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