In considering the various options available,
we should bear in mind what the Government of New Brunswick said
in its discussion paper, Electricity in New Brunswick - Beyond
2000: "One of the Government's key objectives is to create
and maintain jobs through competitively priced electricity for
the people and businesses of New Brunswick while ensuring safety,
reliability and environmental protection."
It is interesting to note that no other objective is identified
in the discussion paper. So, the primary goal in mapping the
future of the electricity industry in New Brunswick is to ensure
a competitive market while maintaining a number of factors that
are potentially in conflict with that objective. We have, accordingly,
cast our views on the options for restructuring in that light.
The discussion paper does not set forth as an objective maximizing
the return from any privatization. Maximizing the return may
well provide a contrary result to "competitively priced
electricity." For example, if NB Power were sold to a single
private buyer, turning over the government-owned monopoly to
a private owner, proceeds may well be maximized. The private
owner would then be in a strong position to exercise market dominance
(to the detriment of customers) and therefore would likely pay
more for that privilege. But in accordance with the government's
objective, we have only looked at options in the context of proceeds
from any privatization remaining subsidiary to the question of
competitively priced electricity.
As we have indicated earlier, the status quo may no longer be
sustainable. That being the case, change can be evaluated on
1. Ownership (Public vs. Private)
2. Market Structure (Monopoly vs. Competitive)
3. Business Structure (Integrated vs. Segmented)
In looking at change, we must always keep in mind which question
we are addressing. Each has a set of issues and objectives which
will best be met by certain structures.
Business ownership, whether "public" (meaning, by government)
or "private" (by private interests), brings benefits
of control and potential profit to the owners - but also the
burden of risk and potential loss. In an earlier section, we
discussed the contrasts between public and private ownership.
Both offer certain advantages while, at the same time, labouring
under certain disadvantages. For the private owner, the disadvantages
include the increased cost of capital the owner requires to support
the business. (Debt interest rates are higher for the private
owner than for government; more important, equity capital is
more expensive than debt capital, as equity investors require
substantially higher returns than debt investors.) And the private
owner must pay taxes.
In the context of competitiveness, the issue of private versus
public ownership reduces to the question of whether the efficiencies
typically achieved in the private sector outweigh the burden
of costs of capital and taxes which the private sector bears.
The world-wide experience with privatization, not only in the
electricity industry but over a wide range of businesses, tends
to support the view that, on balance, private enterprise is more
economical and therefore should best be able to provide competitively
priced electricity to customers. In our consultations, we were
given numerous examples from around the world to support this
We recognize that the control which public ownership brings is
important in supplying an essential commodity like electricity.
But the ability to execute public policy mandates, such as cross-subsidization
of electricity rates and the obligation to serve all parts of
the province, can be achieved through a regulatory regime. Through
new regulation, the government could exercise public policy mandates
and require the operator of the monopoly wires business to comply
and to pass along the related costs to the customer. (Currently,
public policy mandates are exercised by the government through
their ownership of NB Power and the costs are effectively incorporated
into our power rates.) The regulatory regime can also be revised
from time to time so as to remain responsive to current conditions.
2. Market Structure
A monopoly market stands at the opposite end of the spectrum
from a competitive market. Given the government's objective of
"competitively priced electricity," our view is that
the market needs to be competitive, not monopolistic. In this
section, we analyse NB Power in terms of its component parts
and assess which of those parts might fit into a competitive
As already noted, the electricity system consists of the following
parts: generation, transmission (the high voltage wire transport
system), distribution (the wire transport system from the transmission
lines to customers), and marketing. The transmission and distribution
functions are often referred to as the "wires" business.
Marketing is the sale of electricity, either wholesale (in which
customers such as Saint John Energy, the City of Edmundston,
and outside utilities purchase electricity for resale) or retail
(in which customers purchase electricity for their own use).
This last group, the retail customers, includes: large-scale
industrial users, such as pulp and paper mills, mining operators,
and an oil refinery; medium-scale users, such as food processors,
small manufacturers, stores, schools and hospitals; and small-scale
users, such as residential customers.
Generation is the process of producing electricity from primary
energy sources. NB Power generates electricity by using water
flowing from behind dams (hydro), by burning fossil fuels, such
as oil, orimulsion and coal, and by nuclear fission. NB Power
also buys and sells electricity to balance its needs and its
Like all manufacturing businesses, generation is generally thought
of as a natural business for competition. Through competition,
generating companies (abbreviated "Gencos") compete
with each other to supply marketers with the least expensive
electricity. If one Genco is not competitive, the marketer will
buy electricity from another. In other words, market discipline
is used to create a competitive electricity market.
If the generating segment of New Brunswick's electricity industry
is to be made competitive, a number of issues have to be dealt
o Security of supply
o Competitive market
o Stranded costs
o Point Lepreau Nuclear Generating Station
The question of privatizing NB Power's generating assets applies
to both the conventional generating facilities and the Point
Lepreau nuclear generating station. However, because a number
of unique issues relate to nuclear generation, we shall deal
with Point Lepreau separately.
Security of Supply
If NB Power's generating assets were privatized, agreements would
have to be put in place to ensure that electricity generated
within the province would remain available to us, at least until
competitive sources are brought on stream. Marketers, which may
still include NB Power, would be required to secure contractually,
with appropriate creditworthy guarantees, adequate supplies of
electricity. We should add that our border interconnections with
adjacent jurisdictions - as a percentage of our total system
capacity - are the greatest of any utility in Canada. The interconnections
are a major avenue to ensure adequacy of supply from out-of-province
suppliers. NB Power has confirmed to us that "it would indeed
be possible to contractually secure all reasonably expected additional
electricity requirements through Hydro Quebec and Nova Scotia
The concept of a competitive generating environment requires
a separate study to ensure that competition is maximized while,
at the same time, our core interests are protected. A sale of
all of NB Power's generating assets to a single entity would
not maximize competition. To replace a government-owned monopoly
with an effective private monopoly would not serve the government's
Competition can come from a number of sources: there could be
multiple owners of NB Power's generating assets; independent
power producers (IPPs) could be allowed to generate electricity
inside New Brunswick, or to sell into the province from outside;
outside utilities could also sell into the province; and there
could be co-generation, in which a private company generates
power for its own industrial operations, selling its excess electricity
into the grid.
In relation to United States-based generators as possible suppliers
of electricity to our competitive internal market, it should
be noted that our direct interconnections through Maine allow
the total transfer capability of 820 megawatts to Maine, but
only 180 megawatts from Maine. We understand, however, that overcoming
this obstacle would not be a major undertaking.
We are also aware that line loss in the transport of electricity,
and the cost of using transmission lines for transport, create
two additional costs which outside suppliers would either have
to absorb, giving them lower profit margins, or pass on to customers
by means of higher prices. But if, as in the case of electricity
bought from Hydro Quebec, generation costs are low enough, these
additional transport costs may be incorporated into pricing and
the price could still be competitive with domestic suppliers.
It should be noted that, while the price of electricity in U.S.
markets appears to be significantly higher than ours, the selling
price for our electricity is below our cost of production. (As
noted earlier, NB Power has been losing money for the last three
years on an operating basis.) With deregulation of many markets
in the United States, private generators are becoming increasingly
efficient and will look to all markets to sell electricity. Eventually,
competition can be expected from the U.S. market.
The ability to achieve a competitive market varies, depending
upon customer class. For large industrial customers, a competitive
market may be achieved by allowing co-generation and out-of-province
generators access to those customers. But load pocket considerations
(i.e., demands in a specific area), peak usage patterns, and
the sheer number of residential customers make competition for
residential customers more difficult to achieve.
In summary, if the objective is to achieve competitively priced
electricity, this is likely to occur with the maximum number
of suppliers to the marketplace. Accordingly, consideration should
be given to opening the market to all suppliers.
A typical co-generation arrangement would involve a private company
building its own generating facility, using the electricity (and
heat) it needs, and selling the balance to a utility at an agreed
price. That agreed price is often defined as the "avoided
cost" - the cost the utility would otherwise have paid for
an equal amount of electricity.
At present in New Brunswick, no one is allowed to operate a generator
in excess of 500 horsepower without approval of the New Brunswick
Cabinet. Thus, generation remains essentially a legislated monopoly
for NB Power. We were not advised of any other jurisdiction in
North America where this is the case. Several participants in
our meetings expressed a strong desire to co-generate power.
Allowing a current customer of NB Power to co-generate has several
implications. With natural gas and the latest generating technology,
a customer may be able to generate electricity more cheaply than
it can be obtained from NB Power. But if NB Power's generating
capacity is no longer used to supply that customer, that unused
generation, if it cannot be economically sold, becomes a burden
on NB Power. This may give rise to what is known as a "stranded"
cost. At the same time, however, the possibility of co-generation
- if accompanied by elimination of the legislated monopoly -
could ensure that any new generating facility would be built
on an economical basis. In this way, co-generation could provide
a competitive element to the supply of electricity in New Brunswick.
Many definitions can be found for the term "stranded costs."
Essentially, they are the costs a monopoly utility like NB Power
incurs in meeting its obligation to serve customers - costs which,
in a subsequent competitive environment, might not be recovered.
The main potential for stranded costs will arise from NB Power's
generating assets (its biggest investment). But before we can
ascertain whether stranded costs will indeed arise, we must look
at all of the NB Power assets which might be privatized. Some
may well be worth more than their book value, and some may be
worth less. If all of these assets were privatized, and were
sold below their total net book value, then stranded costs would
So the question becomes one of whether the efficiencies of the
new market will, in economic terms, outweigh the stranded costs,
if any, of the old investments. The jurisdictions which have
opted to open their electricity markets to competition have generally
concluded that the short-term pain of stranded costs are outweighed
by the long-term benefits of a competitive electricity market.
A more detailed discussion of stranded costs and their recovery
is dealt with in the Change Issues section of this report.
Point Lepreau Nuclear Generating Station
Nuclear generating facilities around the world have always engendered
a high degree of public controversy. Of late, things have taken
a turn for the worse. A significant number of those facilities
have been in the news recently with shutdowns, operating problems,
and questions about their future operations. Point Lepreau has
been no exception.
While we were writing our report, a report on Point Lepreau by
Hagler, Bailly, a consulting firm commissioned by NB Power, was
completed. We did not receive a copy of that report and did not
wish to delay the release of our report by reviewing it in detail.
However, in discussions with NB Power, we understand that, according
to the consultant's report, Point Lepreau is not expected to
operate beyond 2008 without substantial new investment. NB Power
has advised us that $450 million of the original fixed costs
for Point Lepreau will be left unamortized as of 2008. Accordingly,
there has been a mismatch between the depreciation rates and
the useful life of the facility. By 2008, if current depreciation
schedules are still used, the total cost of producing electricity
at Point Lepreau would be understated by $450 million. Incorporating
that amount into cost calculations would have a significant effect
on the price per kilowatt-hour of electricity produced at Point
Nuclear generation has high fixed costs and low variable costs.
Conventional thermal generation has relatively lower fixed costs
and relatively higher variable costs. To compare the relative
costs of generation, proper amortization of fixed costs is essential.
To compare only variable costs of generation is useful for generation
dispatch decisions, but can be misleading for new investment
decisions. The decision NB Power and the government will make
regarding investing to extend the life of Point Lepreau beyond
2008 will involve a comparison between the total costs of electricity
production at Point Lepreau and the total cost at an alternative
We note that the recent federal government initiative to deal
with permanent storage for spent fuel failed to identify a solution
acceptable to all interested parties and ended this year without
resolution. Such costs, therefore, remain unknown. However, we
did note that the operator of Maine Yankee (a nuclear facility
in Maine) is suing the U.S. federal government for US$125 million
in connection with permanent storage for spent fuel at that facility.
The potential numbers can apparently be quite large.
The above factors require us to address the question of Point
Lepreau separately from the conventional generation facilities.
No participant in our process, including NB Power, was able to
cite an example of the sale of a nuclear facility anywhere in
the world where all the benefits and risks have been transferred
to a purchaser. We were advised that nowhere has the risk of
the permanent storage of spent fuel, or the risk associated with
decommissioning, been transferred to a buyer. When the British
government privatized its nuclear facilities, a financial limit
was put on the liability which the privatized entity, British
Energy, would take. The balance of the liability was left with
the government. The existing and potential future sales of nuclear
facilities have been more akin to operating and management contracts,
with the vendors retaining residual liabilities and effective
ownership risk. The purchasers/operators do, however, take the
operating risks. We understand that British Energy has been negotiating
with Ontario Hydro on this basis. We also understand the potential
"sale" of Boston Edison's Pilgrim nuclear facility
is being put forth on a similar basis.
Finally, to reduce the concern expressed to us regarding the
operation of Point Lepreau if it were transferred to private
sector hands, we have been advised that the operation, whether
by NB Power or a new operator, will still be subject to the authority
of the Atomic Energy Control Board (AECB). AECB has a mandate
from the federal government to regulate the operation of all
nuclear facilities in Canada. Accordingly, the concern expressed
to us regarding the potential for lower safety standards (in
aid of higher profits) is so severely restricted by AECB as not
to be an issue, in our view. We also believe that any private
sector entity which would contemplate operating/purchasing Point
Lepreau would likely have a very significant level of nuclear
operating experience before they would risk the future of their
company on such a contract. This expertise may well be a benefit
to Point Lepreau operations.
Summing up, we believe that any privatization of Point Lepreau
may not be a "sale" in the normal sense of the word.
However, if NB Power's conventional generation facilities are
to be privatized, we would be in favour of privatizing Point
Lepreau to the extent possible to enhance operating performance
through the private sector and to encourage competition in generation.
If Point Lepreau has stranded costs associated with it, those
stranded costs should be recoverable in the same manner as all
other stranded costs, as detailed later in this report.
Transmission and Distribution (the "Wires" Business)
The wires business is a natural monopoly. It is impractical and
inefficient to string two sets of wires for two competitors.
Rather, it is more efficient to ensure the wires are operated
by a monopoly regulated to ensure that the users of the lines
(the Gencos, marketers and customers) get open, non-discriminatory
access on a transparent cost basis, i.e., on a basis where the
costs of the wires operator are open to scrutiny. The regulator
is the appropriate way to provide scrutiny. A more detailed discussion
regarding rates is found in the Change Issues section under "Regulator."
To ensure competition, access should be provided to generators
to provide transmission within the province; into the province
(to allow competition from outside suppliers); through the province
(to allow transport of electricity through the province); and
out of the province (to allow electricity generated here to be
sold outside the province). These four types of access combine
to allow maximum competition within the province and to ensure
reciprocity with other jurisdictions. Through reciprocity, we
ensure that electricity from outside the province is available
to us and that markets outside the province are available to
our generators. NB Power currently provides access for out and
through transmission. Access for within and into has not been
necessary because the current electricity system does not allow
competition to NB Power in the province. Access combined with
regulated transmission rates will provide the basis for a competitive
In addition to providing the "roads" over which electricity
is "transported," the wires business provides an extremely
important function to the overall operation of a stable and reliable
electricity industry. In their presentation to us, NB Power stressed
the importance of the ancillary services the entire wires network
(the "grid") provides. Unlike other forms of energy,
which can generally be stored and used when needed, electricity
in the grid must be maintained in balance at all times. Electricity
is not elastic. As it is drawn off the system to be used, more
must be added to maintain the balance. This is an area too complex
to detail here, but we cannot overlook the importance of these
ancillary services to a properly functioning electricity system.
Any new regulatory regime must ensure that these services are
always there, and that all costs associated with them are incorporated
into the wires tariff. As North American utilities continue to
tie into a common grid, these issues become increasingly complex
All participants in the electricity system need to use the wires,
so the wires business is the key mechanism government can use
to effect public policy. For example, the government may wish
to pursue environmental public policy matters, such as providing
development funds for so-called "green power" and conservation-based
demand management programs. The costs for such public policy
programs may be appropriately levied on users of electricity,
and the wires tariff mechanism provides the ideal mechanism with
which to do so. Postage stamp rates for residential customers
(discussed later) can also be effected through the wires tariff.
The wires regulatory framework does not need to be set in stone
but, rather, should be flexible to adapt to changes in the industry.
As such, it would remain the instrument by which the government
could continue to influence and direct development of the electricity
industry in New Brunswick. That being the case, ownership of
the wires business, whether public or private, is less important.
Again, the same analysis would need to be done as in the generation
segment: will the efficiencies of private operators, less the
burdens of private operators (cost of capital and taxes), outweigh
any advantages accruing to the public sector? If the answer is
yes, then there is no reason to maintain public ownership of
the wires business.
Marketing is the business of finding a customer who wants electricity,
buying electricity (either directly or indirectly from a Genco),
and having that electricity delivered from the generation facility
to the end user. In the current structure, this function is performed
by NB Power, but is not visible to customers. With no competing
marketers, NB Power does not need to market. If you want electricity,
you simply call NB Power. The profit in the marketing business
essentially lies in the difference between the buying and selling
prices. Where there is no competition, there is no incentive
to keep selling prices as low as possible.
Given the Government of New Brunswick's objective of ensuring
"competitively priced electricity," creating a competitive
marketing segment is a logical step. In a competitive marketing
environment, customers would seek out the most competitive supplier.
This would cause marketing companies to create efficiencies to
reduce costs and perhaps to reduce their profit expectations.
Global experience shows that marketers will also seek to add
or "bundle" certain services (for example, a security
monitoring service) to provide an overall competitive offering.
Based on the experience of many jurisdictions, the theory of
competitive marketing appears much easier to deal with than its
actual implementation. Two issues that must be addressed are:
to which classes should marketing be applied and should there
be a default supplier?
There are two basic categories of customers for electricity:
wholesale (customers buying for resale) and retail (customers
buying for their own or their corporate group's consumption).
In defining these two categories, usage rather than volume is
the relevant factor. So, even large customers are retail, rather
than wholesale, if they are buying for their own use. In our
view, competitive marketing should apply to both groups.
In New Brunswick we have only two wholesale customers, Saint
John Energy and the City of Edmundston. Other wholesale customers
for NB Power exist outside of the province, but we cannot control
the marketing environment in those jurisdictions.
The retail customer base is much more difficult to deal with
because it spans large numbers (residential), large users (the
large industrials, such as pulp and paper mills, mining operations,
and an oil refinery), and medium users (commercial customers,
including food processors, small manufacturers, stores, schools,
and hospitals). All customers want competitively priced electricity.
For residential customers, uncompetitively priced electricity
can range from being annoyingly expensive to life-threatening
(as in the case of a low income family living in an electrically
heated home in a cold winter). For manufacturing customers who
operate in a global marketplace, uncompetitively priced electricity
can be the cost which tips that facility into unprofitability.
Such facilities, when owned by large corporations as part of
a portfolio, are constantly reviewed with the aim of reducing
overall corporation costs. This can lead to decisions to shut
an expensive facility and to expand less expensive operations.
In these cases, expensive electricity can be the difference between
life and death for marginal facilities.
Based on the experience in other jurisdictions, large-scale users
of electricity (both wholesale and large retail), particularly
private sector businesses, are more price-sensitive and change
marketers more readily. Accordingly, large-scale users generally
call for marketing competition before residential users do.
We believe that all classes of customers should have access to
competitive marketing as soon as it is technically feasible for
One of the most important concerns in moving to a competitive
marketing environment is to ensure that every customer who wants
electricity has the opportunity to get it. In the monopoly environment,
NB Power has an obligation to serve all customers. In a competitive
environment, this would not necessarily be the case - both the
marketer and the customer would have to come to an agreement
to ensure service. We would suggest that NB Power (that is, NB
Power's marketing business) be obligated to supply electricity
to customers who do not want to move to a new marketer, under
a standard contract offer (approved by the regulator). This arrangement
may only be an interim step until the new competitive market
is fully operational. Further study, based on experience in other
jurisdictions, is necessary to design interim and final forms
of the marketplace.
3. Business Structure
The issue of a competitive market involves the question of whether
electricity in New Brunswick should be provided by a single entity
- an integrated utility, in which the businesses of generation,
transmission, distribution, and marketing would be handled by
a single company - or by several entities, where the businesses
would be "segmented" into separate companies. With
one exception, participants in our meetings were of the view
that competition required separating the businesses. We were
not informed of any jurisdiction seeking to create a competitive
market that did not segment the electricity industry.
To examine the question of segmentation, we have looked at the
relationships among the component businesses of an integrated
Separating Generation from Wires and Marketing
Segmentation is most clearly appropriate for the generation part
of the electricity business. At one end of that business, electricity
is produced at a generating facility; at the other end, a customer
receives and uses electricity. Most people acknowledge that,
to promote competition in the pricing of electricity, it is necessary
to have multiple suppliers/Gencos of electricity. A properly
designed market will ensure that Gencos do compete, and, as electricity
is a commodity, the competition will be on price. It would be
possible to provide that competition by requiring NB Power to
purchase electricity produced by IPPs on some formula (usually
based on avoided cost, as explained earlier), but such a stage
is generally seen as an interim step towards full competition.
It was the first step the United States implemented in 1978 in
initiating that country's move towards competitive electricity
markets. With the benefit of that experience, other jurisdictions
have moved directly to competitive generation environments. On
balance, it seems to us the interim step of allowing IPPs to
supply competitive electricity to NB Power is an unnecessary
delay to full competition.
To maximize competition, the distributors/marketers should be
able to purchase electricity from different Gencos and thereby
create real competition among those Gencos. If NB Power operates
the distribution/marketing business, while also generating electricity,
an extremely strong bias will exist to purchase electricity "in-house,"
rather that from an outside Genco/IPP, thus thwarting real competition.
In the United States, combining generation assets with transmission
assets has been viewed with great concern during the deregulation
process because of the potential for market dominance. The Federal
Energy Regulatory Commission has insisted on open and transparent
access to transmission for all participants as a mechanism to
Given the above, we see separating NB Power's generation business
from both the wires business and the marketing business as a
logical first step in developing a competitive electricity market.
Separating Transmission/Distribution (Wires) from Each Other
and from Marketing
The next questions relate to whether the wires business should
be broken into separate entities for transmission and distribution,
and whether these businesses should be separated from the marketing
As noted earlier, the wires business is, by its nature, a monopoly
business. As such, it makes sense to have the wires business
segmented from competitive businesses, such as generating and
marketing. The same logic, however, does not apply to separating
the two parts that make up the wires business - transmission
and distribution. Both are monopoly businesses, although they
perform different roles in the electricity industry, transmission
being the conveyance of high voltage electricity, like a kind
of limited access highway, and distribution being the conveyance
of low voltage electricity, like the roads around towns. Both
are absolutely essential to the movement of electricity. Accordingly,
we see no reason to separate the transmission and distribution
functions from each other.
Gencos and marketers must, in some way, share the cost of using
the wires to transport electricity to their customers. In a competitive
environment, access to the wires and fairness of the charges
are essential to ensuring a level playing field for competing
players. Allowing NB Power (or that segment of NB Power which
performs the marketing function) to be a marketer in a competitive
marketing environment, as well as controlling the wires business,
may be seen as problematic by new marketers. If the NB Power
marketer also operates the wires monopoly, concerns will be expressed
regarding the fair treatment of the other marketers' customers.
Will they receive the same level of service the NB Power marketer's
customers receive? In addition, the status quo supplier has the
advantage that residential customers are generally reticent to
change to a new supplier unless the pricing differentials are
substantial. In the absence of such a difference, they prefer
to stay with the supplier they have known and relied upon for
In jurisdictions where regulators have allowed a single entity
both to operate the wires and act as a marketer, a code of conduct
is usually introduced to ensure a level playing field (i.e.,
to ensure that the wires company provides the same level of service
to all customers). We are aware of the success in deregulating
the long distance business in the telephone industry, where the
wires business was not separated from the competitive long distance
marketing businesses. On balance, we believe that if the Select
Committee and the government would like to keep the wires business
and NB Power's marketing functions together, with an appropriate
code of conduct, it should not inhibit the development of a competitive
While we noted that in some jurisdictions the wires business
is separated between the transmission business and the distribution
business, we were not provided with any arguments to do so in
New Brunswick. In many jurisdictions, local distribution/marketing
companies (e.g., Saint John Energy and the City of Edmundston)
own the distribution systems and are also marketers. Based on
our view that, with a proper code of conduct, one company could
own the distribution network and be a marketer, we see no reason
to consider trying to put these local distribution functions
into a provincial wires monopoly.