Clarity on the $1.6B

I am a little weary of the NB Power file – I suspect many of you are as well but I have to clear up one more little point that many people are making.  They talk about the $1.6B NPV rate savings from moving to HQ as some kind of liquid cash asset that can be used for whatever we want.  Some have even talked about using the $5 billion rate savings to pay down additional debt.

This is not cash, folks.  It has no cash value.  I guess theoretically HQ could have put some kind of deep cash discount on it but they are already going to the debt market to raise the funds to pay off NB Power’s debt.  The rest of it is a 30 year stream of economic value coming from the lower rates compared to what we would have paid under NB Power (based on a variety of assumptions that we have talked about before and that are listed in the NERA report).  In fact, $1.7 billion of the savings is a totally theoretical number because it is stretched to infinity (they call it net present value in perpetuity).

The only real debate, then, is where you allocate the rate savings.   You could maybe negotiate more up front or you could have cut residential rates and frozen large industrial rates – there are an infinite number of possibilities.  The government, I assume, looked at it and said that the large industrials were more at risk from high cost electricity than other rate classes.  You may disagree (and it seems most of you do) but at least we can talk about real process and real data and not theories and weird assumptions about the cash value of an estimated rate savings stream.

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6 Responses to Clarity on the $1.6B

  1. Ed Hollett says:

    The current NB Power debate mirrors one in Newfoundland and labrador about 15 years ago. Hysteria and fear won out over sense and logic.

    Some of the ssme people who are now moaning about lower rates for industry will also be screaming for the government to do something when the sale doesn’t go through, rates aren’t lowered and insudtries that could be doing well are shuttered because of high energy costs.

    You cannot eat your cake and have it too, as some people in New Brunswick may soon find out.

  2. Anonymous says:

    Thank you for clarifying this; it has been distorted by the government rhetoric referring to this as a $10B deal. Jack Keir and Shawn Graham are on record declaring this is a $10B deal. I think they are wrong and you are right however the rate releif has some current value. We would need more information and some NPV formulas but it would certainly have a cash value less than $5B. For sake of arguement, Let’s say $2B.

    So, now we have a $7B deal, about the book value of NBP as identified in their annual report. We have not seen a market value assessment as yet but Keir said yesterday that they have hired investment bankers and are getting it. I would have hoped they did this before negotiating but it will be good to get the data sometime before making this legal.

    So the deal goes like this:

    We sell NBP for book value and agree to pay nearly double for 2 of 3 rate classes. Not convinced this was well negotiated. Why not ask for rate Quebec rates accross the board in all rate classes?

  3. Anonymous says:

    I was encouraging some economic development discussion on something other than pulp mills and saw mills in hopes of targeting more current industry with perhaps a brighter future. It seems that, at least for the present time, our policies and support remain focused on traditional natural resource industries. Personally, I think we have only seen the tip of the iceberg of the hurt in those sectors but for the sake of New Brunswick, I hope I am wrong.

  4. I am not arguing with your position on what industries should benefit – just your insinuation that the $1.6B could be passed around like cash. I suppose we could use those savings to attract data centres (a sector I do have an interest in) but they have such a little economic multiplier – I am just not sure of the value. A pulp mill like AV Nackawic requires likely close to 1,500 people up and down the supply chain (and induced activity in the local community) from silviculture and tree planters through to loggers and truckers through to sawmill workers right to the mill itself. That doesn’t include the host of professional people that are working in forestry-related biology, engineering, front offices, etc. A data centre requires 50-70 people to monitor the systems and keep the lights on. on a per megawatt basis, you get far more economic value out of a forest products mill or a UMOE solar plant or some other industrial activity than a data centre. No, I think if you really think those mills should die (like what happened in Maine) you should advocate no more incentives, no effort to fix power costs, no public silviculture or any investment at all in forestry and they will close within 5 years or and we can, I guess, move on to other opportunities.

  5. Anonymous says:

    To be clear, I posted suggesting that in exchange for rate releif there should be commitments from these mills and other industrial users to moderize or transition to more sustainable operations. UMOE and AV Nackawic are perfect examples of operations that did transition.

  6. mikel says:

    There are a number of other things in the deal that are being distorted. I’ve read the MOU numerous times, but I can’t recall where it says only CURRENT industrial players will recieve the cheaper rates. Even if its argued that big industry deserves the lower rate, then it makes no sense to ONLY include current industry. That is something that is also being ‘thrown around a lot’ but whether its true I’m not sure. Whether the new plant in Caraquet will recieve CURRENT rates or the new rate is a pretty big question that so far has no answer. IF it was told it would get rates the government hasn’t yet passed, then that’s a pretty creepy move by Graham, but if that wasn’t a factor, it pretty much disproves the theory that the rates aren’t competitive. The company specifically said that its more cost effective to set up in NB than anyplace else in North America.

    The other NEW information comes from the Auditor General and points out that fancy acounting lets NBPower put electricity costs during the lepreau shutdown in a special file not counted with basic debt. Ironically it actually calls this an ‘asset’. But according to the AG NBpower actually lost close to half a billion dollars this past year alone-thanks to lepreau. Those costs are meant to be recouped over the life span of lepreau, however, lepreau is very much an experiment, as Energy Probe said years ago, Ontario Hydro tried the same thing but it simply didn’t work. NB COULD have another 2 billion fiasco on its hands.

    But more to the point, Ed is being a little bit unfair. Bernard Lord had a technology fund specifically for the forestry industry that was worth half a BILLION dollars over a few years, that was hundreds of millions of dollars for Irving. Then, last year Irving comes along and says they are going to move to Quebec if the government doesn’t ‘help them out’, and the province advanced them 10 million more. There were people who griped at the blogs, but really no demonstrations or anything like that. The problem here is NOT that government is helping out companies, they’ve been bailing out the large industries for years (and that really should be more a topic), but HOW they are doing it. It’s been confirmed that the rate savings are MORE than industry asked for.
    Specific to forestry, there are other opportunity costs to consider as well. The ‘status quo’ lets companies close mills but still have access to the wood supply. There are OTHER options for the wood supply to provide income to those workers. NB provides the FEWEST jobs per acre of forest than ANY province in the country-that ALSO should be more a topic, but rarely is. These companies had all kinds of opportunities to invest back ten years ago when they were making money hand over fist.

    And there’s also a bit of hypocrisy there, when Bathurst was being hit by mine closures, which have just about the same economic impact, the government quite famously said “theres nothing we can do”. In fact this was at the same time as the bailout of Nackawic was being planned. Bathurst literally goes up and down with the mining market, but for some reason forestry is considered a different case.

    The reason that pulp and paper is mentioned so often is the simple fact that it so clearly IS a ‘sunset industry’ with fewer and fewer benefits to the province-and the resource could be managed far differently. And because all the companies haven’t even been identified. A final point is that this deal also relies very much on the negotiating skills of this province, and who is comfortable with that? Jack Keir, not to be personal, but either seems to be not aware of what goes on one day to the next, or, well-his latest gaffe was to promise everybody that the rate savings for all companies would be published because its ‘open information’ but is now saying that that is priveleged information (a spokesman for Irving Pulp and Paper did post in the comments section, I think stating that they’d save $18 million a year).

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