Power Rate ‘Shock’ Threatens NB Industry’s Competitiveness & Viability

Amid speculation of a looming double-digit hike in electricity rates this year, New Brunswick’s manufacturing and resource sectors are calling for a longer term plan for dealing with NB Power’s debt and for greater certainty in future power costs. “A reliable, cost effective supply of electricity is essential to our competitiveness,” said CME’s energy committee chair Andrew Booker. “A critical criteria for making investments in our operations, and in New Brunswick’s economy, is to have a clear picture of our costs going forward.”

Canadian Manufacturers & Exporters (CME) has been the voice of the nation’s manufacturing sector since 1871. CME’s membership is largely comprised of SME’s, but also includes some of the largest companies in Canada. These companies account for an estimated 75% of our manufacturing output and 90% of exports. The sector employs about an eighth of New Brunswick’s workforce and many more have jobs providing supplies and services to manufacturers. Manufacturing is truly the engine driving our economy.

The New Brunswick Forest Products Association (NBFPA) is a non-profit organization that represents its forest industry members by serving as a common voice in relations with the government and the public, promoting a healthy New Brunswick forest, raising public awareness of sustainable forest management practices, and providing a forum for the exchange of information, ideas, and concerns. The NBFPA has over 80 members which are made up of pulp, paper, and solid wood manufacturing companies, as well as consultants, contractors, dealers, institutions, and individuals.

Electricity typically comprises more than 10% of manufacturers’ operating costs. This figure is even higher for resource-based operations. As well, since our economy is heavily weighed to resource extraction and processing, industry accounts for a higher proportion of NB Power’s load and revenues than is the case for most utilities. Thus, manufacturers’ and NB Power’s competitiveness are integrally linked. Great care must be taken, then, to ensure electricity rates support their sustainability and contributions to our economy and standard of living.

The prospect of a double-digit rate hike is especially troubling for sectors that are in the throes of a restructuring of global markets. “Currently, our forest industries are facing unprecedented challenges,” said NBFPA President & CEO Mark Arsenault. “The high value of our dollar, a downturn in the US housing market and high energy costs have all contributed to a very difficult business climate for investment that ultimately challenges industry’s long-term survival.”

Energy is a key element of Government’s Charter for Change. As well, the Self-Sufficiency Task Force has identified five energy mega-projects that are underway or proposed that could generate real wealth, and employment, over the next decade. Indeed, there is a real opportunity for the province to take a leading role as an energy provider for the region and the world. It is essential, however, that a reliable, reasonably-priced source of energy also be available for New Brunswickers.

It’s been said that New Brunswick rates compare favourably with most surrounding jurisdictions. Our electricity prices, however, have been inexorably rising. Since 1990, (average) rates have risen by more than 60%. As well, our manufacturers are operating in global markets and many competitors actually enjoy lower electricity costs. A number of other jurisdictions also have advantages such as lower labour costs. The dramatic appreciation of the “loonie” has intensified the pressure on exporters. Manufacturers need time adapt and adjust to these new challenges.

It has been suggested that the cause of NB Power’s relatively high debt is that the utility has not been charging enough for the electricity it generates. This argument, however, is misleading and suggests a `wrong-headed’ approach to the challenges ahead. In fact, industry raised concern about the utility’s debt more than a decade ago. The reality is that NB Power’s debt was largely accumulated before the 3% rate cap was instituted in the `90s, when the utility could apply for full cost recovery. As well, decisions taken over the past few years have exacerbated the financial challenges facing the utility.

The `easy way out’ for the utility is to simply raise rates. This will, however, lead to a `spiral’ of declining business investment, declining revenues for NB Power and ultimately a debt that can’t be serviced. NB Power must drive internal efficiencies to ensure the best value for its customers. Indeed, industry is facing similar challenges in responding to rising costs and increasing global competition. “Very few manufacturers have the luxury of raising the price of their products to offset rising costs,” said vice President of CME’s New Brunswick and PEI Divisions. “Leaner operations, higher productivity and innovations in process and products are necessities to survive in today’s global economy.”

It has also been suggested that Government should not offer direct assistance with energy costs, but should focus its efforts on conservation. Of course, energy efficiency and conservation will play a major role in managing the demand, supply and cost of energy over the longer term. In fact, manufacturers have improved their energy intensity by about 1% per year over the past two decades. CME has undertake a number of energy efficiency initiatives over the years and will continue to work with its members to identify and undertake measures to improve energy management and, hence, productivity.

Energy efficiency can make sound business sense, but it isn’t the (sole) solution to the conundrum of rising rates. Cost increases can eliminate any gains from such measures. Public incentives can assist to lower the `hurdle rate’ for energy efficiency projects. However, capital is scarce in today’s markets and investments of this order of magnitude likely wouldn’t be supported in an environment of uncertain and rapidly escalating power rates.

In public comments, government has indicated that it wants NB Power to operate as a business and, at least, break even this year. This suggests that the utility should operate much as it would in a competitive market. In this scenario, consumers would be provided with a reliable source of electricity at the best possible price. While the best effort has been made to foster competition, the reality is that our electricity market essentially remains a monopoly. There is no competitive market to ensure that the utility operates as efficiently as possible and offers the best value.

CME and the NBFPA have made representation to government, as well as to the regulator, advocating a managed approach to dealing with the challenges facing the utility and its owners. This approach doesn’t attempt to `pass off’ responsibility for NB Power’s debt, but it recognizes the reality that we didn’t get into this situation overnight and there’s no `easy fix’.

Firstly, it is essential that the structure of the utility and electricity markets is transparent and does not impose additional costs for the utility and its customers, without a corresponding increase in value. The current structure reflects a competitive electricity market. However, competition is unlikely to emerge in New Brunswick for least the medium term. Thus, pause should be taken to reconsider the regulation of NB Power and its business model.

This reconsideration must not, however, be used as an excuse for inaction. There is a need to deal with the utility’s debt, particularly with refurbishment of Pt. Lepreau on the horizon. Rates should be set to pay down the debt, over a longer period of time. Avoiding `rate shock’ must be a key consideration of public policy. Consumers are ultimately responsible for NB Power’s debt, but there is little sense in raising rates so quickly that fewer consumers can afford to pay off the money that is owed.

During the PUB hearings, NB Power said that institution of annual 3% increases over a decade would have brought the utility’s debt/equity ratio to a commercially viable level. The spike in oil prices upset this strategy. There’s considerable value in providing a degree of certainty and stability in the pricing of electricity. Thus, NB Power should be required to develop and publish a debt payment plan and rate forecast that incorporates reasonable increases.

The impending shutdown of Pt. Lepreau also raises some uncertainty about the security of supply. Such uncertainty can have a `chill’ on investment. The utility is understood to be undertaking a comprehensive planning exercise to ensure sufficient capacity over this period. As well, NB Power regularly updates its forecasts of load that it will be required to serve. Nonetheless, there would be real value in NB Power preparing and publishing a longer term plan for its generation capacity and for ensuring a secure supply.

Given that NB Power is effectively still an integrated monopoly, the focus must be on ensuring the utility operates as efficiently as possible and consumers have reasonably priced electricity. NB Power is to be commended for instituting a “Business Excellence Program”. It was clear from the recent rate hearings, however, that more can be done to improve efficiencies. (The previously announced Energy Action Plan included a requirement for the utility to undertake a further $20 million in cost reduction.) NB Power should be required to provide more rigorous reporting on cost reduction measures, as well as develop new performance improvement measures against established benchmarks.

Effective regulatory oversight is essential to ensuring the utility operate as efficiently as possible. In the design of the electricity market, and in subsequent drafting of the Electricity Act, it was envisaged that the Energy & Utilities Board would have a major role in monitoring the electricity market and regulating market participants. In recent PUB hearings, It was clear that the regulator was struggling with these roles. Indeed, a lack of scrutiny of generation costs (as dictated by legislation) was a major point of contention in those hearings. Given that NB Power has a monopoly in the provincial electricity market, the entire utility, including Genco, should be subject to regulatory oversight.

Since the PUB couldn’t fully review generation data, it simply applied the cost allocation formula from the previous (1991-’92) rate hearing. The ramifications of this (non) ruling were wide ranging and complex. CME’s experts’ analyses showed that this resulted in an unusually high (85%) allocation of costs to “energy” and to industry. This is akin to gas accounting for 85% of the cost of owning and operating a car. Going forward, it’s essential that consumers have a clear picture of cost causation. Thus, a complete review of the entire utility’s embedded costs, including how costs are transferred between business units, and the revenue to cost ratios of the various consumer classes must be undertaken.

Energy plays an integral role in the vision of New Brunswick’s future. However, it’s also an essential element of the investment climate in the province today. New Brunswick is one of Canada’s most industrialized provinces. The future of industry and NB Power, as well as New Brunswickers, depends on a reliable source of power at the best possible price. “A measured, longer term approach, is essential to ensure the sustainability of the utility and its customers,” said (CME chair or VP)