The Decline and Fall
of the Electric Empire

David Coon
April 1998

Universally accessible and affordable electricity. Inexpensive and reliable power for industry. These were the goals of creating the New Brunswick Electric Power Commission and giving it a monopoly over electrical generation in the province

Massive public investments were made to achieve these goals, and achieved they were. Electricity flowed to lonely farmhouses and massive pulp plants alike. Power rates declined throughout the fifties, sixties and into the seventies. But by the late seventies, provincial politicians decided the New Brunswick market limited the growth of N.B Power and began to look at electricity export markets. What followed was nothing less than a construction frenzy.

========== "Electricity flowed to lonely farmhouses and massive pulp plants alike." ==========

The Clean Air Act was passed in the United States banning power generation by high sulphur oil. Lacking equivalent legislation in Canada, the New Brunswick government sensed an economic opportunity and built a massive oil-fired power plant outside of Saint John. This plant, our province's largest generator at 1,000 megawatts, would then burn high sulphur oil to provide cheap electricity to supply America utilities that had been backed into a corner by U.S. environmental legislation.

Next came Richard Hatfield's obsession with nuclear technology and a willing partner in the Atomic Energy of Canada Limited. Together, they concocted an export fantasy that had six or more CANDU reactors lined up along the border. They would then ship electricity south, where utilities were running into fierce opposition to nuclear power plants. Of course, what we ended up with was Point Lepreau and a foundation for Lepreau 2.

Finally, when the McKenna Liberals swept into power, another couple of massive power plants were placed on the drawing board. Thus allowing the new government to build its own electric monuments. The Belledune coal-fired power plant on the north shore was a result, one of a planned two units, that would be the centrepiece of the Liberal government's electricity export strategy.

A house of cards

The result? With the arrival of natural gas and relatively inexpensive gas-fired generating stations, the electricity market dried up. As the recently released white paper on the future of the electric power sector in New Brunswick puts it, "NB Power currently has an inappropriately high level of debt ($3.6 billion), resulting primarily from an aggressive program over the past twenty years to construct new generation facilities, and a failure to raise rates charged for electricity by sufficient amounts during that period. In addition, current operational problems at Point Lepreau are placing an added strain on NB Power's ability to pay down its debt."

The report made no mention of NB Powers disastrous build for export strategy. It was as if the government had fallen for its own rhetoric about building to meet provincial demand, exporting any surplus and keeping electricity exports artificially high to keep New Brunswick power rates low.

Stoically the white paper says NB Power's $3.6 billion debt is its number one challenge. "In the future, NB Power must have a balance between revenue and costs sufficient to meet its financial obligations and to reduce its debt to more appropriate levels," according to the white paper.

To make matters worse, the provincial government believes that they will have to open up the electric power sector to competition. To export electricity into New England, New Brunswick must open its markets to American imports. Ending NB Power's monopoly on electricity generation would deeply cut into its revenue generating capacity. Large power consumers then might choose to generate their own electricity from natural gas, providing them with cheaper power than NB Power can provide. They could also choose to purchase cheap hydroelectric power directly from Hydro Quebec or inexpensive coal-fired power from the Ohio Valley. Presumably, municipal utilities in Saint John and Edumndston would also exercise these options.

Public Consultation

In search of a way out, the provincial government has struck a task force co-chaired by University of Moncton economist Donald Savoie and financial services advisor David Hay. Assistance has also been provided by Doug Goss, senior advisor to the Public Utilities Board and David Folster,a former journalist and executive director of the New Brunswick branch of the Canadian Forestry Association.

The mandate of the Task Force will be to consult with interest groups from the Irvings and labour unions, to environmental organisations. They will also receive written submissions, on the government's white paper on reforming the electric power sector, from the public.

The Task Force will then prepare a report of options to be presented to a new Select Committee of the Legislative Assembly. The Select Committee will be holding public hearings and will submit a report to the Legislature.

Energy Minister Alan Graham cited several issues that need to be explored including: restructuring the industry, open competition, and private sector involvement in the electrical energy sector. He emphasized the need for active involvement from New Brurnswickers in the consultation process.

Key Issues

In their 1997 book, "Reinventing Electric Utilities," Ed Smeloff and Peter Asmus list two key questions for citizens to consider when governments contemplate opening the electric power sector to competition.

(photo: www.realgoods.com)

========== "...require private power generators to supply a set percentage of the power they sell from renewable sources." ==========

First, does the restructuring ensure that investments in energy efficiency and renewable energy technologies are encouraged? Replacing a publicly-owned monopoly, subject to public policy and legislation, with a competitive market requires the sector be re-regulated to reflect the restructuring of the industry. Explicit public polices are required to promote investments in energy efficiency and renewable energy technologies. In a number of American states, a public benefits charge has been contemplated to build a pool of capital to be invested in energy efficiency. The other public policy mechanism that has been considered is a renewable energy portfolio which would require private power generators to supply a set percentage of the power they sell from renewable sources.

Secondly, are the costs and benefits of restructuring equitably shared between individuals, small businesses and the big power consumers? Large power consumers such as the Irvings, because of the size of their electrical demand, would have tremendous negotiating leverage in arriving at a price for electricity in a competitive market. Without organizing into large buying co-ops, individuals and small businesses would not have this leverage. American experience to date has been that any economic advantage from a competitive market tends to flow to the big players.

========== "Whatever the future holds, the implications of restructuring the electric power sector are huge..." ==========

(photo: www.realgoods.com)

The flip side of this is that the costs of competition could unfairly rest on the shoulders of New Brunswickers. For example, in a competitive market, the debt incurred to build Point Lepreau and Belledune would represent stranded costs to N.B. Power that would then have to be passed onto consumers. One approach is to place a hefty surcharge on that electricity supplied from other sources, as it runs through N.B. Power's transmission lines, to make sure everyone bears their fair share of the debt burden. This becomes more difficult in situations like the one under consideration by the Irvings, where they could build their own power plant at their oil refinery to meet its electrical needs and those of the adjacent pulp mill and shipyard. Unless that power is carried over N.B. Power wires, the company could avoid much of its share of the stranded costs at the utility.

Important Choices

If the New Brunswick electric power sector is opened to a competitive market, it is likely that some of N.B. Power's power plants will not be able to successfully compete. Two or three could be shut down, while others may be sold to the private sector. It is conceivable that N.B. Power would end up simply owning and operating the provincial transmission and distribution system while purchasing power for its customers from a variety of sources. Customers, at least the big ones, would also have the option of buying directly from the private sector and simply using N.B. Power as their electrical conduit.

Whatever the future holds, the implications of restructuring the electric power sector are huge for New Brunswickers, economically, socially and environmentally. Add to this the arrival of natural gas in the province by 1999 and it is clear that we are in the midst of setting provincial energy policy for decades to come.

The big question is whether there will be a full debate of all the issues, or will it be a one-sided discussion led by the major power consumers in the province. That will depend, to a large degree, on how hard the provincial government works to hear from its citizens. No announcement has been made to-date on whether participant funding will be available to make submissions to the Task Force or the Select Committee. Nor has there been any indication of whether the Task Force and Select Committee will have adequate budgets to hire the expert advice they may require.

The only thing that is clear, is that New Brunswick’s electric empire is crumbling.

Issues to be Addressed by any Proposal to Restructure the Electric Power Sector
(from Reinventing Electric Utilities -- Competition, Citizen Action, and Clean Power, by Ed Smelloff and Peter Asmus, Island Press, Washington, D.C. 1997.)

Opening the electricity market to competition must not exacerbate the environmental problems caused by this sector, and must ensure that the introduction of renewables and other cleaner safer power sources is accelerated.

1. Goals of restructuring must be clear.

2. How are the costs of past investment decisions (i.e. Point Lepreau & Belledune) to be recovered. These become stranded costs in a competitive climate?

3. How are the costs of generation, transmission, and distribution to be unbundled?

4. How do you encourage the development of cleaner safer power sources if the market is automatically going to prefer the cheapest and possibly dirtiest option?

5. How do you ensure that all classes of customers have reasonable opportunities to benefit from restructuring the electric power sector? Costs should not be disproportionately borne by residential and small business customers.

6. How do you ensure there is no discrimination around access to transmission services? That is responsibility for the control and operation of the transmission system must be independent of those with vested financial and economic interests in power plants.

7. How do you encourage the development of distributed power generation? Smaller-scale distributed generation located close to load centres offer multiple benefits.

8. How do you ensure that investments in energy efficiency (demand side management) are given the same consideration as investments in new supply sources? Minimize incentives for distribution companies to promote the sale of electricity by disconnecting profits from the amount of electricity sold over the retail system.

To learn about the issues from the perspective of workers in the electric power sector, information is available from Ross Galbraith at the International Brotherhood of Electrical Workers, Local 2309,
138 Neill Street, Fredericton, N.B. E3A 2Z6,
506-450-4800.