The Selling of NB Power - Part 3 - A Fist Full of Dollars (See below for Parts 1&2)

The proposed sale of NB Power will net a cool $4.75 billion – cash in hand. This money will be used to pay off “40% of New Brunswick’s debt”.

There’s a little problem with that last statement; well, more than one problem – actually quite a few.

Currently, NB Power’s debt is shuffled through three different entities: the NB government and two, separate Corporations. I’m sure it comes as no surprise that the Government and NB Power support some of the debt. What is likely a surprise to many is that there is also the “New Brunswick Electric Finance Corporation” or NBEFC, in the mix, which is responsible for the total amount NB Power has “borrowed” from the government. Anyway, all three carry their own debt, as follows:

As of 31 March 2009:
1) NB Government – $7.4b
2) NBEFC – $4.2b
3) NB Power – $3.5b (this number is consolidated into NBEFC’s debt)

“Holy Christmas,” you exclaim, “does this mean New Brunswick’s total funded debt is over $11b?” Indeed it does, fair reader -- actually it’s over $14b – but we’ll stick to discussing the numbers above.

The division of NB Power’s debt across separate entities thus begs the question: whose name will be on the $4.75b cheque?

“But Mac”, you say, “aren’t they one in the same? Why does it even matter?” Good question – the answer is sort of and no.

As noted, the current government trumpets that it will “pay off 40% of its debt” with the cash, people will rejoice and take a ceremonial dip in the healing waters of the Mactaquac head pond and/or a collection of Danny Williams’ tears, and so on – it’s a windfall.

This is more or less true. If you take NBEFC’s and the government’s total debt, it will be a significant reduction (Mac realizes with the 31 March numbers it’s more than 40%, but clearly the debt has grown since then). There’s a little problem, however.

Let’s step back and review a little more context. Currently, the New Brunswick government is running a massive deficit (the largest in NB history) and has added to the total provincial debt, bringing it to well over $7 billion, as noted above. Can they realistically afford to dump that entire amount into the debt? The magic “40%” is purely speculative – there’s no guarantee the government will follow through.

For a final nail in the context coffin, what about the closing date of the deal, 31 March 2009? Why that specific date? The government claims this is the date upon which NB Power would have to institute a 3% rate increase. Alright, that’s understandable.

A secondary (implicit) reason is that any delay beyond 31 March and a subsequent rise in rates can be easily blamed on political opponents – this has been obvious from day one and, quite frankly, is “just politics” (with our money, of course, but that doesn’t seem to phase ‘em).

But the real impetus is much more likely that 31 March marks the end of the Fiscal Year.

If the NB Government is issued the cheque, it will show up on the annual report as revenue – clever. The government will be able to manipulate the $4.75b into the books to make it appear that the province is in a much better financial position than it actually is.

That is, until April 1st (Fool’s Day, appropriately), when they have to start spending it. But who cares, that won’t show up on the books until 12-months later – 31 March 2011.

“Wait, wait –“, I hear you say, “what about the debt? The ‘Our Sovereignty Is 60% Off’ t-shirts have already been printed! We’ll have 40% less debt, right?” You’d think that given government PR, but there’s no guarantee – actually its highly unlikely they will be able to commit the entire amount, or any large share of it, to debt payment.

Stated correctly, the PR slogan reads: “The $4.75b could pay down the debt by approximately 40%, if the government can afford to commit the entire amount, which they can’t”. Think about it.

Given that the government is currently experiencing the largest deficit in New Brunswick history, HQ’s cash is far more likely to be spent to prevent the province from sinking further into deficit-spending quicksand. And what is going to be a major drain on the province’s financial resources after the Hydro Quebec deal is concluded? NB Power.

Setting aside the latter scenario, let’s assume the cheque goes to NB Power and they actually use the money to eliminate their debt (this is equally as unlikely). If you remember back to Part 1 and Part 2 of this blog, NB Power still remains in existence after the majority of its assets are sold. The company will be responsible for the “Retained” generating sites (Coleson and Belledune), which they must operate when HQ demands it.

A large plant like Coleson, once shutdown, takes significant effort (and money) to restart, meaning if Hydro Quebec doesn't want to buy power from the plants 4 days out of the week, NB Power is still bound by contract to keep them running idle and generating their minimum load.

While HQ purchases any fuel used for running the plants, NB Power still pays for the maintenance, employees (who will likely be HQ employees contracted by NB Power!), and other costs.

This is, of course, on top of all the costs associated with decommissioning the “Surplus Facilities”, refurbishing Lepreau, severance pay to employees of the surplus sites, maybe a few Board or other “golden parachutes” – essentially NB Power will be bleeding money with little to no actual income flowing in to offset the post-sale expenses.

Recent PR statement: “Under the proposed agreement, Hydro-Quebec would purchase the majority of NB Power's assets for $4.75 billion, a move that would wipe away the utility's debt.”

Yeah, for about 12 hours. More like a fist full of sand.

Mac's Still Here.

Good afternoon folks,

I've got another entry coming which I'll have up by the weekend. It will discuss issues surrounding the $4.75b pricetag and what the cash really means for the Province's debt - is it a windfall or simply government optics?

Cheers,

Mac

The Selling of NB Power – Part 2 – Your Neighbour (See Part 1 Below)

Generating Sites

Not all of NB Power’s assets are of interest to Hydro Quebec. This means the NB Government gets to keep a few power Generating sites, eh? Three of sites HQ didn’t want or even consider useful. Two of the generating sites – Belledune and Coleson Cove – HQ wanted to keep around, sort of, for emergencies or something I guess. Anyway, they didn’t want to take direct responsibility for them, so we’re stuck with ‘em.

“Well, that’s a source of income for the Government, what’s the matter with that”, you reply with the last bit of optimism you’re able muster. Unfortunately, you will recall we offered to sell our entire Power Grid, and thus the words “Tolling Agreement” head a section of the Memorandum of Understanding. If the NB Government chooses to continue operating either of the above two sites -- wait, sorry – they don’t get to choose. The NB Government must operate the sites when the HQ overlord demands it, and both sites must pay a “toll” to use the power grid.

If that wasn’t bad enough, the “tolling agreements” can be as long as 20 years. One can almost hear Danny Williams screaming “I told you so!”

And then there’s this gem of a quote: “the regulatory framework governing the generation, transmission and distribution of electricity in New Brunswick will be altered to conform to the framework currently in effect in Quebec” (except the rates, of course). I think that’s fairly clear: the Quebec government circumvents New Brunswick’s authority and regulates all aspects of electricity in New Brunswick.

But don’t fret, the MOU also has a section claiming that nothing in the memo is meant to infringe upon the sovereignty of New Brunswick. We can trust Quebec Hydro, right?

Employees

A lot of New Brunswickers rely on NB Power for employment. The government must have their interests and livelihoods in mind, right? Well, not really. Actually, not at all – those people are on the table as bargaining chips.

The MOU states: “Hydro Quebec will offer employment to all employees of NB Power and its subsidiaries at the time of [the sale’s] Closing”. Perfect….right? Well, I’m sure you understand the style of this piece by now – all is not as it seems.

HQ agrees to respect all collective bargaining agreements. Essentially, they will respect current employment contracts. Once those expire, they may offer renewed employment on the same or better terms or, much more likely, they may poison the milk with a poor contract to entice employees to leave. Heck, when the contracts expire, Hydro Quebec might just clean house, and why not? It’s not like they’re accountable to the people of New Brunswick!

Moving right along we find: “The Definitive Agreement will include provisions to be agreed by the Parties to give effect to this section in connection with the Retained Facilities and the Surplus Facilities.”

Now isn’t that nice of them, they’ve even considered retaining employees of the facilities they don’t want, or only want to exploit for their benefit and at our expense. Notice the underlined section. That means these folks' livelihoods are to be bargained for later, so cross your fingers.

What are those “Surplus Facilities” mentioned above? The NB Government gets to keep them (Dalhousie, Courtenay Bay and Grand Lake). Will they keep them open? Right now, it looks like any employee of the “Surplus” sites is on the chopping block.

Oh, yeah, and the “Retained Facilities”? Hydro Quebec can shut down either Belledune or Coleson Cove on one-year’s notice, and that notice can be given at any time. For example: shortly after the ink dries on the NB Power sale agreement. The employees would have no recourse, and the NB government would be unable help.

Speaking of bargaining - or should I say gambling – there’s nothing like gambling with someone’s future. While the NB Government will retain the previous Pension plans for NB Power employees, our benevolent HQ overlord has been kind enough to offer to institute a pension plan for new employees it hires (assuming it bothers to hire anyone from New Brunswick – there’s no provision for that).

But remember dear reader, HQ is a Quebec Crown corporation. How much say will New Brunswickers, or even the New Brunswick government, have in the management and governance of this new pension plan? Not even the intrepid EUB can intervene! Well, just like with the jobs above, it’s all on the bargaining table!

Let’s look closer at what this means for the pension plan the NB Government will remain responsible for. Current Employees of NB Power will continue to pay into the pension plan, assuming they keep their job. However, as we just went over, a lot of them likely WON’T.

Essentially what this means is that while previous and current employees of NB Power will retain their pension, not as many people will be paying into it, nor will any new employee of NB Power (by that I mean Hydro Quebec) be paying into it either – they have a new plan. Further, the NB Government won't be getting any revenue from the sale of energy to offset these costs; it's going right over the border into Quebec's pocket.

So, while New Brunswick gets to ditch NB Power for a quick payout, it still has the enormous overhead cost of pensions for its former employees, coupled with consistently dwindling revenue being paid into the pension fund year-over-year. Do you think the 21-year-old Line Worker who just got hired last year is going to be guaranteed a full pension at 60? The government is gambling with his future and YOUR future.

The Selling of NB Power – Part 1 – Your Wallet

This is a commentary on the Memorandum of Understanding (MOU) between New Brunswick and Hydro-Quebec regarding the sale of NB Power.

Note #1 - Restructuring

The Hydro Quebec (HQ)-owned subsidiary body that will be operating in New Brunswick will be considered, for all intents and purposes, a New Brunswick Crown Corporation. That is, it pays no income taxes, capital taxes, is exempt from certain private sector regulations, etc.

Note #2 - The New Brunswick Energy & Utilities Board

The NB EUB will remain active. They will be responsible for: approving rate increases proposed by HQ and approving transmission and distribution rates in conjunction with HQ (these rates being guaranteed by law or contract to be “fair and reasonable” [i.e. in HQ’s favour to the detriment of NB’ers]).

Also, how much power do you think a New Brunswick board has over a Quebec Crown Power Corporation that also functions as a Crown corporation in NB? The EUB is completely toothless – it’s for show only. It’s an attempt to lull NB’ers into believing they have some say in what HQ does. The EUB has no recourse in the face of an abusive HQ as it’s unable to sanction or threaten with fees or taxes. All it can do is ask nicely.

Speaking of fees, on with the show.

Rates

Currently, the New Brunswick Government is faced with introducing a rate increase of 3% per year. The proposed Hydro Quebec deal will freeze the current power rates at their present-day level for 5 years - an attractive proposal. However;

New Brunswick’s demand for electricity in 2010 is estimated to be at least 17TWh. Roughly 38% of that is “Industry” and the rest “Residential”, leaving us with a projected 6.5TWh industrial consumption and 10.5TWh for residential. We’re only interested in Residential.

For ease of example, let’s assume the Residential consumption doesn’t budge and remains firm at 10.5TWh over the next 5 years (wishful thinking – it won’t). If NB Power remains in the hands of New Brunswickers and has to institute the rate increase of 3% per year compounding, the cost of Residential power consumption will be about $5.7 billion (based on the bulk rate of $495 per 5000KWh).

Alternatively, if we capitulate to Quebec and the rates are frozen, the cost of power over the next 5 years will be about $5.2 billion.

That’s $500 million, you exclaim! What a savings! Er, wait, there’s a catch – well, more like a pitfall.

HQ felt the need to place a “cap” on the total amount of power the Residential sector can consume per year at the frozen rate. The Residential Cap is set at 9.5 TWh.

“But wait,” you say, “that isn’t enough to cover the projected consumption, how will we make up the difference?” Well, NB will simply buy the excess at “market-based competitive prices”!

Now, who are the local Energy merchants. Well, there’s Nova Scotia, but its power is supplied by a private company – can’t have that. Danny up in Newfoundland has a few watts to spare, but he makes too much noise, so he’s out. Oh, wait – Quebec! And by Quebec, I mean the excess power produced by our (now Quebec owned) NB power plants – brilliant.

And there won’t be much trouble getting the EUB to approve a ‘competitive market price’ for Quebec power. Heck, there will probably be a former HQ employee or former Quebec politician or two appointed to the board. Anyway, you get the idea – another sham.

Continuing on with our example, the energy deficit will be at least 1TWh per year. Now, do you think NB’s HQ overlords are going to just charge us whatever preferential “market rate” they receive for the excess power? Yeah right; we’ll likely get a retail price.

Let’s assume we are charged the “frozen” rate for the excess power consumption (wishful thinking again). At that rate, over 5 years, the cost will be $495,000,000. That number seems awfully close to the one above, doesn’t it? Well, we will still save $5,000,000, right? Wrong.

We also pay compounding interest on all total excess power consumption due at the end of the 5-year freeze, which is then averaged into the new power rate!

“Well, what about those famously low Quebec power rates we’ll get after the 5-year term expires”, you say. A humbug, is the retort.

Once the 5-year term is up, the new price is rated to the New Brunswick Consumer Price Index. That means when the NB CPI goes up (which it does every year by 1-3% [sound familiar?]) the power rate follows suit. Due to the poor economy and the low price of oil, the current CPI is actually negative, which is likely why HQ didn’t index the power rate immediately. Well, costs do go up over time, so that’s reasonable right? Wait, there’s more!

NB Power was divided into a number of different entities some years ago, each controlling a separate aspect of the business. One division was Distribution, another Transmission. Together they controlled: the power lines, stations, towers and the people and infrastructure to connect and serve consumers – the “power grid”.

Well, we’ve offered to sell that too. As a result, NB’ers will be charged a “transmission and distribution fee” to use the very same power grid our blood, sweat and tax dollars have built over the last few decades. But the EUB will protect us, right? Well, we’ve already covered that one – a resounding “no”.

Are you on the floor yet? Here’s another kick while you’re down. In addition, the rates may (read this as: “are certain to in the near future”) include any costs associated with the dismantling and/or clean-up of unwanted NB Power Generating sites and any unforeseen costs in bringing Point Lepreau into compliance with Federal requirements. Lepreau has already gone over expected costs by how many hundreds of millions?

So basically, any cost related to anything they don’t want or need and any unforeseen budget overruns for anything they have to fix is dumped on the rate payers.

Let’s recap. New Brunswick power rates following the 5-year freeze will:

1) Be set by Hydro Quebec with the hollow “oversight” of the NB Energy & Utilities Board

2) Be subject to CPI increases (inflation)

3) Include the deferred costs (with interest) stemming from the estimated minimum excess power consumption of 1TWH per year

4) Include an additional fee for “transmission and distribution” on our own grid

5) Include costs associated with dismantling, repairing or upgrading Generating sites.

Outlook for achieving the vaunted “Quebec rates”, or even rates significantly lower than if NB Power stays in the hands New Brunswickers: not good.