The Atlantic Institute for Market Studies is taking NB Power to task for claims that a recent AIMS paper contained “numerous inaccuracies” and “serious errors”. The corporation says this reflects, “a fundamental misunderstanding of the electric utility industry and NB Powers operations.”
The author of the report, Thomas L. Tucker PhD., reviewed the list of NB Power’s assertions and said today, “These assertions may offer a temporary public relations fix for NB Power, but they simply do not address the very serious issues raised in the paper.”
Dr. Tucker was invited to review and update earlier studies published by AIMS in the 1990s by Tom Adams, which found, at the time, that NB Power had one of the highest debt burdens and that its aging assets would be unable to generate sufficient revenues to service that debt.
Dr Tucker’s key findings in “Power Trip: Stumbling Toward a Policy for NB Power” were that the company’s debt position remained acute and that existing assets would indeed be unable to service future debt payments without additional major borrowings to refurbish them. He noted that the creation of a new corporate structure would not relieve the taxpayers of New Brunswick from their ultimate responsibility for the outstanding debt.
In response to specific purported “inaccuracies” contained in the paper, Tucker observed:
In its media release NB Power noted that its rates “fully cover operating costs and the Corporation has been paying all its debts.” The paper never implied otherwise. It did note that since AIMS’ earlier studies, NB Power has more-often-than-not operated at a loss and has added substantial new debt. This unsustainable course of action was emphatically commented on in May 2003 when David Nicholson, Chairman of the New Brunswick Board of Commissioners of Public Utilities (NBCPU), made a presentation to an international conference of utility regulators characterizing NB Power as “insolvent”. (www.camput.org/documents/Nicholson-paper.pdf)
In the same release NB Power states, “its operating rates are similar to those in Saskatchewan and Ontario.” The paper specifically recognized that SaskPower’s operating costs have exceeded those of NB Power since 1998. The paper also shows that the combined fixed and variable costs for SaskPower are now marginally higher that NB Power’s. It should be noted, however, those crucial overall costs are higher by a very large margin for both SaskPower and NB Power than for every other major Canadian utility. It is hardly comforting to New Brunswickers to know that they are in competition with SaskPower for the title of worst performing utility in its class in Canada.
NB Power argues, “the province is not assuming any of the company’s debt upon restructuring.” However, a newly created crown agency will assume $1.5 billion of the company’s debt—for which taxpayers remain ultimately responsible. The remaining approximately $1.5 billion will remain on the books of the new companies. In its media release the company states “the new companies will replace half that amount with non-guaranteed loans from the private sector and will generate dividends and payments that will repay the money owing the Province”. (This would appear to recognize that the Province has indeed assumed responsibility.) A key conclusion of the paper is that if the single utility has been unable to generate the revenue necessary to repay the debt, it would appear ludicrous to think that the restructured companies would collectively be able to do so—unless rates are raised and major new efficiencies introduced.
NB Power does recognize it faces “significant challenges to upgrade its aging facilities” and claims “it is undertaking significant investments that put it well ahead of most other North American utilities.” The paper notes that the dearth of new investment since the mid-1990s has left the company with assets that in a number of cases are deteriorating more rapidly than projected and whose remaining life is less than the revenue stream necessary to repay the debt undertaken to build them. It also questions the wisdom of the investment strategy undertaken by the utility. In particular, it expresses reservations about the commitment to a major capital program at Point Lepreau in spite of a decision of the New Brunswick Board of Commissioners of Public Utilities not to support the corporation’s $845 million planned expenditure. In delivering their opinion, the Board commented that: “there is no significant economic advantage to the proposed refurbishment project”.
NB Power contradicts the paper claiming it: “…did not build Point Lepreau for export.” Commercial operations at the site commenced in 1983. National Energy Board documents show that as early as 1980, the company made application to export more than one-half of the facility’s capacity to the United States.
The NB Power media release implies that the paper claims that the utility’s reserve capacity is excessive. The paper makes no such claim. It does argue that the excess reserve capacity (which every prudent utility must maintain to satisfy power needs during interruptions) is exceptionally high because sufficient capacity must be maintained to supply power needs in the event of a failure at Point Lepreau, which normally supplies a high proportion of the utility’s capacity. Thus the paper correctly notes that the structure of NB Power’s generation assets burdens the utility with high operating rates as a consequence.
NB Power, many years after AIMS papers first made the point, now recognize in their release that its use of local coal has been wildly inefficient. The paper also details how their commitment to Orimulsion, a bitumen slurry obtained from a single source, may prove to be a costly and possibly unreliable alternative.
Among other alleged “inaccuracies” listed by NB Power in their press release, it is stated: “For example, the Point Lepreau Generating Station is not being expanded…” The paper used the term “expansion” with respect to Point Lepreau only in specific reference to the 1993 expansion. The paper refers correctly to the currently proposed project as “refurbishment.” With respect to the Coleson Cove Station, the paper refers to the replacement of the facility’s infrastructure—not replacement of the facility.
The release chastises the paper noting, “the Kyoto Protocol has nothing to do with SO2 and NOX emissions.” The paper does reference Sulphur Dioxide (SO2). Over 65% of SO2 released to the air in the U.S., more than 13 million tons per year, comes from electric utilities, especially those that burn coal. SO2 is not a focus of the Kyoto Protocol. However the paper makes no mention of the generic nitrogen oxides (NOX) but does specifically comment upon nitrous oxide (N2O), which is one of the emissions covered by the Kyoto Protocol as is, of course, carbon dioxide (CO2), as the paper noted.
Dr. Tucker has extensive experience in the areas of government policy analysis and development, industrial development and benefits, strategic and operational planning, economic analysis and forecasting, business planning and assessment, program evaluation, and teaching at the university level.
The “numerous inaccuracies” and “serious errors” cited in NB Power’s response to Dr. Tucker’s paper lack substance and in total do not address or refute the fundamental conclusions of his paper, namely that
- NB Power is, in every practical sense, insolvent.
- The assets that NB Power has constructed over the years will never be able to pay for themselves before they are obsolete, and
- Solutions that government and management propose are cosmetic, lacking the substance to reverse the financial bleeding and won’t put the utility on solid footing.
Unfortunately both ratepayers and taxpayers in New Brunswick will have to foot the bills of this catalogue of past policy errors. The question Dr. Tucker’s paper poses is whether policymakers are prepared to stop making a bad situation worse. The defensive and superficial response of the utility to the paper suggests that the answer is “No”.
For more information please contact
Jordi Morgan
Director of Communications and Development
AIMS (902) 429-1143
Direct (902) 446-3532
Cell (902) 452-1172
Fax (902) 425-1393
[email protected]