In today’s Globe and Mail, Tom Adams and I have another run at the proposed NB Power-Quebec-Hydro deal put forward by NB Premier Sean Graham and QC Premier Jean Charest.
As readers of this blog will know, I think this deal is a dream proposition for New Brunswickers. Ten years from now, if it goes through, people will look back and bless the name of Sean Graham, the premier who had the balls to propose it.
As Tom and I show in the essay in the Globe, far from being the “province’s crown jewel” of much overheated anti-deal rhetoric, NB Power has been a poorly managed mess for years. It has drowned the province in huge debt, locked them into high-cost and low-productivity generation, and encouraged politicians to play politics with electricity rates. The multi-billion dollar debt the utility has accumulated is a millstone around the province’s neck.
This deal will allow the province to rid itself of that debt with the stroke of a pen. It will see residential rates frozen for 5 years (they’ve risen faster than inflation — 27% in the last 5 years alone), after which they will track inflation. That’s a better deal than QC-Hydro’s own customers have got in recent years. Major industrial users will benefit from a 30% cut in their power rates, a major boost to competitiveness. Future increases in electricity demand can easily be met from Quebec’s plentiful, green and low-cost hydro base. The electricity business will still be subject to regulation by the NB authorities.
Two of the main criticisms of the deal hold no water:
1) that this gives Quebec blocking power on future electricity development in other eastern provinces because QC will be able to block access to the US market.
Uhhhh, no. Quebec is itself a major exporter to the US and would like to sell a lot more. That access to the US market comes with conditions. QC-Hydro must have a licence to export from the Americans’ Federal Energy Regulatory Commission (FERC). FERC regulations unambiguously require anyone exporting to the US to allow open market access to their jurisdiction from other suppliers. If Quebec tried to exploit their geographic advantage by blocking electricity exports from, say, NL or NS, they would lose their FERC licence and with it their access to the US market. It would be incredibly self-damaging for no gain. Won’t happen folks.
2) NB is just exchanging one electricity monopoly for another. Yes, true. And yes, I would prefer to see both QC-Hydro AND NB Power broken up and sold, creating a genuine competitive electricity market in eastern Canada. That’s not happening anytime soon. What we’ve got is this: under the proposed deal, NB is still subject to a monopoly supplier of electricity. That supplier is still subject to the regulatory authority of NBers. It is the status quo in that regard, so they are no worse off. By contrast, they get rid of more than $4-billion in debt, access to lower cost sources of electricity, remove local politics from a lot of power decisions, improved competitiveness for many major industries, and can expect much better rate performance than they’ve got from NB Power for years and years. So it’s not competition, but a huge improvement on the status quo. Let’s not let the perfect become the enemy of the good here.
My main criticism of the deal: rather than springing it, Meech Lake-like, on the public, the province should have announced that the utility was for sale and invited proposals. The QC-Hydro deal is a clear improvement on the status quo, but we don’t know how it rates compared to other alternatives that might have been put on the table. In 2009, NB’s way of proceeding seems old-fashioned and paternalistic. If they’d gone ahead in a more open manner, they probably could have managed public opinion better. Still, when the emotional reaction eases a bit, and NBers can look at this deal in the cold light of day, I think they’ll realise they’ve been given a gift — a free pass out of their own self-created electricity mess. They should take it.
NB Power deal: I am a NB resident. I am not against lower power rates. If the premier and his ministers are correct, why are they hiding information and trying to sell the deal to us with conflicting and incomplete messages? It seems to me that the opportunity for NB is more access to the hydro power of Quebec and an alternative to outright sale would be a firm contract to purchase a significant block of this power and provide a transmission route to the state of Maine at market rates. If as stated publicly by QH that they expect to make 10% on their investment, this must be because of their intention to supply much of NB from their hydro generation. Why can NB not get ahold of its political interference problems and still keep the revenue available from the assets? If one assumes that this cannot happen, what is to prevent future problems because there will still be interference in the form of the EUB (Energy and Utilities Board) for setting rates and determining what factors of additional costs are built into the rates. The loss of taxes paid by NB Power to the govt will have to be made up somehow. The pension plan, currently underfunded, may suffer as future employees contribute to QH plan. As for debt, some published information has claimed that the debt ratio of QH is actually worse than that of NB Power, but I cannot verify that. Again, if this is a good deal, make it clearer to us Mr. Premier, don’t just try to bully us. And, surprisingly, a pro-business group, the Atlantic Provinces Economic Council (APEC) recently stated that the industries getting the best rate cut are unlikely to be growing with or without this benefit. Even the CEO of Fraser papers has said with the rate cut although his company will save, this will not by itself be sufficient to open some facilities closed because of market conditions.
If Quebec Hydro is bound by FERC rules why couldn’t Newfoundland develop the lower Churchill and export power to the USA via Quebec’s transmission facilities?
The answer, of course, is that they can. No one has said they can’t Newfoundland’s problem is not that QC stands in the way. The problem is that Lower Churchill power is wildly uneconomical. It won’t pay to develop and ship this power.
Lots of content here. Thanks for writing Dave. A few quick points: 1) It is correct that an alternative would be to buy blocks of power, but it would be an inferior alternative. People seem quite stuck on the idea that it is desirable to own NB Power. I don’t see that argument at all. In fact it has been a mess and would take a long time to clean up, even if you assumed that the politicians would do so as quickly as possible. NB is being offered a free ticket out of the mess. 2) Yes, the EUB can still play politics with power rates. Remember, though, that one of the major reasons for political game-playing with NB Power has been using the utility to prop up uneconomic jobs in NB (see, e.g. coal mining). Get out of the business itself, and the regulator will be able to be more even-handed. I’m not guaranteeing no politics. Only observing that the incentive to politicise is reduced. 3) Re: QC-Hydro’s debt. Why do you care if it is better or worse than NBP’s? The point is that NBers will no longer be carrying it. The strengthening of provincial finances will be enormous. 4) Not sure what the relevance is of some industries saying that the proposed rate reduction may not be enough for them. Are you therefore saying that it is better that they not get the reduction at all? And why look only at industries long judged uneconomic? There will be others for whom the change will tip them into profitability, or otherwise improve their outlook. Dying industries are hardly the yardstick here.
Mostly I think your arguments are good, but some people have trouble believing the messengers. 1.) NB is . . . “free ticket out of the mess”. You know what they say about something that sounds too good to be true. Many people are skeptical and wonder if the best price is being paid. Debt by itself is not necessarily bad in an industry like that, but if the utility is managed as part of the provincial job creation machine there are bound to be waste issues and you are right. Also, if the same team that helps create the problem tells us they have a solution why would we not be skeptical? 2.) QC-Hydro debt – why care? If their ratios are worse, maybe there are issues like reliability and long term rate trends that may weaken the deal. Also, our rate payments are then going to support that debt without the (maybe questionable) benefits of local job creation. 3.) Strengthening provincial finances: On this point there have been reports by the provincial auditor claiming that doesn’t matter, since debt held separately. I realize debt is guaranteed by province, so not sure where the truth lies. 4.) Industrial rates: clearly if the lower rates were just to support a dying industry, how does that differ from the argument against using the utility to prop up un-economic jobs? Not sure if the biggest rate cuts are going to help the smaller possibly growth industries. 5.) Maybe this is just name calling, but drive through QC and look at all those highway underpasses with steel mesh catching the concrete chunks. I know they have been doing major rebuilds and maybe the situation is getting better, but does QC Hydro maintain their equipment better than the highway dept? The ice storm a few winters ago saw many towers fall and some people were out of power for weeks.
New Brunswick should just enact some qualifications for who can be allowed to run for Government, rather than the ridiculous bunch since Hugh John Flemming! Giving power to the powerful at less then cost is about as dumb as it gets. You would think these two “writers” would be more informed? Well thats probably it, the have been “informed”!
Deals for aluminum firms hurt province, report says
Blasts saguenay smelter project. Universite Laval economics professors peg cost at $274,338 per job per year
The Gazette (Montreal)
vendredi 13 avril 2007
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Par Paul DELEAN
The Quebec government is doing itself no favours agreeing to sweetheart deals with aluminum companies, the Montreal Economic Institute says.
In an economic note made public yesterday, the institute pegs at $274,338 the cost per job, per year, of a Dec. 14 agreement with Alcan Inc. on a new $2-billion smelter in the Saguenay. That’s based on 740 jobs over 35 years at the new plant, and using a conservative number for the market value of electricity.