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Overview


The electric utility industry has embarked on one of the most significant transformations in today's business environment. Anticipating the fiscal and regulatory implications of this transformation, NB Power has begun its own transformation. Its 1997-2002 Business Plan reflects the Corporation's evolution from a monopoly with an "obligation to serve" to that of a business operating in a competitive marketplace. Introduction of competition to the Canadian electricity market will bring significant change during the period covered by this plan. Some of this change will require legislative modifications.

The major thrusts of this Business Plan are:

  1. Reorganization

    The Corporation is being reorganized into three business units:

    • Generation
    • Transmission and Distribution
    • Marketing and Customer Service

    All three will be supported by a corporate services group that will provide financial, administrative, technical and human resource support. Each business unit will have performance targets and results will be measured against clear objectives.

  2. Expenditure Restraint and Debt Reduction

    Operations, Maintenance and Administration (OM&A) costs will be reduced below levels of seven years ago despite the recent addition of new facilities. Debt reduction will be more than $900 million or almost 30% of existing debt, from a peak of $3.4 billion in December, 1995, to approximately $2.5 billion at the end of the plan.

  3. Increased Value

    Electricity rates are forecast to decline in real terms over the next five years. There will be three years without rate increases following increases that average 2.9% in each of the first two years of the plan. Lower costs, reduced debt and greater operating efficiencies will increase the value of our service to customers and increase the corporate value for our owners.

Contingent Issues

While deregulation forms the backdrop for this business plan, there are a number of contingent issues that are addressed. They include the performance and reliability of Point Lepreau, the fuel conversion opportunities presented by the development of Sable offshore natural gas fields, the continuing cross-subsidization of rates within and across customer classes and the evolution of our corporation into a more customer-focused culture.

Emerging Electricity Market

Change in the electric utility industry is being driven by diverse factors. Some form of deregulation is expected before the end of this decade. Consumers will demand greater choice, better service and lower prices. Deregulation will bring competition which could reduce our market share. Lower market share could result in stranded costs (generating capacity being under-utilized). In a pure competitive marketplace, that's fair game. In New Brunswick, however, electricity generating capacity is owned by the citizens and taxpayers of the province. They are also customers. While competition is welcome and could lead to lower prices for some customers, there could be offsetting social and tax costs that accompany deregulation. For this reason, NB Power favours some form of public consultation before moving to competition in New Brunswick.

Legislators throughout North America are responding to regulatory change. Open and equal access to transmission facilities is seen as the key to creating competition. The pressure for change is originating in the United States, and is intensified by a number of states where electricity rates are more than double New Brunswick's rates. The US has open access for wholesale customers, and state regulators continue to issue rules for competition in the retail sector. In Canada, the federal and provincial governments are developing a framework for an inter-provincial electricity trade agreement.

As a result, the evolution of the electricity sector is well underway. In a monopolistic environment, the generation, transmission and distribution functions of an electric utility are integrated. In a deregulated market, generation, transmission and marketing are separated or "unbundled" and competition is introduced through the generation and marketing functions. The physical and technical aspects of the electricity system remain basically unchanged, while the business aspects of the industry experience significant change. Electricity will trade like any other commodity with the price set by supply and demand rather than by the existing cost recovery method. Furthermore, advances in technology and the availability of natural gas will allow smaller units to generate electricity at a cost that is competitive with larger units. They can also be built in a much shorter time period.

Market Position

An electric utility's resource profile and location greatly impact its competitive market position. New Brunswick has limited natural resources available to generate low-cost electricity. The result has been a development strategy that emphasizes fuel diversification together with strong interconnections. New Brunswick's location, bordering three provinces and the United States, created the opportunity for NB Power to develop interconnection facilities which allow for the import and export of electricity and the operation of larger-than-normal generation units. The resulting transactions have been beneficial to NB Power and resulted in lower rates for our in-province customers.

The development of NB Power's system around these strong interconnections represents both an opportunity and a challenge. The opportunity relates to market access outside the province. The challenge stems from the potential of losing the historic use of our interconnections to provide the electricity reserves required to backup the operation of NB Power's larger units.

NB Power's market position is further influenced by the recent expansion and modernization of the Corporation's generating and transmission facilities. The resulting debt is approximately $3.4 billion and the associated fixed costs of that debt, together with depreciation, currently represent 51% of our total revenue. The reduction of debt becomes more important as the electricity market becomes more competitive.

Business Goals

NB Power requires an appropriate business structure to prosper in a competitive marketplace. This includes the discipline of expenditure restraint and debt reduction and significant improvements to our marketing and customer service initiatives.

  1. Business Reorganization NB Power's new "business-unit" structure (Generation, Transmission and Distribution, Marketing and Customer Service) is supported by a corporate services group. This structure will help improve cost control and overall business performance. It will also nurture a more competitive business culture.
  2. Expenditure Restraint and Debt Reduction Operations, Maintenance and Administration (OM&A) costs will be brought to their lowest level in seven years. They will be capped at $259 million, except for a one-time increase in 1999-2000 for an extended planned outage at Point Lepreau. Capital expenditures will be reduced to their lowest level in ten years. Improvements in productivity and technology will offset inflation, expected to be 1.8% annually.

    Last year, NB Power forecast debt reduction at $750 million by the year 2001. Due to unplanned outages at Point Lepreau we have fallen short of that target by approximately $37 million. This plan extends to 2002, and the debt reduction forecast has been increased to more than $900 million. As debt is reduced, fixed costs will decline to 42% of total revenue and will make NB Power more responsive to a competitive marketplace.

  3. Marketing and Customer Service To maintain and improve market share, NB Power's new "Marketing and Customer Service" unit will sharpen our focus on customers. Customer service, reliability and competitive rates will be the key to protecting market share and profitability.

    NB Power's first goal is to improve existing customer relationships. Industrial and commercial customers will be served by account representatives. A new customer information and billing system will simplify and improve information. Innovative efforts will address the marketing of new and existing products.

    Improving the direct link between employees and customers is a significant marketing strategy that will deliver further impetus to our service improvements. New performance targets for customer satisfaction, profitability and market share will be established to monitor marketing and customer service activities. Export markets will be pursued aggressively as new market-access rules are defined and NB Power identifies new sales opportunities and new ways to augment margins on existing export sales.

Business Challenges

NB Power will focus on improving recent performance of the Point Lepreau Generating Station, maintaining financial stability and ensuring significant debt reduction.

  1. Point Lepreau Approximately 30% of NB Power's electricity is produced at Point Lepreau. After hydro, nuclear operates with the lowest incremental cost on the system. The station was shut down for extended periods for unplanned maintenance in each of the past two years.

    An inspection program of work done during the 1995 outage has been completed and the results of this review provide greater assurance regarding reliable production in the future. A technical and economic study of the station's use will be undertaken to ensure maximum economic benefits from the station over the long term. It will be important to assess the remaining economic life of the facility. Although the financial impact of recent unplanned shutdowns at the station should not be underestimated, the station has operated at 85.3% capacity since 1983. The business plan forecasts safe, efficient operation averaging 85% for the plan period.

  2. Maintaining Financial Stability Over the five years of this plan all indicators of financial health will steadily improve, including net income, cash flow, interest coverage and debt ratio. This improved situation is forecast despite more conservative operational and financial assumptions than the previous five-year plan. Operational difficulties at Point Lepreau have caused some to portray NB Power as a business in financial crisis. The fact is the Corporation is not in financial crisis. Its position is stable and improving. Debt is high but there is positive cash flow and a rigorous plan to significantly reduce debt over time.

Looking Forward

NB Power's preparations for deregulation and competition are intensifying. For the first time, NB Power may face real competition for its in-province customers and its export markets will be much tighter. This requires meaningful business and cultural changes that build on the Corporation's strengths and address its challenges in a forthright manner.

By the year 2002, NB Power will be a different company than it is today. It will have a stronger financial base and a clearer focus on the needs of its customers. Both improvements will pay strong dividends as competitive markets develop. Through the initiatives outlined in this business plan, NB Power will deliver more value to its customers and to its owners - the taxpayers of New Brunswick.



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