussion paper entitled Electricity in New Brunswick Beyond 2000, as well as the report of the 1998 Hay-Savoie Task Force, entitled Electricity in New Brunswick and Options for its Future. The committee decided upon four categories of goals for restructuring the electric industry in the province:

  • Additional generation competition and improved economic efficiency
  • Improved supply diversity
  • Elimination of cross-subsidies while maintaining affordability
  • Improved environmental quality

The experience in the United States and other nations that have either restructured their electric industries, or are in the process of doing so, clearly indicates that generating markets can no longer be characterized as "natural monopolies." There is no reason that the benefits of these competitive forces, which we fully expect to reduce the market cost of generation over time, cannot be pursued for the benefit of all New Brunswick residents and businesses.

The committee recommends that the province adopt a policy of managed transition. In light of the early stages of other restructuring efforts, the province should pursue a more deliberate and controlled restructuring policy. Such a policy will allow for the gradual transition of the electric industry from its monopoly structure today. The committee believes that a managed transition will be less disruptive to the lives of New Brunswickers, yet improve efficiency and equity for all customers, and enhance economic development opportunities in the province.

The committee recommends that NB Power undergo a structural separation into three distinct crown corporations: NB Generation, NB Transmission, and NB Distribution. This means these three entities will remain in public hands for the foreseeable future. Each corporation will address the needs of different aspects of the electric market, and each should be required to operate as efficiently as possible. Initially, NB Generation will continue to own all of NB Power’s existing generating assets, including the Point Lepreau Nuclear Generating Station. NB Generation will also be required to provide electricity to NB Distribution to meet the needs of all domestic electric consumers.

NB Distribution will be responsible for providing electricity to retail customers in the province. NB Distribution will also be responsible for providing electricity in a safe, efficient, and reliable manner. NB Distribution’s requirement to purchase all of its domestic electric power requirements from NB Generation will be gradually reduced over a five-year transition period. In its place, NB Distribution will be required to develop competitive bidding mechanisms that will ensure the lowest wholesale purchase prices of generation, whether from NB Generation or elsewhere. A wholesale power exchange will also be developed over time to facilitate market transactions. The five-year transition period will also provide the time for other critical issues to be evaluated, allowing change in New Brunswick to be accomplished with as few surprises as possible.

NB Transmission will own and operate the high-voltage transmission system in the province. NB Transmission will serve as a common carrier, providing access to all parties wishing to use the transmission system, whether for delivery of electricity within the province, for exports out of the province, or for wheeling through by other parties.

One of the major concerns of the committee is the significant debt level of NB Power. In total, NB Power today has a debt load of over $3.2 billion, which constitutes a major component of the total indebtedness of the province. The committee is concerned that this debt load needs to be addressed if restructuring the province’s electric industry is to succeed. The committee believes that NB Power must release a comprehensive proposal to address its debt level and the orderly means of reducing that debt - and to do so soon.

The committee believes it is critical to maintain continued public ownership of Point Lepreau in the near term. There are critical environmental and safety requirements that must be closely monitored. While it may be possible to transfer ownership of Point Lepreau to the private sector in future, such a sale and transfer should not be contemplated until market issues (owing to the plant representing a large fraction of the province's overall generating capacity) and environmental/safety issues are addressed.

The committee also believes that improving regulation of the electric industry is important to protect the public interest. The committee recommends that the New Brunswick Legislature empower the NB PUB in a similar vein to that described in the Gas Distribution Act, 1999.

Last, the committee believes environmental issues must be addressed. New Brunswickers value their environment and see the way in which electricity is generated and distributed as an integral part of the environmental equation. In terms of electricity restructuring, demand side management programs offer real potential for reducing energy demand and should be implemented. The committee also urges the government to work with the Canadian Council of Ministers of the Environment to develop standards for "green" energy resources. At the international level, the committee recommends that NB Generation work with the provincial and federal governments through the Climate Change Review Process to help Canada develop a strategy to meet international obligations under the Kyoto Treaty.

The committee recommends immediate formation of a "Stakeholder Group" that will develop detailed recommendations and policies, and monitor restructuring efforts elsewhere to ensure that New Brunswick continues on an appropriate restructuring path. The committee recommends that, only after the Stakeholder Group has developed detailed guidelines, should the five-year transition period begin, during which it expects to see a vibrantly competitive wholesale generation market develop in the province. Once it is clear that such a market has developed, and with the experience gained from observing other regions that have introduced competition, then full retail competition should be considered, along with appropriate mechanisms to ensure continued access to safe, reliable, and uniformly priced electricity supplies by consumers. The committee believes this approach will ensure the greatest possible benefits to the province, while minimizing any adverse impacts from implementing policies with limited real-world experience.

I. Introduction

In recent years, the electric utility business has been undergoing restructuring in many parts of the world. Central to discussions surrounding this process have been questions of whether existing monopolies should be broken up or "unbundled," whether wholesale and retail competition in providing electricity to customers should be permitted, and who should be involved in that competition, whether public or private entities, or both.

Because keeping electricity available at competitive rates is essential to sustaining New Brunswick's economy, and to the well-being of its people, these changes in the electricity industry are highly relevant to the province. Accordingly, the Government of New Brunswick asked the 53rd Legislative Assembly to create a Select Committee on Energy and gave it a broad mandate. The committee was asked to examine the future of the electric utility industry in New Brunswick and, because of the imminent arrival of natural gas, to consider the implications of that new fuel for the province.

In the Autumn of 1998, the Select Committee presented its report on the public policy and legislative issues surrounding natural gas. It then turned its attention to the specific subject of electricity. Over the ensuing six-month period beginning in November, 1998, the committee engaged in extensive consultation and discussion, using as its departure point the discussion paper entitled Electricity in New Brunswick Beyond 2000 as well as the report of the 1998 Hay-Savoie Task Force, entitled Electricity in New Brunswick and Options for its Future.

Public hearings were held in Fredericton, Saint John, Moncton, Campbellton and Edmundston, and many citizens, companies and organizations, not least of whom was NB Power, presented their views to the committee. The committee also consulted with energy experts representing provincial, state and federal agencies in Canada and the United States, and with a number of individuals associated with private companies that have established expertise in the energy field.

This report is the result of these consultations and deliberations. It details the committee's examination of this complex subject and recommends a prudent course of action that the province should follow in preparing New Brunswick's electricity industry for inevitable change, while keeping open options for the future.

This report is organized as follows. Chapter II discusses whether restructuring is needed at all. This chapter reviews the findings of the Hay-Savoie Task Force, discusses the issues that the committee identified as needing to be addressed, and presents the major goals identified by the committee for restructuring in the province. Chapter III presents the committee’s recommendations for restructuring the electric industry, based on the goals it identified and its review of restructuring efforts elsewhere. Chapter IV provides some concluding comments and presents an Action Plan to implement the committee's recommendations.

II. Why Restructuring?

Since the early 1990’s, the electric industry in North America has been moving toward greater competition. Like other formerly regulated industries, technological change in the electric industry is spawning new opportunities – and challenges. Markets are opening up and new players, both generators and retailers, are seeking to challenge traditional utilities. Electricity consumers, especially larger industrial and commercial ones, are also seeking change: they want opportunities to choose from whom they purchase electricity and, in some cases, they want opportunities to take advantage of improving technologies that allow them to generate their own electricity.

New Brunswick’s formation of the Select Committee on Energy and the province’s evaluation of its electric industry fit within this overall framework. To place the options being considered by New Brunswick in perspective, this chapter begins with an overview of the electric industry in New Brunswick today.

The Electric Industry in New Brunswick Today

In a few months, New Brunswick's electric utility industry will enter its third century. It began in 1884 when a private company, the Saint John Electric Light Company, built a generating station on Paradise Row and started distributing electricity. Within a few years, other companies entered the business around the province so that, by the end of the 1880s, communities like Moncton, Fredericton and Woodstock also had electricity to light their homes and streets and power some of their industries.

Throughout this early period, generation and distribution of electricity was entirely a private enterprise. The beginnings of today's NB Power came in 1920 when the New Brunswick Electric Power Commission was formed and shortly thereafter started construction of a hydroelectric generating station on the Musquash River. In the ensuing more than three-quarters of a century, the commission has evolved into a modern public utility with a total generating capacity of 4116 MW. This power flows from six hydro generating stations, five thermal plants, three combustion turbine installations, and one nuclear facility.

NB Power is a crown corporation, which is to say that it operates semi-autonomously from the provincial government, under the corporate governance of a board of directors. This board consists of the corporation president and ten directors appointed by the Lieutenant-Governor-in-Council. As noted in the corporation's annual report for 1997-98, "Their mandate is to direct the affairs of the Corporation in a manner that is consistent with sound business practices." At the same time, the corporation also serves a public policy purpose: to ensure that electricity is available and affordable everywhere in the province, and priced uniformly. Indeed, this purpose is the primary reason NB Power has existed as a public utility rather than a private one.

When it comes to determining the price of electricity, the NB Power is under the regulatory authority of the provincial Public Utilities Board (PUB). However, under the provisions of the Public Utilities Act, NB Power may change its electrical rates without reference to the PUB, if the change is three per cent or less.

How Electricity is Produced and Delivered

The process of providing electricity to customers within the province is complex, and perhaps taken for granted. Electricity is first generated at fossil-fuel and hydroelectric sites, then transmitted over an interconnected system of high voltage lines to localities. There, distribution substations reduce the voltage and deliver electricity to local homes and businesses. The system must meet the instantaneously changing demands of customers, be safe, and be reliable.

Unlike other network industries, such as telecommunications and natural gas, the flow of electricity cannot be directed. Flows of electricity are determined by the laws of physics, not by the laws of contracts. As a consequence, the operation of the electric system in the province can affect, and be affected by, operations in other provinces and the United States. Wherever electric transmission systems are interconnected, there must be coordination if power flows are to be reliable. That is one reason NB Power is a member utility of the North American Electric Reliability Council (NERC). Since the mid-1960s, after an outage in November, 1965, that affected 30 million customers in the Northeast United States and Canada, NERC has been responsible for keeping electricity service reliable in the three highly linked transmission grids that span Canada, the United States, and parts of Mexico. Utilities have given NERC a degree of operational freedom as separate generators and distributors of electricity in exchange for greater reliability and efficiency.

To improve reliability, NB Power built an extensive transmission system that provides numerous interconnections among itself, Quebec, Nova Scotia, and New England. This system allows for significant levels of imports and exports, and provides an important backup for NB Power's own generating resources.

Another unique characteristic of electricity is its inability to be stored cost-effectively. That is why electricity production must be synchronized to match changes in demand instantaneously, thus "balancing" the system. Although hydroelectric dams and batteries are forms of storage, the former stores a fuel (water) to produce electricity, while the latter is far too expensive and insufficiently safe, given current technology, to be a reasonable storage alternative, except under very specialized conditions.

The three main functions of the electric industry – generation, transmission, and distribution – must all be addressed when considering restructuring policies, even if only changes in one of those functions are contemplated. The reason for this is the necessary integration among the functions; without such consideration, changes to one function can adversely affect the others. This is precisely why restructuring efforts elsewhere have addressed all three functions.

Characteristics of the New Brunswick Electric System

By far, the largest number of users in New Brunswick's electricity system are residential customers. There are 272,000 of them, as compared to about 1800 industrial customers.

Though the province has experienced some of the North American trend toward greater urbanization, many of these residential customers continue to live in rural areas scattered across the province. To serve this large, low-density residential market requires a transmission system totalling 6700 km, and a distribution system that amounts to 25,300 km.

Providing this service is obviously costly, and to make electricity affordable throughout the province, the government and NB Power have employed a system of cross-subsidization of electrical rates. Thus, residential customers have been paying $0.88 for one dollar's worth of electricity (plus HST), large industrial users have been paying $1.01 for the same amount, and general service customers (who include small businesses, schools and hospitals) have been paying $1.19. To achieve "postage stamp" rates--that is, exactly the same price for electricity regardless of where in the province a customer lives--there has also been some cross-subsidization within the residential class.

As the discussion paper, Electricity in New Brunswick Beyond 2000, pointed out, "The New Brunswick Public Utilities Board has set an objective for NB Power to have revenue/cost ratios in the 0.95-1.05 range. However, in an effort to avoid rate shock, movement to reduce the subsidy has been very gradual."

While geographical spread is an obvious challenge for the electricity industry in New Brunswick, geographical location may be seen as a decided strength. The province is positioned so that it can be, and is, at the centre of a strong system of interties with adjacent jurisdictions. The province has 700 MW interties with both Quebec and Maine. In addition, it has a 450 MW intertie with Nova Scotia and a 150 MW intertie with Prince Edward Island. Apart from the electricity export opportunities this system has provided, it has also helped ensure the province a safe and reliable electric supply.

As noted above, New Brunswick's generating capacity encompasses six hydro plants, five thermal stations, three combustion turbine facilities and a nuclear generating station. The thermal plants provide just over 50 per cent or 2072 MW of the province's total generating capacity of 4116 MW. Hydro accounts for about 21 per cent or 881 MW of capacity, while the combustion turbine facilities account for nearly 13 per cent or 528 MW. The Point Lepreau Nuclear Generating Station provides 635 MW or about 15 per cent of supply. In view of past operational problems at the facility, some believe that to be an uncomfortable reliance on this single source of supply.

The Need for Change

Why must changes to the electric industry be considered at this time? There is general agreement that New Brunswick enjoys a safe, reliable electric system, with universal access and comparatively low rates. NB Power has also been a successful exporter of surplus power, which has provided significant revenues to the province and kept domestic rates affordable.

Answering this overriding question was the committee's first task, and it first consulted several reports that had been previously issued. In February, 1998, the Government of New Brunswick created a task force to consult with "stakeholder groups" in response to the government discussion paper, Electricity in New Brunswick Beyond 2000. Subsequently, that task force, co-chaired by David D. Hay and Donald J. Savoie, prepared a report detailing the complex issues surrounding electricity restructuring and carefully weighing the advantages and disadvantages of possible options for New Brunswick.

The Hay-Savoie Report, Electricity in New Brunswick and Options for its Future, was issued in July, 1998. The report stated that "powerful forces were at play just below the veneer of the status quo." As a result, the Hay-Savoie report suggested that maintaining the status quo would likely be untenable over the medium and longer term, even though the electric system appeared quite sound at first glance. Changes were already being made to the structure of electric markets in other Canadian provinces, as well as in the United States, especially in New England. As mentioned earlier, like other formerly regulated industries, technological change in the electric industry is spawning new opportunities – and challenges for regulators and policymakers. The interconnected nature of the electric system means that changes outside of New Brunswick will have an effect within the province.

The Hay-Savoie report concluded that, to maintain the status quo, "New Brunswick would have to build a protective wall around its border" and "introduce a series of measures to place NB Power on a proper financial footing." The report identified several different restructuring options, including privatizing NB Power but maintaining it as a sole-source supplier to customers, to ultimately allowing multiple marketers to sell to all customers and complete separation and privatization of generation, transmission, and distribution.

The committee also heard from numerous presenters from Canada and the United States in special briefing sessions. These presenters, ranging from utility CEOs to federal regulators, possess a tremendous breadth of knowledge and experience. They provided the committee with much-needed information as to changes taking place elsewhere. These presenters discussed many of the "details" necessary to consider as New Brunswick moves forward.

The Challenges Faced by New Brunswick

In the United States, the initial rationale for restructuring the electric industry was high electric prices. Industrial customers, especially those in California and New England, warned that the high prices they were paying for overly expensive generation, and subsidies to other consumers, were crippling their competitiveness in a rapidly globalizing economy. This economic rationalization was also a prime factor in the restructuring of the electric industry in many other countries, including Great Britain, Norway, and New Zealand.

In New Brunswick, it is widely recognized that industrial and large commercial customers subsidize residential customers. The government discussion paper, Electricity in New Brunswick Beyond 2000, reported that residential customers paid about 15 per cent less than the true cost of their electric service. Since that report was issued, the subsidy has fallen to about 12 per cent. Complicating this, however, is the fact that, even though residential customers may be paying less than their full share of system costs, they alone must pay 15 per cent HST on their total electric bills. A further complication is the concern that rates in the province are insufficient to recover NB Power's accumulated debt in a timely manner.

Improving the New Brunswick economy in the long term means that all of these issues must be addressed. Not only must the system be made more efficient, but questions about equity and fairness must also be addressed. Subsidies paid by one customer group must, of necessity, be paid by others, raising the latter’s costs.

Cross-subsidies exist in order to meet the requirement that electricity be kept universally available and affordable, especially for the province's rural customers and for its low-income customers. Selecting an appropriate balance between a competitive industry and one that meets important social needs remains a critical challenge.

One issue that concerned the committee was the future role of distribution systems in Saint John, Perth-Andover, and Edmundston, which today operate their own municipal electric companies. Among some committee members, there was a perceived inequity arising from the fact that these three municipalities may not provide direct support towards ensuring the affordability of electricity to rural New Brunswick. Specifically, serving rural New Brunswickers is more expensive than serving urban populations, and these three urban areas may not share, to the same degree, such costs as do other urban areas in the province.

When they are able to purchase their electricity supplies on an open market, their populations may enjoy an added benefit not available to other New Brunswickers. However, the committee also considered the fact that NB Distribution will have greater purchasing power and may be able to obtain better prices.

The committee was not prepared to recommend any change to the existing arrangements because of their long-standing nature – some preceded the commencement of NB Power – nor was it prepared to extend such arrangements to other urban areas, mainly because of the negative impact this would have on rural New Brunswick.

Generating costs have also been a concern. Many large centralized plants, especially nuclear plants, cost far more to build than anticipated. Nuclear plants also face still-unsolved problems associated with the permanent disposal of nuclear waste. Others, such as coal-fired plants, have been implicated as major producers of greenhouse gases. Newer, modular technologies (i.e., ones that are much smaller and of standard design), especially rapidly advancing natural gas-fired combustion turbine plants, appear to promise lower costs and fewer environmental impacts.

Although the average costs of NB Power's generating assets are relatively low, newer technologies promise lower costs still. Furthermore, as markets in New England are fully restructured and new generating resources are built in that region, NB Power's ability to secure significant export revenues, which it has used in the past to keep domestic rates low, may be jeopardized. Export markets into the United States will also be affected by the need to comply with U.S requirements for equal access. In other words, if Canadian generators wish to sell their surplus power into U.S. markets, they must provide equal access for U.S. generators wishing to sell power to Canadian markets. Because New Brunswick has not met this "reciprocity" requirement, NB Power can today sell power only at the Canada - U.S. border, thus foregoing potentially lucrative new export markets in New England.

Maintaining a diverse supply of generating resources also protects against sudden supply shocks. When they fail to perform as expected, large generating facilities can have significant impacts on total generating costs. Thus, the province will want to ensure that, as the industry changes, its current diverse set of generating resources is maintained or enhanced with newer modular technologies.

The existing structure of electric utility regulation is also a concern. In a sense, technological change has outpaced the regulatory structure, which was designed for a different era. In New Brunswick, the committee recognized that the regulatory structure would have to be addressed, if for no other reason than the development of a natural gas distribution system in the province.

Finally, whether the crown corporation model will remain the most appropriate structure for the province was hotly debated. Some presenters suggested that complete privatization was the best approach. Others argued just as forcefully that the interests of the province have been well-served by the crown corporation, and will continue to be well-served in the future.

The Goals of Restructuring for New Brunswick

In an ideal world, restructuring the electric industry would reduce costs, improve environmental quality, lower risks, improve the province's industrial competitiveness, eliminate cross-subsidies, and maintain access and affordability for all. These goals are a common theme in most restructuring efforts that have taken place, whether those efforts have resulted in complete retail competition or slight adjustments to the type of regulation used.

Unfortunately, these broad goals require that tradeoffs must be made. The committee recognized that it would have to balance competing goals. The committee decided upon four broad categories of goals for restructuring the electric industry in the province:

  • Additional generation competition and improved economic efficiency
  • Improved supply diversity
  • Elimination of cross-subsidies while maintaining affordability
  • Improved environmental quality

For each of these categories, the committee identified more specific objectives. For example, improving the competitiveness of the province's electric industry would mean lower prices and additional opportunities for economic development activities. Improved competitiveness would also help reduce NB Power's debt level.

The committee recognized that overriding all of these goals and objectives was the need for a managed transition. There are many examples of areas where more radical change in the electric industry has been undertaken, and has given rise to unanticipated complexities. Designing rules for equitable pricing and access to high-voltage transmission systems, for example, remains one of the most difficult issues to solve. Different areas have recommended alternative pricing and access systems, each with its own set of benefits and costs. Meanwhile, regulations for distribution companies, those that provide the final links to consumers, have been generally ignored. Yet, as the industry is restructured, ensuring that all customers are served by a safe and reliable system is paramount.

The committee believes that too quick a transition in New Brunswick would be disruptive for consumers and would sacrifice some of the identified goals. There is much to learn from other regions that are restructuring their electric industries. All New Brunswickers can benefit by observing those changes that are working well and those that appear problematic.

Electricity Restructuring - What Has Happened Elsewhere

As we have already said, electricity restructuring has been taking place around the world during the decade of the 1990s. This has, of course, included North America, where electric system interconnections are such that changes in any jurisdiction have a bearing on other jurisdictions. This reality is part of what has prompted New Brunswick to examine its restructuring options. It is useful, therefore, to know precisely what is happening in other parts of our continent, and indeed elsewhere in the world. Accordingly, as part of its examination of this complex subject, the Select Committee on Energy reviewed and heard testimony about changes being made in other places and the circumstances that have prompted them. The following summary of these changes provides a context for our deliberations in New Brunswick. (Readers interested in a more detailed look at the changes taking place in other jurisdictions may wish to refer to Appendix 3.)

Electricity Restructuring in Canada

Alberta

Alberta has gone furthest of the provinces in restructuring its electric industry. In 1995, the province passed legislation to allow open competition in the generation of electricity and created an open access power pool through which all electricity is bought and sold in Alberta. The transmission system is managed and regulated as a single entity. The province is on a timetable that will allow retail customer choice to be phased in, starting with a pilot project involving large industrial customers and extending to all other customers by 2001.

British Columbia

British Columbia has, over the last several years, considered restructuring its electricity market and allowing retail competition. An Advisor's Reform Proposal called for phased-in retail access, separation of the electrical grid or transmission entity from the generating and distributing parts of the electricity business, and creation of a B.C. Power Exchange. But the proposal was not implemented, because final consensus could not be reached.

Ontario

In 1996, Ontario embarked on a process of opening up its electricity market. The provincial government's intention is to achieve full competition, both wholesale and retail, by next year. Three principal reasons have prompted Ontario to undertake restructuring: a concern that changes in other areas, notably New England, would leave the province far behind; performance problems with the province's nuclear plants; and a belief that a new structure would aid economic development. Under the plan, Ontario Hydro will be replaced by three separate entities--a "wires" or transmission company, a generating company, and a new non-profit crown corporation to operate an electricity exchange. The Ontario Energy Board will be given strengthened oversight responsibilities. The province has also outlined various steps to deal with stranded debt.

Quebec

Hydro Quebec embraced wholesale competition in 1998 and has positioned itself to take advantage of deregulation in the United States. Through its subsidiary, H.Q. Energy Services, based in Philadelphia, the company will buy and sell power and energy, purchase transmission services, and perhaps buy generating capacity in the United States.

Nova Scotia

In 1992, Nova Scotia privatized its former crown corporation, Nova Scotia Power, essentially replacing a public monopoly with a private one. The company sells electricity to seven other utilities that serve the province. Technically, the smaller utilities can compete for customers, but since all the power comes from the same source, genuine competition is not possible.

Other Provinces

None of the other four provinces--Manitoba, Saskatchewan, Prince Edward Island and Newfoundland--has pursued electricity restructuring on a broad basis. Manitoba Hydro did open its transmission grid and started wholesale competition in early 1997, which enabled it to join the Mid-America Power Pool. The utility also restructured itself internally. Moves in the other provinces have ranged from modest preliminary steps to maintaining a watchful eye on developments elsewhere.

Electricity Restructuring in the United States

In the United States, most states have taken at least preliminary steps toward electricity restructuring. Providing retail customers with a choice in electrical supplier--and therefore lower rates--is a prime motivation. To date, 19 states have taken regulatory or legislative action, while most other states are examining the issue.

In the 105th Congress, which ended in January, legislators pushed policies to restructure the electric industry on a national level. Meantime, New England and New York have been leading the way on a regional and state level. It is easy to understand why. Average electric rates in New England and New York are among the highest in the United States. Those in New England (1997 figures) were 51 per cent above the national average, while those in New York were 62 per cent above the national average. The high cost of generation at utility-owned plants is a big part of the problem, and with new methods of generation becoming available (for example, natural-gas fueled plants), there has been a strong move toward restructuring. Our nearest American neighbour, Maine, will introduce retail competition for all electricity customers on March 1 of next year. Rhode Island and Massachusetts have already done so, and Connecticut will begin implementing retail competition in July of this year. A court challenge has stalled the process in New Hampshire, and Vermont has yet to approve any restructuring legislation. New York is restructuring its electricity industry by service district, a process that will extend over the next several years.

Electricity Restructuring around the World

As in Canada and the United States, the electricity industry elsewhere in the world has been changing, too, driven by essentially the same factors. They include consumer demand for choice in electricity supplier, the need for local economies to become more competitive, higher environmental standards, changes in technology, and the gradual obsolescence of older generating facilities. Competitive power pools have been established in Scandinavia, the British Isles, Spain, Australia, New Zealand and part of Latin America. In England and Wales, for example, restructuring began in 1989, and while there have been some problems, resulting in correction and fine-tuning during the ensuing decade, the change has generally been considered a success.

Description of Alternative Policy Options Considered

The committee's review of restructuring efforts elsewhere in Canada, the United States, and the world revealed many similar objectives. Although the timing and degree of restructuring have differed in these efforts, there are a number of similarities, especially in the areas of creating more competitive wholesale generating markets and regulatory reforms.

Based on these restructuring efforts elsewhere in the world, and the goals it developed for restructuring in the province, the committee debated the relative merits of three broad restructuring policies. These were:

  • Maintain the status quo, with only limited changes in existing PUB regulations;
  • Change to a wholesale competition; or
  • Rapidly introduce retail competition and privatize NB Power.

Maintain the Status Quo

Under the status quo option, little would be changed. This option would "tune up" the existing industry structure, primarily focusing on improving the regulatory system. Elements of this policy option are:

  • NB Power would remain an integrated electric utility and a crown corporation. NB Power would continue its internal efforts to restructure itself into separate business units.

  • The Point Lepreau Nuclear Generating Station would continue to be operated to maximize economic returns.

  • Debt repayment would continue at the current schedule. No efforts would be made to accelerate NB Power debt repayment or transfer debt to the province’s books.

  • Transmission system would not be fully opened to be consistent with US FERC Order 888. NB Power would continue to sell power at the Canada-US border.

  • Independent generation for export would not be allowed. Non-utility generators could sell to NB Power, which would then market all export sales.

  • Changes in the regulatory system would include:

  • Comprehensive, independent regulation of NB Power to ensure consistency between NB Power policies and actions and natural gas industry policy and regulation.

  • NB Power would be required to submit all proposed rate increases for approval. NB Power would also be required to develop integrated least-cost electric plans every two years. Such plans would contain detailed forecasts of electric demand, supply alternatives, etc.

  • Development of clear standards for distribution system reliability and safety. The PUB would require NB Power to comply with all NERC standards for transmission system reliability and interconnection standards.

  • The PUB would develop performance-based regulatory standards for NB Power.

Managed Transition to Wholesale Competition

Under the wholesale competition option, NB Power would become one of many suppliers of electricity into the wholesale market. These suppliers would be required to bid for the right to serve customers in the province, and would have to ensure that their costs were competitive with other suppliers. The elements of this option are:

  • NB Power would be broken up into three distinct entities, separately focused on generation, transmission, and distribution. Whether or not these entities are later privatized would depend on their performance and an overall assessment of deregulation.

  • A vibrant, wholesale generating market would be encouraged to develop, both using new generation supplies developed within the process and purchases of low-priced imports. The generation arm of NB Power would be required to compete on a level playing field with other wholesale suppliers.

  • The distribution arm of NB Power would be required to purchase output from the wholesale generating market using competitive bids.

  • The transmission arm of NB Power would ensure there is sufficient transmission capacity to meet the needs of the province. It would also open up the system to maximize usage by complying with the open access and reciprocity provisions of the U.S. FERC. Wholesale suppliers would be able to sell directly to customers within the U.S., rather than having to sell to NB Power.

  • Similar changes in the regulatory system would be incorporated.

Full Retail Competition and Privatization

Under this third option, restructuring would be all-encompassing. Customers would be able to choose their electric supplier, and NB Power would be separated into distinct private entities. The elements of this option are as follows:

  • NB Power would be separated and privatized, forming NB Distribution, NB Transmission, and NB Generation.

  • An Independent System Operator would be created to ensure equal access to the transmission system.

  • All customers in the province would be able to choose their electric supplier. Those who do not make a choice, or refuse to do so, would be served by NB Distribution as the supplier of last resort.

  • The transmission system would be completely open. All carriers would be permitted equal access to facilities consistent with guidelines under U.S. FERC Order 888 for reciprocity. NB Transmission would submit transmission tariffs to both the newly constituted NB PUB and the U.S. FERC. NB Transmission would encourage maximum use of its transmission facilities. NB Transmission would be required to adhere to the operating principles established by the North American Electric Reliability Council (NERC).

  • NB Distribution would have an obligation to connect all customers. NB Distribution would maintain reliability and safety standards as established by the PUB.

  • NB Generation would be limited in its generation ownership so as to eliminate market power concerns. Generation units would be auctioned off in the province. New generation development by private developers, as well as imports of electricity into the province, would be encouraged. Private suppliers would be responsible for all of their investment decisions.

  • Similar changes in the regulatory system would be incorporated.

The committee carefully weighed these three very different restructuring proposals, debating the relative merits of each in light of the goals and objectives that were identified. Ultimately, the committee determined that the second option, Managed Transition to Wholesale Competition, was the preferred strategy for the province at this time. The details of the committee proposal are presented in the next chapter.

III. Policy Recommendations

The committee agrees with the findings of the Hay-Savoie report that, while New Brunswick continues to enjoy relatively low rates and reliable service, fundamental changes are underway. New Brunswick must address these changes for several reasons. First, to ignore them will mean that, rather than addressing changes in an orderly and controlled fashion, sudden change could be forced upon the province. Such sudden changes could pose a serious threat to the health of the New Brunswick economy. Second, by addressing changes today, New Brunswick will have better control over the pace and the outcome of restructuring. In short, New Brunswick will be better able to achieve the goals identified in the previous chapter: a more efficient electric industry that can help promote economic growth in the province, yet one that also improves environmental quality and fairness for all New Brunswickers.

The experience in the United States and other nations that have either restructured their electric industries, or are in the process of doing so, clearly indicates that generating markets can no longer be characterized as "natural monopolies." Rather, technological changes in generation are enabling development of smaller, modular, and more efficient generating facilities, as well as innovative generating technologies that are actively competing against one another. There is no reason that the benefits of these competitive forces, which we fully expect to reduce the market cost of generation over time, cannot be pursued for the benefit of all New Brunswick residents and businesses.

The committee recommends that the province adopt a policy of managed transition. Many electric restructuring efforts are in their early stages, including important efforts in Ontario and in New England. Electricity is vital to the lives and livelihood of New Brunswick citizens, and too essential a service with which to blindly conduct restructuring experiments. In light of the existing uncertainties, and the early stages of other restructuring efforts, the province should pursue a more deliberate and controlled restructuring policy. Such a policy will allow for the gradual transition of the electric industry from its monopoly structure today. In that way, large-scale and insufficiently tested restructuring approaches can be avoided until there is clear evidence that such approaches are viable. Yet, at the same time, the province can prepare itself for these larger-scale structural changes should they prove appropriate. The committee believes that a managed transition will be less disruptive to the lives of New Brunswickers, yet improve efficiency and equity for all customers, and enhance economic development opportunities in the province. This approach will also allow NB Power the time it needs to restructure itself and face a more competitive future while continuing to provide the high level of service quality the province expects.

Elements of a Managed Transition

The committee has concluded that a managed transition should be composed of four major elements. These are as follows:

  1. The gradual introduction of wholesale competition into domestic electric generation markets and development of a wholesale power exchange

  2. Incentives for improving economic efficiency in regulated transmission and distribution functions

  3. Improved and consistent regulatory oversight

  4. Assurance that all citizens will continue to have access to safe, reliable, affordable, and uniformly priced electricity supplies.

The committee recommends immediate formation of a Stakeholder Group that will develop detailed recommendations and policies and monitor industry restructuring efforts elsewhere to ensure that New Brunswick continues on an appropriate restructuring path.

The committee recommends that, only after the Stakeholder Group has developed detailed guidelines, should the five-year transition period begin, during which the committee expects to see a vibrantly competitive wholesale generation market develop in the province. Once it is clear that such a market has developed, and with the experience gained from observing other regions that have introduced competition, then full retail competition should be considered, along with appropriate mechanisms to ensure continued access to safe, reliable, and uniformly priced electricity supplies by consumers. The committee believes this approach will ensure the greatest possible benefits to the province, while minimizing any adverse impacts from implementing policies with limited real-world experience.

Specific Changes

The committee recognizes the critical role that has been played by NB Power as a crown corporation. However, the committee firmly believes that generation, transmission, and distribution are very different functions, which can be best served with different market structures. Therefore, the committee recommends that NB Power undergo a structural separation into three distinct crown corporations: NB Generation, NB Transmission, and NB Distribution. Each corporation will address the needs of different aspects of the electric market, and each should be required to operate as efficiently as possible.

This recommendation is generally consistent with the internal restructuring that NB Power has already undertaken. NB Power has already formed separate business units for generation, transmission and distribution, and marketing, each of which is to be operated as efficiently as possible. There are, however, two differences between NB Power's reorganization and the committee's recommended structure. First, the committee believes that high-voltage transmission and distribution services are sufficiently different that the province will be better served if these are separated. In that way, distribution services can be more focused on customer needs, while transmission services focuses on maintaining the overall integrity of the interconnected grid. NB Power's proposed marketing business unit, which is to be responsible for the obligation to serve, can also be folded under distribution services. Second, forming separate crown corporations, each with a mandate to operate efficiently and profitably, rather than individual business units within a single corporation, will better prepare NB Power and the province for future changes.

Summary of the Role of Each Crown Corporation

Based on the experience already gained by restructuring elsewhere in Canada and the United States, the committee envisions the roles of the three crown corporations as follows:

NB Generation

Under the committee proposal, NB Generation would continue to own all of NB Power’s existing generating assets, including the Point Lepreau Nuclear Generating Station. Initially, NB Generation would be required to provide electricity to NB Distribution to meet the needs of all domestic electric consumers. NB Generation would use the high voltage system owned and operated by NB Transmission and would deliver power to NB Distribution for ultimate disposition to all retail customers in the province.

The committee does not envision full retail competition at this time. Instead, the committee believes that an evaluation of the relative benefits and costs of retail competition can best be determined over time by examining the experiences with retail competition in other jurisdictions, especially Ontario and the New England states, as they unfold. Should it appear that retail competition will provide significant benefits to customers, the committee recommends that its implementation be revisited by the government after the five-year transition period during which wholesale competition will be implemented.

NB Distribution

Because the committee is not proposing direct retail competition at this time, NB Distribution will initially be required to purchase all electricity for domestic sales from NB Generation, for ultimate delivery to all of its customers in the province. This requirement will ensure that NB Generation is not placed at a competitive disadvantage and will give it time to adjust its generating resource portfolio and operations to increase efficiency during the transition period.

NB Distribution’s requirement to purchase all of its domestic electric power requirements from NB Generation will be gradually reduced over the five-year period. In its place, NB Distribution will be required to develop competitive bidding mechanisms that will ensure the lowest wholesale purchase prices of generation, whether from NB Generation or elsewhere. The committee also recommends that a wholesale power exchange be developed during the transition period to facilitate market transactions.

All growth in electric demand will be available to be served by competitive entities. Similarly, NB Generation will be free to focus on more profitable markets as it sees fit. In this way, both corporations can develop mechanisms that encourage more efficient operations. The committee recommends, however, that proper incentive mechanisms be developed by the Government of New Brunswick to ensure that additional savings and profits are shared for the benefit of both during the transition phase. In other words, savings accruing to one crown corporation should not come as a result of additional costs in another.

This system of gradually introducing wholesale competition to the province over a five-year transition period is consistent with ongoing development of new, independently-owned generating resources. West Coast Energy, for example, is already converting the 250 MW capacity Courtenay Bay oil-fired generating unit to burn natural gas, which is cleaner. Similarly, Tractabel Energy is negotiating with NB Power to develop a new gas-fired generating station adjacent to the 450 MW Belledune coal-fired generating plant. This proposed generating facility could serve as an anchor point for the new gas pipeline lateral to be built into northeastern New Brunswick.

As previously stated, NB Distribution will be responsible for providing electricity to retail customers in the province. NB Distribution will also be responsible for providing electricity in a safe, efficient, and reliable manner. The committee recommends development of an incentive-or performance-based regulatory system that rewards NB Distribution for improved service quality and efficiency. This will require development of measurable performance standards and targets. Similar approaches are already in use or under development elsewhere, including Ontario.

NB Distribution will be responsible for all customer service issues, undertaking the role that NB Power has assigned to its marketing unit. NB Distribution will serve as the contact point for all retail customers. It will connect and disconnect all customers, provide billing and metering services, maintain the distribution system, and respond to system outages.

NB Transmission

NB Transmission will own and operate the high-voltage transmission system in the province. It will serve as a common carrier, providing access to all parties wishing to use the transmission system, whether for delivery of electricity within the province, for exports out of the province, or for wheeling through by other parties. NB Transmission will continue to comply with established operating and reciprocity requirements that have been established, so as to encourage cross-border wholesale market transactions, and will encourage fair and efficient use of provincial transmission assets. NB Transmission will also serve as the eventual operator of a wholesale power exchange market, much like those being created in other jurisdictions. These exchanges facilitate purchases and sales of electricity, reduce transaction costs, and improve price transparency, all characteristics of competitive markets.

Because NB Transmission will likely be the smallest of the three crown corporations, ensuring that it is as efficient as possible will be important. For example, rather than duplicate maintenance staff, NB Transmission can contract with NB Distribution for transmission line maintenance services.

Debt Issues

One of the major concerns of the committee is the significant debt level of NB Power, which constitutes a major component of the total indebtedness of the province. The committee is concerned that this debt load needs to be addressed if restructuring the province’s electric industry is to succeed. The committee believes that NB Power must soon release a comprehensive proposal to address its debt level and the orderly means of reducing that debt.

Although it might be tempting to consider immediate sales of NB Power's generating assets, the committee believes it is premature to do so at this time. One of the first requirements in developing a competitive wholesale generating market will be development of standards to prevent market power abuses arising from excess concentration of generating assets with too few owners. As discussed in the next chapter, the committee recommends forming a special stakeholder committee that will develop guidelines to prevent market power abuses. Those guidelines, which the committee believes should be developed during the first year of the transition, will provide the foundation upon which future generating asset sales could be contemplated.

Debt issues are also at the core of stranded cost determinations. In the absence of any specific actions to change the market structure in the province, generating costs will continue to be paid by ratepayers, as they are paid today. Under the proposed wholesale market structure, however, "stranded" costs will be created to the extent that generating assets are sold for less than their book values, or if generating assets are subject to accelerated write-downs of their debt. In both cases, the province will be required to pay off the remaining debt.

If NB Generation is to become a truly competitive entity, it cannot suddenly be saddled with all of the debt associated with its existing generating assets. These generating assets were developed for the benefit of all NB Power customers in the province, and their costs should be the responsibility of all customers. Neither, however, would it be equitable to guarantee that all of NB Generation's fixed costs be covered, while requiring other wholesale competitors to recover both their fixed and operating costs. To do so would overpay NB Generation's stranded costs and hamper development of a truly competitive wholesale generation market.

The committee recommends that a competitive transition charge (CTC) be calculated and levied on all customers. The CTC should be designed to minimize the potential for uneconomic bypass (i..e., where a retail customer generates its own electricity at a higher cost than otherwise available because its total tariff charges are higher still), while recovering the estimated net difference between the estimated market value and the book value of NB Generation’s assets. This CTC will allow NB Generation to recover costs that might otherwise be unrecoverable in the transition to a competitive wholesale generating market. The committee also believes, however, that NB Generation should be required to demonstrate that it is doing everything possible to minimize stranded costs, and that final design and approval of a CTC mechanism, including the potential imposition of exit charges, should be placed with the NB PUB.

Point Lepreau

The committee believes it is critical to maintain continued public ownership of the Point Lepreau Nuclear Generating Station in the near term. There are critical environmental and safety requirements that must be closely monitored. While it may be possible to transfer ownership of Point Lepreau to the private sector in future, such a sale and transfer should not be contemplated until market issues (owing to the plant representing a large fraction of the province's overall generating capacity) and environmental/safety issues are addressed.

Based on presentations made to the committee by NB Power, the committee believes that the plant’s economics remain favourable at this time. The plant should continue to be operated to provide maximum economic benefits to the province. However, because of the importance of this generating facility and its contribution to the overall debt level of NB Power, the committee recommends that the plant’s economic value be independently assessed every two years. The committee believes that such assessments should be carried out under the auspices of the NB PUB. Furthermore, the committee believes that the review should be delivered to the responsible minister for consideration.

Self-Generation and Wholesale Generation

The committee heard testimony from several industrial customers who wish to generate their own electricity. We understand the desire of these customers to reduce their operating costs as much as possible, so as to improve their global competitiveness. However, the committee wishes to avoid so-called "uneconomic by-pass." Uneconomic by-pass occurs when individual customers self-generate, because it is cheaper for them to do so than to purchase an equivalent amount of electricity under their current tariffs, but the overall net economic cost to the province of this self-generation is greater than the cost of electricity supplied by the market.

Self-generation that creates uneconomic by-pass redistributes costs to other customers and reduces the overall economic well-being of the province. The committee believes that customers who wish to develop on-site generating facilities should be free to do so, as long as these facilities do not adversely affect overall system reliability. If customers wish to develop their own generating facilities, while still remaining connected to the overall distribution grid, they should be required to pay appropriate stand-by charges, so as to avoid cross-subsidies. Last, customers who wish to self-generate and no longer wish to be connected to the transmission and distribution grid should be required to pay an exit fee, to be determined by the PUB. (Guidelines for exit fees should be established in the next phase of the transition.) The committee believes that exit fees will compensate NB Generation, NB Distribution, and NB Transmission for system investments that were required on behalf of customers, and will prevent other customers who remain on the grid from being saddled with additional debt.

The committee also does not believe that customers who self-generate should be guaranteed a buyer for all excess generation, as is the case under so-called "net-billing" arrangements. Under such arrangements, excess generation could be resold to NB Distribution at the customer’s existing tariff rate. Customers who choose to develop their own generating facilities and wish to market any excess generation should compete in the wholesale market on an equal footing with all other wholesale market participants. If NB Distribution wishes to negotiate with self-generating customers having excess capacity, then it should be free to do so.

Companies wishing to develop new generating facilities should not be prevented from doing so, assuming they meet all environmental and siting requirements. Wholesale developers of generation resources should be provided equivalent transmission access to facilitate export and domestic sales.

Regulation

The committee believes that regulation of the electric industry during this transition period is critical. The committee recommends that the New Brunswick Legislature empower the NB PUB in a similar vein to that described in the Gas Distribution Act, 1999. Specifically, the committee recommends that the NB PUB:

  • Have a staff of independent professionals who are thoroughly knowledgeable in all aspects of the electric industry, and who do not have any financial ties to NB Generation, NB Distribution, or NB Transmission.

  • Be cognizant of regulatory actions in the emerging natural gas market in the province so as to ensure that electric and natural gas regulation and policies do not work at cross-purposes or otherwise reduce the overall economic benefits derived from natural gas and electricity in the province.

  • Develop clear standards for distribution system reliability and safety. The PUB will require NB Transmission to comply with all North American Electric Reliability Council (NERC) standards for transmission system reliability and interconnection standards.

  • Develop performance-based regulatory standards for NB Distribution, NB Generation, and NB Transmission to ensure high-quality service at the least cost. Financial incentives should be developed for all employees so as to encourage improved economic performance and efficiency.

  • During the transition period, require that all rate increases be submitted to the NB PUB for approval. The ability to unilaterally raise rates by no more than the annual inflation rate should be eliminated. After the transition period, and upon evidence that a vibrant wholesale market has developed, then NB Distribution and NB Transmission will continue to be regulated by the NB PUB. A performance-based regulation format should be adopted that incorporates incentives for productivity gains, while also recognizing technological improvements.

  • Select an independent evaluator to assess the economics of continued operation of the Point Lepreau Nuclear Generating Station every two years. The government should be required to approve any accelerated write-downs of Lepreau or other generating assets, and evaluate recovery mechanisms.

  • Minimize cross-subsidies of rates between classes of customers, while ensuring that all ratepayers have access to safe, reliable, affordable, and uniformly priced electricity. The committee recognizes that within class subsidies may be required to meet the goal of universal access to affordable electricity.

  • Develop, administer, and monitor a competitive transition charge that will be used to assist NB Generation with the transition to wholesale competition.

The Transition Period

The five-year transition period will provide the time for critical issues to be evaluated. First, this transition period will allow the government to evaluate the relative benefits of other restructuring efforts worldwide, especially those in Ontario and New England. The committee wishes to ensure that change in New Brunswick can be accomplished with as few surprises as possible.

Second, the transition period will allow time for a vibrant and competitive wholesale generating market to develop, or expose limitations, such as excessive concentrations of market power, that prevent development of such a market.

Third, the transition period will provide time for NB Generation to determine the market value of its generating assets, and develop the expertise with which to compete successfully at the wholesale level.

Fourth, the transition period will allow NB Distribution to refine approaches for competitive selection of generation suppliers, so as to ensure that its retail customers reap the greatest possible economic benefits.

Figure 1, which appears following the appendices, provides a schematic of the transition period. The committee envisions an approach that provides for the orderly transition for both NB Generation and NB Distribution. The committee recommends that NB Distribution be required to purchase 100 per cent of domestic requirements from NB Generation in the first year of the transition period. This requirement will be reduced to 80 per cent in the second year of the transition period, 60 per cent in the third, 40 per cent in the fourth, and 20 per cent in the fifth year. The actual sales amounts should be based on sales that are normalized for weather conditions. After five years, NB Generation will no longer be guaranteed any level of sales to NB Distribution. Instead, NB Generation will be required to have developed a competitive portfolio of generating assets. The need for NB Generation to continue to receive CTC payments should also be evaluated at this time.

Similarly, during the transition period, NB Distribution will be able to rely on NB Generation for a declining percentage of its electric supply. This will force NB Distribution to develop methodologies to competitively source electric generation supplies in a wholesale market.

The committee also recognizes that these transitional obligations may interfere with competitive opportunities for both companies. Therefore, the committee recommends that a "shared-savings" approach be developed that would allow greater flexibility for both companies, while ensuring that such flexibility does not cause adverse impacts on one or the other. The committee recommends that the NB PUB oversee both development and implementation of such a shared-savings approach.

At the end of the transition period, the committee believes that the relative merits of retail electric competition should be evaluated by the NB PUB and the government. If there appear to significant benefits from retail competition, both based on the wholesale competition experience within New Brunswick and experience in other jurisdictions, then retail electric competition should be allowed in the province. However, if there is no clear demonstration of benefits from retail competition, then the Legislature should be under no obligation to implement it.

Environmental Issues

More than a few groups and individuals appearing before the Select Committee stressed the importance of environmental issues. It is clear to us that New Brunswickers value their environment and see the way in which electricity is generated and distributed as an integral part of the environmental equation. Some argued strongly for Demand Side Management programs as a means of reducing the demand for electricity and thereby conserving resources. Others spoke of the desirability of making so-called "green power" available to consumers in the province, even if it required a premium rate.

In a very real way, the environmental issues surrounding electricity go to the heart of the vision of New Brunswick in the next century. It seems to us that New Brunswick will want to present itself as a good place in which to live and work, a place in which preserving the integrity of the environment is a high priority. That will be an important element in attracting the new businesses of the next millennium, in drawing here those who will start up the creative new enterprises that will drive our economy in the future.

Accordingly, we believe it is important for New Brunswick to embrace environmentalism not only to mitigate global warming, acid rain and other pollution problems, but also to project a proper environmental image. In terms of electricity restructuring, we strongly believe that environmental quality should not be sacrificed in the transition to a more competitive market.

The committee believes that new gas-fired generating technologies will have significantly lower air pollution emissions than existing fossil fuel generation. Thus the arrival of this technology in New Brunswick will, of itself, improve environmental quality. Meanwhile, New Brunswick has established standards for clean air and water which current generating plants are required to meet. The Energy Task Group of the Premier's Round Table on Environment and Economy, in its brief to our committee, urged that the same standards apply to electricity imported into the province. The committee endorses this recommendation.

The committee also believes that Demand Side Management programs offer real potential for reducing energy demand and should be implemented. They should include widespread public education programs to promote energy savings. It seems obvious to us that these Demand Side Management programs should not be administered by utilities, which after all are in the business of selling electricity for profit, but instead by an independent agency or credible non-profit organization. Means for funding these programs will have to be determined, but a method widely employed elsewhere is to impose a specific surcharge on the transmission of electricity.

The committee also believes that providing consumers with the option of choosing "green power," that is, electricity generated using renewable resources like wind, sun and biomass, is a desireable goal, even as we recognize that it is difficult for New Brunswick to provide such power by itself. We believe this province should become a strong advocate of "green power" and, through its membership in the Canadian Council of Ministers of the Environment, should take the lead in urging that a national program of research and development of "green power" sources and standards be initiated.

Conclusions

The committee believes that, taken together, its recommendations will provide a solid foundation for the orderly transition of the existing monopoly franchise into a more competitive, dynamic industry. By recasting NB Power into three distinct crown corporations, each with a separate mission to operate as efficiently as possible, New Brunswick will be able to enjoy the potential promise of a more competitive environment, while still retaining the necessary public service characteristics that have enabled all citizens to enjoy affordable, safe, and reliable supplies of electricity.

As we continue to learn from restructuring efforts elsewhere in Canada and abroad, this managed transition will enable the government to "fine-tune" its policies so as to best meet the unique needs our citizens.

IV. Conclusions and Action Plan

Electricity will continue to increase its importance in our daily lives. Throughout the world, the electric industry is undergoing massive changes, brought about by many different forces. The challenge for New Brunswick is to guide change in an efficient manner, so that the benefits of these changes can be enjoyed, while minimizing disruption. Although New Brunswickers enjoy relatively low rates and reliable service, the province must confront the changes occurring elsewhere in a timely and efficient manner.

To do that, the Select Committee on Energy proposes a policy of managed transition. This proposal includes a restructuring of NB Power into three distinct crown corporations that will focus individually on generation, transmission and distribution. It includes development of a new regulatory structure to encourage greater operating efficiency through performance-based regulation, and consistency between natural gas and electric regulation. The proposal also incorporates a measured transition to wholesale competition over a five-year period. Throughout this transition, the government will continue to monitor restructuring developments elsewhere in Canada and abroad. This will enable New Brunswick to chart a course that maximizes benefits, while reducing the risk of unanticipated shocks.

At the end of the five-year transition period, New Brunswick may decide it wishes to restructure the electric industry further, introducing retail competition for all customers. Or it may decide that maintaining wholesale competition is the best way of keeping prices affordable and access universal. Many uncertainties could affect future decisions. Technological change may make it possible for individual consumers to generate their own electricity on-site at a lower cost than existing central station generation sources. New environmental concerns may emerge that will require rapid adjustments to the generating resource mix. There may even be future energy price shocks that arise from tensions in the Middle East. The province cannot eliminate these uncertainties, but it can stress development of an electric restructuring policy that is flexible and responsive to changing future events.

Action Plan

The most critical component to the success of any restructuring policy is to "get the details right." The committee has examined many issues and developed an overall policy proposal. It was briefed by experts from other jurisdictions, and heard testimony from many individuals, businesses, and interest groups within the province. The committee does not, however, possess the detailed expertise or background required to address the critical details that must be debated and determined if the restructuring framework outlined is to succeed. The need to address these critical aspects is all the more reason to proceed in a managed, orderly fashion.

To develop the detailed policies that will be required, the committee first proposes that the government form a broad Stakeholder Group. This group should be composed of generation developers, businesses, consumer groups, and regulators. It should be charged with crafting the specifics for the broad policy proposal presented in this document. This will be an undoubtedly difficult and perhaps contentious task. But to ignore these issues will, at best, condemn this proposal to irrelevance and, at worst, may work in direct opposition to the goals the committee has put forward.

The committee believes the Stakeholder Group should be chaired by a well-respected New Brunswicker, who can provide both an understanding of electric restructuring and an ability to facilitate productive debate. The Stakeholder Group will need to address the following issues through subgroups that will focus on each:

  1. Preventing market power and anti-competitive practices in the emerging wholesale generating market

  2. Designing appropriate mechanisms for the sale of generating assets, should the market power guidelines require NB Generation to divest itself of some portion of its generating resource portfolio

  3. Improving environmental quality and energy efficiency, including development of green power guidelines

  4. Ensuring all consumers have access to safe, affordable, and uniformly priced electricity

  5. Preparing a competitive bidding structure for NB Distribution

  6. Developing a performance-based regulation framework that promotes greater operating efficiency for all three crown corporations

  7. Designing transmission pricing and access rules, including the design of a wholesale power exchange

  8. Designing innovative rate structures to promote efficient use of electricity and minimize uneconomic by-pass

  9. Developing new governance structures for NB Generation, NB Distribution, and NB Transmission

  10. Monitoring and evaluating procedures to ensure that the goals of restructuring are being met.

The tasks awaiting these individual subgroups are described in the following paragraphs.

Market Power Subgroup

Market power is the ability of a firm, alone or in concert with other firms, to profitably maintain the price of a product or service above competitive levels for an extended period of time. If generation currently owned by NB Power is simply transferred to another single entity, that entity will possess significant market power in the province. But there may also be efficiencies for firms wishing to own multiple generating units. The market power subgroup should be charged with developing the necessary rules to prevent accumulation of market power, as well as to prevent anti-competitive abuses that prevent development of a vibrantly competitive wholesale generation market. However, the subgroup will also need to ensure that realization of generating economies is not inhibited.

The subgroup must develop its recommendations within the first year of the transition, prior to NB Distribution being able to solicit offers for electricity from suppliers other than NB Generation.

Generating Asset Sales Subgroup

Should market power concerns necessitate the sale of some or all of NB Generation's assets, there should be mechanisms in place to ensure that such sales are accomplished in a fair, efficient manner that can achieve the highest market price. This will not only allow the province to reduce its stranded debt load, but also will ensure that assets will not simply be transferred to an entity that will exert anti-competitive influence in the new wholesale market.

The committee believes that some form of generating asset auction will be the most effective method to sell NB Power's generating assets, should such a sale be necessary or desirable. The committee expects that this subgroup will develop appropriate recommendations for the structure of such auctions.

Environmental Quality Subgroup

The environmental quality subgroup (in collaboration with the Canadian Council of Ministers of the Environment) should develop guidelines for "green" power, beginning with a definition of green power that best serves the needs of the province. This subgroup should determine the tradeoffs that must be made to develop new resources, recognizing that no generation technology is without any environmental impact whatsoever. Moreover, this subgroup should determine a framework for the most efficient regulatory treatment of environmental issues. Last, the subgroup should develop guidelines for demand-side management program implementation and recommendations to the PUB.

Consumer Access and Affordability Subgroup

This subgroup will be responsible for developing guidelines for maintaining consumer access to safe and reliable electricity supplies. This will entail developing recommendations for low income consumers as well as rural consumers.

In addition, this subgroup will be the appropriate body to carefully consider and recommend action to ensure equity among all New Brunswickers and regions, with special reference to the separate distribution systems maintained in Saint John, Perth-Andover and Edmundston.

Competitive Bidding Subgroup

This subgroup should develop recommendations to be implemented by the PUB concerning the use of competitive bids by NB Distribution to secure least-cost electric supplies for NB Distribution's customers. The subgroup will likely need to work with the Market Power Subgroup to ensure that competitive bids are truly competitive and are completed in a timely manner.

Performance-Based Regulation Subgroup

This subgroup should develop recommendations to the PUB for performance-based regulation (PBR) structures that are appropriate for each of the three separate crown corporations. The subgroup should consider alternative PBR schemes and their relative merits, examine what other jurisdictions have implemented, and work with the PUB to ensure that effective PBR schemes are implemented in New Brunswick. These should ensure sufficient incentives exist for each crown corporation to improve efficiency, while maintaining safety and reliability standards. The subgroup should also work with the PUB to develop those safety and reliability standards.

Transmission Pricing and Access Subgroup

This subgroup will develop guidelines for ensuring efficient transmission access and pricing. It will need to consider rules that are fair, not overly complex and costly to monitor, and ensure maximum availability to export markets and supplies of imported electricity. The rules developed by this subgroup should also be consistent with U.S. FERC guidelines for comparability and reciprocity, again so as to maximize use of the provincial transmission system.

Rate Design Subgroup

This subgroup should develop guidelines for rate designs that promote the efficient use of electricity and minimize cross-subsidies. It will need to ensure rate consistency geographically and across customer classes. The subgroup should also address the potential problems of uneconomic by-pass to ensure that customers who do choose to leave the system do not impose higher costs on those who remain.

Governance Subgroup

This subgroup should develop the necessary governance structures for the three crown corporations, to ensure that they are run as efficiently as possible. The governance structures should be such that the three corporations have clear responsibilities and reporting requirements, and are protected from short-term political decisions affecting long-term electric industry goals.

Monitoring and Evaluation Subgroup

Because the committee is proposing a transitional structure that provides maximum flexibility, there must be a means for monitoring whether the goals set out by the committee are being met over the five-year transition period. This subgroup should develop the appropriate measures to enable the government to determine whether these goals are being met and, if not, appropriate actions that should be taken.

Schedule

Before the transition described in Chapter III can begin, the Stakeholder Group and the subgroups should develop their detailed recommendations. The committee recommends that the government form the Stakeholder Group as soon as possible after this report is received, and provide the necessary resources to complete the tasks before it within one year. Once the Stakeholder Group has completed its work, the transition to a more competitive and efficient system that meets the unique needs of New Brunswick can begin.

Appendix 1: List of Presenters at Committee Briefing Sessions

Mr. D’Arcy McGee, President, INTENCO Energy Consultants, Ltd.

Mr. John Howe, Vice President, American Superconductor Corp. (former Chair, Massachusetts Dept of Public Utilities.)

Mr. Tom Welch, Chair, Maine Public Utilities Commission

Mr. Chris Dutton, Chief Executive Officer, Green Mountain Power Corporation

Mr. Peter Brown, Senior Partner, Brown, Olson & Wilson

Mr. Michel Gordeau, Vice President, Hydro Quebec

Mr. Ivan Harvie, Senior Engineer, Electricity Trade, Transmission and Regulation, Natural Resources Canada & National Energy Board

Mr. Leon Lowry, Special Assistant to the Director, FERC Office of Electricity Pricing and Regulation

Appendix 2: List of Presenters at Public Hearings

List of presenters:

Premier’s Council on the Status of Disabled Persons
Neil G. Craik
(Dr.) Norman Betts
Nova Scotia Power
CIBC Wood Gundy
Conservation Council of New Brunswick
New Brunswick Federation of Woodlot Owners
New Brunswick Division - Alliance of Manufacturers and Exporters Canada
Reginald Tweeddale
Dr. Liuchen Chung
Tractebel Electricity and Gas International
Keswick Island Property Owners Association
Myron Gordon, Professor Emeritus of Finance
J.D. Irving, Limited
Saint John Citizens’ Coalition for Clean Air
New Brunswick Chamber of Commerce
Campaign for Nuclear Phase-Out
Irving Oil
Canadian Nuclear Workers Council
Saint John Energy
Eric L. Teed, O.C., C.D., Q.C.
Dorothy Dawson
J. Bennett Macaulay
Frank Jopp
Écoversité (Moncton)
Syndicat professionnel des scientifiques de l’IREQ (SPSI) et Centre d’études réglementaires du Québec (CERQ)
New Brunswick Federation of Labour
New Brunswick Mining Association
Bill Belliveau
People Against Nuclear Energy
The Energy Task Force Group of the Premier’s Round Table on Environment
Atlantic Salmon Federation
Association of Professional Engineers of New Brunswick
Allison Connell
Northwest Industrial Commission Inc.
Village of Perth-Andover
International Brotherhood of Electrical Workers
New Brunswick Power Corporation
Noranda Inc.
PCI Chemicals Canada Inc.
City of Edmundston
Town of Dalhousie

Briefs submitted:

Fredericton Chamber of Commerce

Dr. Samuel M. Sami
Professor and Director, Reseach Centre for Energy Conversion
University of Moncton

Village of Minto

Village of Sainte-Marie-Saint-Raphaël

Mr. Leo Roach

Appendix 3: A More Detailed Review of Electric Restructuring Elsewhere

Restructuring Efforts Elsewhere in Canada

Alberta

Of all the Canadian provinces, Alberta has gone the furthest in electric restructuring, beginning its examination of electric industry restructuring in 1993. Alberta wished to establish a fair transition mechanism for the province, and introduce regulatory reforms and an industry structure that would preserve the province's competitive electric prices. Alberta’s first major restructuring legislative act was the 1995 Electric Utilities Act (EUA). The EUA established a broad framework for the electric industry within the Province, including open competition for generation, an open access power pool, an independently managed transmission system, continued regulation of distribution services, and financial instruments to manage stranded costs during the transition period.

Currently, Alberta is developing necessary regulations to implement this legislation. Five or six key sets of regulations remain to be developed. The Independent Assessment Team’s final report and recommendations are due to be released on May 30, 1999. Once the Electric Utilities Board has reviewed the report, an auction of generating resources will be conducted. Alberta also anticipates completing customer choice regulations by July 1999, in order to ensure the beginning of a pilot choice program for industrial customers in 2000.

British Columbia

British Columbia was also active in electricity policy review and development. In 1995, the British Columbia Utilities Commission (BCUC) conducted a ten-month inquiry into the benefits and risks of retail competition and market restructuring. It recommended that the market should be vertically de-integrated and that fairer wholesale generation competition should be initially implemented.

Four main points drove the initial desire for reform in British Columbia. These included reforms to enhance export market access, greater consumer choice, additional service options, and the ability for independent generators to compete in the wholesale market.

These four factors persuaded the provincial government to form a Task Force in March, 1997, and provide Terms of Reference that outlined the policy framework for the Task Force. The Terms did not advocate immediate implementation of retail electricity tariffs, but did advocate market reforms of the BC electricity market. These included greater competition among electricity producers and greater customer choice while ensuring reliability standards, unfettered access to export markets for electricity producers, and continued incorporation of environmental and social considerations in the management of the electricity producers and in regulation of the electricity industry. These terms laid the foundation for the key issues in the Advisor’s Reform Proposal.

Customer Access

Without a monopoly in generation, the Advisor did not see a compelling reason to prevent buyers and sellers of electricity from trading with each other. Out of this belief, the Reform Proposal called for phased-in retail access.

Market Structure

Grid-related functions were to be separated from generation and distribution functions. An independent Grid Oversight Committee would be established to regulate the new Transmission Business Units of B.C. Hydro and West Kootenay Power, to ensure they are independent from the interests of their generation divisions. The B.C. Power Exchange, a trading market for buyers and sellers, would also be created. In Phase 2, vertical de-integration would be completed. B.C. Hydro’s Transmission Business Unit would be transformed into a publicly-owned B.C. Grid Company.

Social Concerns

The Advisor’s report paid special attention to potential social concerns associated with electric restructuring. All of the reforms to address the social concerns surrounding the Advisor’s Proposal were to be implemented during Phase 1. The BCUC would retain control over all tariff policies, including postage stamp rates, system extensions, connections, etc. The BCUC would also retain its existing responsibilities for system reliability, security of supply, and consumer protection.

Environmental Concerns

Another social concern was the effect of restructuring on the environment. To address these concerns, the Advisor’s proposal recommended that distribution utilities retain the responsibility for energy efficiency programs. These programs were to be justified on the basis of utility costs or customer costs, and would remain regulated by the BCUC.

The Proposal incorporated a resource "Portfolio Standard" to foster "environmentally desirable technologies," defined as cogeneration, wood waste, small hydro, resource additions at existing large hydro, solar, tidal, geothermal, landfill gas, and wind.

Evaluation

The final section of the Advisor’s Proposal assessed the proposal against the Terms of Reference. From this analysis, the Advisor concluded that restructuring would create jobs and promote economic development, provide greater consumer choice, maintain high reliability, continue public stewardship of the province's hydroelectric resources, promote additional export sales, and address environmental and social concerns.

The Advisor’s Reform Proposal was never implemented. The Advisor was unable to achieve an overall consensus among the members, and the BCUC did not believe it could fairly implement the proposal without this consensus. In the meantime, B.C. Hydro and West Kootenay have completed wholesale restructuring.

Nova Scotia

The Province of Nova Scotia privatized the former crown corporation, Nova Scotia Power in 1992. Currently, Nova Scotia Power sells generation to the seven other utilities that serve Nova Scotia. Technically the smaller utilities can compete for customers, however, by buying power from the same source they can not realistically pursue competition at this time. Regulators in the province are aware of changes occurring in other provinces and the United States, but no formal restructuring initiatives have been pursued.

Ontario

The Advisory Committee on Competition in Ontario’s Electricity System, chaired by Donald MacDonald (the "MacDonald Commission") released a set of rules on how to open up Ontario’s electricity market in June 1996. Nine months later, the Ontario Government released a White paper, Direction for Change: Charting a Course for Competitive Electricity and Jobs in Ontario, the government’s plan for introducing full competition by 2000. There were three overarching reasons compelling industry change in Ontario: (1) the pace of change in other areas such as New England was threatening to leave Ontario behind; (2) Ontario Hydro had been fraught with performance issues over the past 10 years – especially in regards to its nuclear facilities; and (3) a provincial belief that a new industry structure would open up more business opportunities and enhance economic development.

The recommendations embodied in the Government’s White Paper largely mirrored those found in the MacDonald Commission’s report. The White Paper described seven objectives: (1) supporting investment and jobs with competitively priced electricity; (2) providing more choices for Ontario's citizens; (3) improving reliability, safety, and environmental quality; (4) creating a more efficient distribution system; (5) subjecting new generating supply decisions to the discipline of the market; (6) establishing a level playing field for all participants; and (7) improving financial soundness by reducing utility debt levels.

The White Paper addressed steps to meet these objectives through a nine-point plan detailing specific policy commitments, new rules and institutions, new mandates and responsibilities, and a proposed timeline for implementation. Components of the plan included:

  • Wholesale and retail competition by 2000. Ontario Hydro’s transmission grid and wires would serve as common carriers with posted prices, with an Independent Market Operator – a separate Crown Corporation – coordinating the market through a power exchange and dispatching power.

  • Redesign of the Ontario Energy Board. As a means to provide better protection to Ontario’s electricity customers, the Ontario Energy Board (OEB) would be strengthened. Responsibilities would include: regulating transmission and distribution tariffs; examining and creating a performance based approach to regulation; overseeing the IMO and promoting the development of competition in generation and retail services; guarding against market power abuses; and regulating the natural gas business.

  • Maintain commitment to environmental protection. Existing limits on sulfur dioxide, nitrogen oxides and carbon dioxide emissions would remain, with flexible and cost-effective environmental protection measures considered in the design of the electricity market. Restructuring Ontario Hydro. Ontario Hydro would be reorganized into three separate companies – the IMO, the Ontario Electric Generation Corporation (OEGC) and the Ontario Electric Services Corporation (OESC). The new entitles would have clear business mandates with flexibility to make operation and investment decisions, and the freedom to engage in joint ventures and other strategic partnerships

  • Place new companies on sound financial footing. The issue of "stranded debt," or debt that Ontario Hydro could not service as a commercial entity, would be dealt with to ensure financial soundness.

After release of the White Paper, the Market Design Committee (MDC) was formed to develop the necessary market rules to implement the Government’s proposed plan Highlights of this report included market power mitigation requirements, under which the OEGC will control 35% or less of Ontario’s electricity supply; a usage based transmission charge for the immediate future to recover the sunk, maintenance and refinancing cost of the existing grid assets; local distribution companies would be required to provide or arrange default supply to all customers who have not elected alternative suppliers; and seven technical panels and 20-some sub-panels established to address "detailed" issues.

Quebec

Hydro-Quebec embraced wholesale competition in 1998, but does not intend to pursue measures such as privatization plans. Hydro-Quebec has not taken definitive steps toward restructuring, but has positioned itself to take advantage of deregulation in the United States. Through its two subsidiaries, H.Q. Energy Services and TransEnergie, Hydro Quebec has positioned itself to buy and sell power and energy, purchase transmission services, and possibly purchase generating capacity in the United States.

Other Canadian Provinces

None of the other four provinces--Manitoba, Saskatchewan, Prince Edward Island and Newfoundland--has pursued electricity restructuring on a broad basis. Manitoba Hydro did open its transmission grid and started wholesale competition in early 1997, which enabled it to join the Mid-America Power Pool, and restructured itself internally. Moves in the other provinces have ranged from modest preliminary steps to maintaining a watchful eye on developments elsewhere.

Restructuring Efforts in the United States

In the United States, many states have taken at least preliminary steps toward electricity restructuring. Providing retail customers with a choice in electrical supplier--and therefore lower rates--is a prime motivation. To date, 19 states have taken regulatory or legislative action, while most other states are examining the issue.

Since the passage of the Public Utility Regulatory Policies Act (PURPA) in 1978 and the introduction of Qualifying Facilities (QFs) as a competitive force in wholesale bulk power markets, the electric power industry in the United States has moved away from an industry dominated by regulated monopoly players. Gradually, a workably competitive power market has been established. A variety of regulatory initiatives have pushed the industry along the continuum from regulation to workable competition.

Restructuring Objectives in New England and the Northeastern U.S.

The fundamental driver behind the Northeast’s restructuring initiatives has been creation of competitive forces to reduce costs to end-use customers. Utility Commissions, legislators, governors, customers, and utilities have expressed varying degrees of concern regarding the level of electric utility rates in the region. As illustrated in Tables A3-1 and A3-2, average electric rates in New England and New York rank among the highest in the U.S., with all states ranked in the top 10 of the Continental United States. Average electricity rates in New York in 1997 were 62% above the national average, while average rates in New England were 51% above the national average in that same year.

Table A3-1: Regions Ranked by Average Electric Rates (US¢/kWh 1997)

1

Pacific Noncontiguous

11.6

2

New England

10.4

3

Middle Atlantic

9.8

4

Pacific Contiguous

7.6

5

South Atlantic

6.6

6

East North Central

6.5

7

West South Central

6.1

8

West North Central

5.0

9

East South Central

5.0

U.S. Average

6.9

Table A3-2: States Ranked by Average Electric Rates (US¢/kWh 1997)

1

Hawaii

12.4

2

New Hampshire

11.6

3

New York

11.2

4

Rhode Island

10.7

5

Massachusetts

10.5

6

New Jersey

10.5

7

Connecticut

10.5

8

Alaska

10.1

9

Vermont

10.0

10

California

9.5

Bold- designates New England or Northeastern state

While restructuring has been viewed by most states as a means to reduce costs, concerns regarding fairness (i.e., that all customers benefit from restructuring), have also been addressed. Regulators have expressed reluctance to create "winners" and "losers" in restructuring, particularly if the losers are likely to be smaller residential and commercial customers. (That these same customers may have benefited for years from cross-subsidies paid for by large industrial and commercial customers have rarely been part of the decision process.) This tension between market solutions and consumer protection has been evident in the consideration of strategies for addressing the obligation to serve, standard offer service, and maintaining system reliability.

Restructuring Efforts at the Federal Level

Restructuring actions have also been occurring at the federal level. In the 105th Congress, which ended in January 1999, legislators pushed policies to restructure the electric industry on a national level. Some of these proposals simply sought to remove federal impediments to deregulation; others sought to comprehensively restructure the industry on a national level. The 106th Congress has begun to consider electric restructuring this year with the introduction of four related bills thus far this year.

Last year, the Clinton Administration also became involved in the U.S. debate through the release of its own legislative proposals. Energy Secretary Bill Richardson recently informed Congress that the Administration has fine-tuned its proposal from last year to be "more customer-friendly" and will likely include new provisions such as clarifying the role of the federal power marketing administration in a competitive market.

Connecticut

In 1998, the Connecticut legislature passed legislation opening up retail access for all of the state’s by July 2000. Connecticut took a legislative route to restructuring.

After a series of negotiations with key stakeholders and amendments, the Governor signed Public Act 98-28 on May 6, 1998. Some of the key features of this legislation include:

  • Retail access for 35% of customers by July 1999, and for all customers by July 2000.

  • Utilities required to unbundle and to separate all of their generation assets.

  • Stranded cost recovery contingent upon the divestiture of all non-nuclear generation assets.

  • Nuclear generation assets subject to a public auction by January 1, 2004.

  • Securitization of certain transition costs, to be recovered through a non-bypassable charge.

  • Codes of conduct for distribution companies.

  • Comprehensive consumer education effort.

  • System benefits charge for certain public programs.

  • Renewable portfolio standards.

Maine

The State of Maine pursued regulatory and legislative restructuring measures. In July 1995, the Maine legislature passed legislation directing the Maine Public Utilities Commission (MPUC) to study the industry and develop both recommendations and a plan for the Legislature in order to consider retail competition within the state by the year 2000. The Maine legislature used the MPUC recommendations as it began to consider electric restructuring legislation during 1997, and a restructuring bill was signed into law in May 1997.

Since that time, the MPUC has initiated several rule-making dockets involving issues such as consumer education, standard offer, QF contracts, and a renewable portfolio requirement. The restructuring legislation does not require the major utilities to file restructuring plans or settlement agreements, however, all three utilities must file and receive approval of their plans for asset divestiture. Currently, all three utilities have chosen buyers for their assets.

Key features of the Maine’s restructuring legislation include:

  • Retail access date of March 1, 2000 for all customers.

  • Utilities must divest all generating assets by March 2000. Ownership in nuclear plants, QF contracts and power plants outside the United States do not have to be divested, however, power from these facilities must be sold or auctioned off.

  • Requires suppliers to be licensed by the MPUC.

  • Includes a 30% renewable portfolio standard through the year 2008 for all suppliers within the state.

  • Metering and billing services (ancillary services) open to competition no later than March 1, 2002.

  • Utilities have the opportunity for full recovery of stranded costs.

  • Code of conduct to be developed for transmission and distribution company affiliates.

Massachusetts

The Massachusetts legislature passed a comprehensive restructuring bill in November 1997, providing all customers with retail access beginning on March 1, 1998. Massachusetts chose a combined regulatory and legislative approach toward electric industry restructuring. On the regulatory front, Massachusetts conducted a two-phase investigation into restructuring. The first phase, which was undertaken by the Dept. of Public Utilities (DPU), established goals and articulated principles for the development of a new industry model. The second phase, also undertaken by the DPU, culminated in December 1996 with specific recommendations for the legislature to consider as it began to craft restructuring legislation.

After receiving the DPU’s final order in January 1997, the Massachusetts legislature began consideration of restructuring legislation. Prior to the passage of the restructuring law, Boston Edison, Eastern Utilities Associates and New England Electric System entered into settlement agreements with the MDPU. Many of the features of the settlement agreements were similar to the legislation that was later passed.

Key features of the Massachusetts legislation include:

  • Customer choice for all consumers on March 1, 1998.

  • Standard offer service transition rate reduction of at least 10%.

  • With DTE approval of a securitization financing order, the distribution company will provide a rate reduction of 15% on September 1999.

  • Allows recovery of transition costs if a company files a restructuring plan and agrees to divest non-nuclear generation assets.

  • Low-income assistance and default service.

  • Mandatory kWh charge for energy efficiency activities.

  • Renewable energy portfolio standards through at least December 2009.

  • Licensing of all electricity providers.

  • Supplier disclosure of rates, fuel mix and emission characteristics, and low-income rates.

New Hampshire

New Hampshire pursued regulatory and legislative paths toward restructuring and moved on the issue before most other Northeast states.

After the New Hampshire Public Utilities Commission (NHPUC) released this plan, Northeast Utilities (NU) filed a suit claiming that the NHPUC’s approach to stranded cost recovery violated an earlier agreement with the State A Rhode Island federal judge issued a temporary restraining order blocking New Hampshire’ regulatory plan for stranded cost recovery in March 1997. Currently, retail access remains stalled in New Hampshire because of this lawsuit.

Although its ultimate fate still rests with the courts, key elements of the New Hampshire final restructuring order include:

  • Unbundling of retail electric service into generation, transmission, and distribution.

  • "Hybrid" market model for the new market with bilateral contracts, and pool or spot market purchases.

  • Divestiture of generation assets and aggregation/marketing services.

  • Partial stranded cost recovery, with utilities whose rates exceed the regional average not entitled to full recovery.

  • Universal and default service.

  • Systems benefit charge to protect low-income assistance programs.

  • Rules for consumer protection.

  • Public education efforts.

  • Support for renewable energy resources through disclosure of resource mix, rather than portfolio standards.

Rhode Island

All of Rhode Island’s consumers have been able to choose their electric supplier since January 1998. Rhode Island restructured the State’s electric industry in 1996. Key features of Rhode Island’s restructuring legislation include:

  • Unbundled rates effective July 1997.

  • A standard offer is to begin within three months of 40% of New England customers gaining retail access, and continuing through 2009.

  • Utilities are required to divest themselves of at least 15% of their non-nuclear generation assets to market valuation through lease, sale, spin-off or other method.

  • Full stranded cost recovery through a non-bypassable transition charge from beginning of retail access until end of 2009.

  • Performance-based ratemaking for distribution companies.

  • PUC to develop standards of conduct and reliability requirements for non-regulated power producers.

Vermont

Currently, Vermont is the only Northeast state without a plan for restructuring the electric industry. The Vermont Department of Public Service (DPS) began to consider restructuring by holding a series of Roundtable Workshops with stakeholders to discuss issues related to restructuring and develop goals and principles to guide Vermont’s efforts. The Vermont Public Service Board (PSB) also started proceedings to investigate restructuring of the industry at the same time. The PSB conducted workshops and collaborative meetings with interested parties, developed consensus filings, held information exchanges and Technical Conferences, and developed a report to guide the Legislature’s efforts. The report recommended the following changes:

  • Customer choice for all Vermont consumers

  • Divestiture of generation asset for large investor-owned utilities

  • Equitable treatment of stranded costs through mitigation efforts and sharing of costs between ratepayers and shareholders

  • Municipals, cooperatives and small investor-owned utilities to provide open access, but not required to functionally unbundle

  • Assure consumer protections

  • Cost-effective energy efficiency programs

  • Promote use of renewable resources through a portfolio requirement for non-hydro renewable resources

  • Promote national and regional environmental standards through supplier disclosure and environmental comparability on older source units

  • Development of an ISO and PX

Although the Vermont legislature considered restructuring bills in 1997 and 1998, the Speaker of the House came out during early 1998 against industry restructuring and prevented passage, and a great deal of opposition to regulation still exists. In fact, several legislators have recommended that the state municipalize Vermont's three private utilities.

New York

All of New York’s major investor-owned utilities have filed and received approval of their restructuring settlement agreements. Each utility provided for retail choice, with some customers receiving retail access as early as 1998 or as late as 2002.

New York State has largely taken a regulatory approach to electric industry restructuring.

In May 1996, the New York State Public Service Commission (NYPSC) released the following recommendations:

  • Adopt a "flexible retail PoolCo model."

  • Lower consumer rates.

  • Increase customer choice.

  • Continue service reliability.

  • Retain public interest programs through a systems benefit charge.

  • Use rate cases for the determination of stranded cost recovery.

  • Obligate to serve requirement for distribution companies.

  • Require utilities to file restructuring and rate plans by October 1, 1996 for approval by the NYPSC.

Since the NYPSC’s final order, six of New York State’s utilities have received approval of their restructuring settlement agreements. Unlike the New England states, each utility in New York has a unique and different settlement agreement.

International Restructuring Efforts

The Committee was also presented with information about electric restructuring efforts worldwide. Significant reforms have been made in Australia and New Zealand, South America, and, especially, throughout the European Union (EU) and Scandinavia.

Great Britain privatized its electric industry in 1990, although the structure adopted was quite similar to the previous governmental one. Since that time, Britain's electric structure has gradually introduced retail competition. By the end of this year, all consumers will be able to select their energy supplier. Much work in Britain also focus on developing a private power pool, performance-based regulation, and market power issues.

Other countries within the EU have also restructured, to varying degrees. In Spain, for example, the Spanish Electric Power Act, passed in November 1997, laid the groundwork for restructuring that country's electric industry, and will include a gradual transition to complete retail choice. Also, under an EU directive signed in 1996, EU members were required to open 25 percent of their electric markets to new suppliers in February 1999. By 2006, at least one-third of the members' retail markets must be opened to competition. Several countries, including Sweden, Finland and, as previously mentioned, Britain, will offer complete retail competition by next year. Other countries, such as France, are taking a slower approach. There is already increasing private investment in new generation plants in Europe, and prices in the EU are expected to converge over time, benefiting consumers.

Australia and New Zealand have also restructured their electric industries, converting from state-owned and operated systems to private ones. In late 1996, a competitive wholesale market, the New Zealand Electricity Market (NZEM) commenced operations. Transmission is provided by TransPower, which was spun off from the Electricity Corporation of New Zealand in 1993. A competitive wholesale power pool was also established in Australia. In both countries, regulators have tackled difficult market power issues. Likewise, Argentina and Chile have also restructured their formerly state-owned electric industries. In fact, Chile was the very first nation to restructure its electric industry, beginning the long transition process in 1980.

Figure 1

Figure 1 - New Brunswick Electricity Restructuring Managed Transition Period


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