NERA Report

I said I wouldn’t comment any more on the NB Power thing until new information came to light.  Jim A. sent me the link to the consultants report on rates that is posted on the CBC site.

This report is bound to ease the concerns of Liberal loyalists.  Not only is this firm qualified to do this analysis (it is their core business) they got input on the model from NB Power, the Department of Energy and the Department of Finance:

The stand-alone case is modeled as a “rate minimization” case and is designed to reflect the lowest feasible rates that could be achieved over time if NB Power continued to plan and operate the NB Power System.
NERA reviewed the details of the models with NB Power, the NB Department of Energy and NB Department of Finance to obtain their input. A broad consensus was reached that the stand-alone case provides a realistic and in fact a conservative view of the rates that would be expected to prevail in the stand-alone case.

In other words, the forecast for NB Power’s rate increases going forward is the most conservative approarch they could feasibly assume and they got broad consensus from NB players.

Carbon cost – we assume that NB Power will receive sufficient free allowances under any Canadian or provincial carbon cap-and-trade program to cover the output of Belledune through its remaining original life and the limited output of the other fossil assets. However, we assume this favorable treatment ends after the refurbishment and life extension of Belledune in 2033.

I don’t know enough about cap and trade to know if this assumption makes sense but I assume they know what they are talking about.

New supply – based on NB Power’s load forecast, the company will require additional power supply over the amounts produced by existing generating assets in its 2012 forecast (adjusted to normalize capacity factors). We assume that the cost of this new supply will be $85 per MWh in 2011, escalating at inflation.

Their model actually forecasts that NB will buy power outside the Heritage Pool (they show percentages and not $$ amounts) and they still forecast that the rate savings will hold.  The $85/MWh is very accurate based on current realities but could rise higher based on a variety of geopolitical factors.  However, we have to remember that power inside the Heritage Pool will remain at the low rates – even if Israel bombs Iran.

Terminal value methodology – since our explicit forecast covers only the period from 2011 through 2040, we need a methodology for capturing the terminal value, or value of rate savings beyond 2040. We assume that savings remain constant beyond 2040 and then value this as a net present value in perpetuity with no growth in the rate gap.

I do a fair amount of economic analysis in my day job and it is very hard to predict something like terminal value (out to infinity).  I appreciate their attempt but what I would really like is to hear someone at HQ or in the NB government say that rates will move towards parity (on the residential side) over time – when all the NB Power higher cost structure and goodwill costs have been amortized and we are all one big happy family.  This may be too much to ask for.

These guys certainly believe the risk level (on rate escalation) is far greater on the NB Power status quo than on the Hydro-Quebec option. 

NB Power is subject to a variety of risks that could impact rates in the stand-alone case some of which do not affect the MOU case and thus could affect the level of potential rate savings. The most significant risks include the following: Carbon regulation; Coal/petcoke/natural gas and oil price volatility; The outage of a single large generation facility; Foreign exchange rates; The need to raise large amounts of capital to replace existing generating facilities when interest rates are high; and Construction cost overruns for major generating unit refurbishments/replacements.

They say far less about the risks associated under the HQ model. 

And, of course, the usual disclaimers:

In particular, NERA shall not have any liability to any party in respect of this document or the forecasts contained herein or any actions taken or decisions made as a consequence of this document and the forecasts contained herein.

What I don’t read in here at all is the opportunity cost associated wtih NB Power someday potentially being a conduit for Lower Churchill Falls power.  Under the HQ agreement, HQ gets that benefit.  I have discounted this in my thinking for several reasons – 1) it is far off, 2) I wouldn’t put it past Williams or whoever comes after him to do a deal that cuts of NB anyway; 3) we already ship a pile of HQ power on our lines to New England and the revenue from that hasn’t stopped the big rate increases.

There is also no mention (because it wasn’t part of this report’s mandate) of the lost economic activity from generation – when we close our power plants, we lose the direct economic activity.

The point is that with every deal like this both sides give something and get something.

I still think that strategically what HQ is really buying here is geography.   They are betting that owning access to the U.S. market will allow them to control the tolls that are paid (as well as ship their own generation to the U.S.).  Of course, there are a wide variety of regulations in place in each jursidiction to avoid the kind of monopolistic fears that Danny Williams is warning Wall Street of this week.   

This document is beginning to affirm what I had assumed all along – that massive due diligence goes in to any deal such as this.  When I read the MOU I could visualize the lawyers from both sides parsing every word – in two languages no less – and mapping it to a host of back end assumptions and models. 

I hope they release the calculations of the value of NB Power’s assets next.

I’ll close on this.  I don’t think this will change many minds of those who are against this.  The politicians, who see this as Graham’s Auto Insurance circa 2003, will likely double down and push the populist rhetoric to the max.  The conscientious objectors as I call them will continue to dislike the deal even though they won’t really fight the numbers.  The rest of the opposition who knows?  I don’t think anything would change their minds. 

The last point that needs to be openly debated is why the rate savings were distributed the way they were.  Several very animated people on this blog have deeply resented the industrial rate cut while only freezing residential rates.  They could have easily frozen the industrial rates and cut the residential rates (by a lesser amount because it is over two times as much total power usage).  You know my thoughts on this.  I think we need to have competitve industrial power rates.  Competitive residential rates, for me, is gravy.  But I will say the government should defend their decision on this. 

While I have opened the door here I will also comment on the Equal Opportunity analogy.  This is wrong-headed.  I know they are saying it because there are similarities in the public reaction but beyond that there is no comparison.  Equal opportunity was about human rights.  About equality and freedom.  Selling NB Power is an economic decision about what model is best suited to serve the province’s power needs going forward.  Period.

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23 Responses to NERA Report

  1. mikel says:

    Selling NB Power is NOT an ‘economic decision’, it is a POLITICAL decision. It is political because it is a public utility that belongs to the people of NB who have in no way, shape or form endorsed it.
    And again, ‘projections’ always only follow the ‘status quo’, and come on, not accounting for externals like exchange rates or carbon trading? That essentially makes the whole analysis pretty close to being useless..which again explains why its not that necessary for people to waste time on them. However, the cost of assets, potential other sources, policies changes, etc., now THAT would be useful information.
    However, there are a lot of big ‘ifs’. I wouldn’t be surprised in the least if several of the remaining mills shut down or relocated-which means less power over the heritage pool price.
    But again, there’s bad information there, rate increases over the past five years have been less than most jurisdictions on the east coast, and power rates are still amongst the lowest. The ONLY place they aren’t as low as is Quebec, so why isn’t NS, PEI and NFLD beating themselves up over it?
    There ARE lots that COULD change people’s minds. IF there were a referendum we’d probably see the irvings and other large industrial users say that if it failed, they’d be packing up and leaving. That is a very real consequence that people need to face. As mentioned numerous times though, how long does the province keep subsidizing these industries until the inevitable happens? And this would effectively kill ED efforts aimed at NEW types of industries, where the province could tailor energy rebates to industries that hire x number of workers at x rates. That will be up to Hydro Quebec, and its doubtful they are going to put NB ED in front of Quebec ED.

    But it is very true, for those who see this as a dictatorial decision made by a lying politician, NO information will ‘change their minds’. And that is as it SHOULD be. There ARE ways of turning it into an economic decision-election, plebiscite, or referendum. And its virtually ALWAYS the case that people assume those on ‘the other side’ are listening to ‘rhetoric’ while they are listening to cold hard facts.

  2. Anonymous says:

    I agree that competitive industrial rates are attractive, what I don’t buy into is handing them over to companies that are dead and dying and will only use them to prolong life long enough to suck out whatever additional loans, grants, bailouts and tax cuts they can until they turn off the lights.

    I much rather see the reduced power rates go to existing companies that commit to investment, modernization, and expansion and new industry that agrees to establish here. Guess I am tired of the crying about exchange rates, forestry policy, environmental requirements, energy rates, labour rates etc. We need real businesses that are globally competitive.

    Furthermore, even if this is absolutely the correct action to take, the government got elected on a clear promise not to sell NB Power. For the sake of voter confidence in future policy and commitments, all governments should be forced to have some sort of renewed mandate when they reverse their position like they have in this case.

  3. That’s exactly my point. Mikel thinks he is more qualified than a firm that does this for a living. I wonder if he is equally qualified to override the expert analysis of doctors, lawyers, financial planners, engineers, architects? Maybe he should just admit that he would be against this deal no matter – like many people have – rather than posture as smarter than everyone else.

  4. I just heard the CBC guy talking about this report. It was stunning. He basically told the audience that the risk was associated with migrating to Hydro-Quebec and said that the savings could be overstated by $2 billion. Unbelieveable. Read that document and ask yourself where the consultant thinks the risk really lies. Journalists go into stories with preconceived ideas and their reporting reflects those bias (I guess I am the same here). This report is clear that the risks are far greater from the status quo than the HQ deal.

  5. Rob says:

    Agree with you 100% regarding Equal Opportunity vs. NB Power.

  6. mikel says:

    I AM against this deal ‘no matter what’-for the democratic reasons I mentioned. People in democracies are fully free to even make BAD decisions. IF this was a democratic decision I wouldn’t care-I don’t live there. I don’t live in Bolivia, but I did what I could to help bolivians overthrow a corrupt privatization scheme.

    The guy at CBC is correct, as David well knows if he read the report: “The NPV of rate saving in this case would decrease to $ 4.0 billion. This indicates that fuel price assumptions are a major driver of the value of the estimated rate savings.” Since they project a savings of 5.6 billion thats, well, ALMOST 2 billion.

    Rate increases are tied to CPI (plus decommissioning costs, plus surplus to heritage pool costs, plus transmission and distribution variables). Mr. Savoie (another ‘expert’) points to the mid-eighties CPI where it went through the roof. THIS report states an ‘average’ of 1.8%-from 2013 to 2030. Thats TWENTY years in advance. Now, for a twenty year average you can have a LOT of fluctuation. That’s fine for statisticians, but what about the homeowner who, in 2025 suddenly finds that not only have general costs of goods (inflation) increased by 15%, but so have his power bills (there goes your ENTIRE five year savings).

    The variables for increased production are also extremely low. As I’ve said, given recent trends in wind power, these CAN be substancial and are relatively low cost to implement. Public policy changes in conservation, natural gas pricing and availability, and other changes as well (heck, Danny Williams might even offer a sweet deal on pricing just to spite Quebec-since he may be as ‘untrustworthy as David thinks).

    “As with any forecast, it is important to recognize that actual results may differ and could be higher or lower, and that alternate assumptions could result in higher or lower estimates of rate
    savings. Additionally the savings are net savings. Transmission and distribution components of rates are higher in the MOU case as these rates reflect a regulated cost of service and return and
    are not designed along rate minimization parameters.”

    In case NBers want to know, that is exactly what has happened here in Ontario. Power GENERATION rates have stayed the same, where our increases have occurred is in transmission and distribution costs (which were unloaded to regional power utilities). That means a whole SLEW of new variables this report hasn’t taken into account.

    So this report talks about everything BUT all the variables that have been the problem since the outset. ‘There MAY be substancial savings EXCEPT for all the variables that may arise to reduce the savings’. THAT is their expert opinion.

    The profitability issue is an integral one because NBPower HAS often made a substancial profit (depending on the accounting we’ve seen) which can be deferred to offset rate increases OR pay down debt.

    While their ‘math’ is correct, it is worth at least noting that they were hired by the govenrment, which is no longer objective, and that their savings seem to be virtually identical to the previous one Graham was quoting. To quote Bob and Doug, “take off, how convenient”.

  7. Samonymous says:

    Again, when you don’t consult the people, they will consult. And who can blame them since there are more holes in this deal then a piece of Swiss cheese. For instance, chief executive officer of Hydro-Québec Thierry Vandal told CBC News last week that his company “is paying a higher price for NB Power in return for the tax break.” This was in response to a demand that they pay them if the deal were to go through.

    Like much of the spin going on in favour of this proposal, it’s suspect because anyone who has half a brain in their head (just a quarter of one in my case) knows that it’s nonsensical to make that claim above since the N.B. Power deal was problematic from the get go in that it was a sole-source deal (meaning, if it passes, it will not have gone through a proper competitive process) as the NB government bypassed all qualified bidders in favour of Hydro-Québec. And because of that, the real value of the asset is not known. So it’s impossible to say you’re paying a higher price? Higher than what?Read More

  8. Claude B says:

    David, a few comments:

    These guys certainly believe the risk level (on rate escalation) is far greater on the NB Power status quo than on the Hydro-Quebec option.

    HQ’s generation costs are literally cast in concrete (pun intended)!. I was reading the Romaine project EIA (volume 1, pp. 2-16 to 2-20), where HQ makes the economic case for the construction of the 1,550 MW complex (8.5 TWh/year). In 2026, they forecast revenues of $971M (nominal) for $590M in expenses, including $255M in interest and $146M in depreciation, $71M in water royalties (fuel cost) and other taxes, $65M in OM&A and $53M in transmission.

    With large hydro, variable costs are minimal on the generation side, since HQcan spread the two largest risks they face (a dam collapse or a severe multi-year drought) over 60 facilities in a large territory. Even the interest rate risk is minimized since HQ finances stuff like this with 60% debt/40% equity over a 30-40 year period at 5%. Old hands like the folks at NERA are certainly aware of this.

    I still think that strategically what HQ is really buying here is geography. They are betting that owning access to the U.S. market will allow them to control the tolls that are paid (as well as ship their own generation to the U.S.).

    I’ve said before that the New Brunswick market itself was the prize, and I still believe it is the case. You have to realize that 3-4 TWh/year (including PEI) and a firm load are a sizable amount of exports, even for HQ (close to 20% of their external sales). In comparison, the Vermont deal in the 90s was only ±2 TWh/year (225 MW firm) for 20 years.

    what I would really like is to hear someone at HQ or in the NB government say that rates will move towards parity (on the residential side) over time

    It’s not going to happen for many reasons, including the fact that NB will be farther from the generation sites (higher transmission costs). However, I wouldn’t be surprised if the spread between NB and Qc residential rates shrinks a bit. First, the 5-year freeze. Second, there is a lot of talk about raising the cost of the heritage supply, set by law at 2.79¢, but the Charest cabinet is divided on the issue.

    The Quebec government has an incentive to change the rate, since they would collect an extra $1.4B in dividend (75% of net earnings) for a 1¢/kWh increase in heritage pool electricity. None of this would change anything to the rates in NB.

  9. mikel says:

    I agree with Claude, NB and the maritimes really lag the rest of the country for natural gas availability. An aging population doesn’t exactly have ‘conservation’ at the tips of their tongues. With most provinces trying to beef up exports for the american prize, people can’t forget that even public utilities are in ‘competition’ with one another. This same consulting firm several years ago made the point that there were problems with the accountability and lack of competition within DISCO (again, there were reports NB Power was purchasing power from Irving even when it was cheaper to buy from Quebec Hydro).

    This will have an impact on conservation and other public policy measures. Again, I remember Charles Leblanc long ago saying he was told to ‘shut up about Quebec’ because ‘we do a lot of business with them’. While people MAY over estimate political angles, its just as dangerous to underestimate them.

  10. PeterA says:

    I’ve been following this blog with interest for the last few weeks and have enjoyed the quality of the discussion.

    I read the report tabled by the Liberals yesterday (thanks for the link David). I thought it answered a number questions regarding the various factors that could influence the deal versus the status quo. But I agree with you that this is unlikely to change the minds of those who are strongly opposed. I have a few comments in response to those made on here regarding the report:

    1. It’s no coincidence that the savings being reported matches the numbers Graham has been touting. This report (or at least the analysis) would have been completed before the announcement. This is where the Libs would have got their figures from. A client doesn’t pay a consultant to complete an analysis after their decision is made. Besides, you couldn’t complete this kind of analysis in a matter of weeks. I would assume NERA was involved during the negotations. At least I would hope so as that would only make sense.

    2. I can see the sensitivity analysis is already being cherry picked to suit certain arguments (the CBC report is evidence of that). The point of the sensitivity analysis is to demonstrate the effects of variations in assumptions (i.e. what’s an expected range of benefits that cover most conceivable scenarios). So IF fuel price experiences zero real increase over the next 30 years (low likelihood IMO), we’ll still save $4 billion. Sure it’s less than $5.6 billion, but it’s still a large net benefit in an unfavourable scenario. You could just as easily argue that the benefits are understated by $2 billion for not including the effects of carbon regulation.

    3. “As with any forecast, it is important to recognize that actual results may differ and could be higher or lower, and that alternate assumptions could result in higher or lower estimates of rate
    savings. Additionally the savings are net savings. Transmission and distribution components of rates are higher in the MOU case as these rates reflect a regulated cost of service and return and
    are not designed along rate minimization parameters.”

    To me, this reads that the transmission and distribution costs WERE included in the MOU modelling and were even inflated compared to the status quo, resulting in a more conservative approach. But Mikel and I will likely agree to disagree.

    3. Inflation. I find it quite interesting that the modelling predicts higher inflation to result in HIGHER savings under the MOU (4% inflation projected to result in $300M more savings). This is contrary to the buzz that inflation is a massive risk. I never could understand where people got the idea that inflation is only a risk under the MOU case. NBP isn’t immune to inflation. If it goes up to 15%, we’ll be on the hook either way. I’m not an economist. If someone can explain to me how inflation is a risk only under the MOU, I’m all ears. (And the NB government subsidizing the rise of inflation in the status quo isn’t an acceptable solution)

    4. Technical consultants tend to be conservative to protect their butts. My guess is NERA ran many more scenarios than what they’re reporting and $5 billion is considered a “safe” level of savings for the government to report.

  11. Peter says:

    “In case NBers want to know, that is exactly what has happened here in Ontario. Power GENERATION rates have stayed the same, where our increases have occurred is in transmission and distribution costs (which were unloaded to regional power utilities). That means a whole SLEW of new variables this report hasn’t taken into account.”

    Mikel what % of your total bill do those three rates comprise? I found it odd that the generation rate was the only rate linked to CPI in the MOU.

  12. Rob says:

    “I agree with Claude, NB and the maritimes really lag the rest of the country for natural gas availability. ”

    NB is actually ahead of the rest of the Maritimes for natural gas. Unlike NS, we demanded that the MNEP service local NB loads rather than plough right through the province like in NS. We are also sitting on what could be the tar sands of natural gas about 2 km underneath Kings and Albert County.

    The problem of natural gas, however, is still distribution. I don’t live in downtown Fredericton, but I am certainly within the city. I also will need to replace my boiler if I stay in my house for 5+ more years. I’d like to replace the oil boiler with a condensing nat gas type, although I’ve been informed that natural gas will almost certainly never serve my neighbourhood.

    We’ve seen the government commit to pushing high speed internet to all parts of the province. It’s an absolute sin that we’re still building new homes in the province that are heated by electric baseboard. When 60% of the province heats with electricity, it’s no wonder that the NB Power sale is such a strong topic.

    I’ve mentioned before that NB does not have an up-to-date energy policy. I don’t understand how we can be building an “energy hub”, or selling our public electrical utility, without some strategic guideline for the next 5-10 years.

  13. Sam Turner says:

    A friend tipped me to this blog. Really enjoy it and find it is one of the few places that an objective discord about the NB Power deal is happening.

    A few comments and questions for the group around the NERA analysis:

    The inflation rate actually looks to be low. They are assuming a rate of 1.8% avg from 2013 onward to 2040. The last 30 years inflation has averaged 3.6%. Double their projection. I would like to see what the savings are under a few other models that have higher CPI rates. What does a higher rate (i.e. 2.5%) do to the savings?

    The NPV comparison is not 100% clear. The stand alone version uses a 30 yr window. Is the same window used in the HQ version. NPV analysis can look better and better over a longer period of time. The term infinity has been tossed around in reference to the HQ sale. Was an equal time period compared b/t the two models?

    The refurb costs of Mactaquac and upgrade to Pt Lepreau appear to be included in the stand alone but not in the HQ model. It looks to be north of $4 billion for both. Are they assuming these will not be completed under the HQ model. If they are done (fair assumption that they will be) – it is also fair to assume HQ will recoup this investment in rate changes to NB rate payers. It would be a stretch to assume they would spread these costs over to Quebec rate payers.

    It would be interesting to see the actual rates side by side over the life time of this deal. What does the KWhr rate look like in each year from 2013 o 2040 under the stand alone vs. the HQ model? To calculate the savings they must have the rates for each year. Best/Avg/worst cases.

    The time horizon to realize the full saving is very long. The $5.6 billion in savings will not be fully realized until 2040. How many things are going to happen over this time period that can/will affect this?

    The NERA report is good and put together by professionals. My concern is that is may be a bit narrow in its mandate. It only talks to (defends?) the deal with the savings rate payers will see. Are there not many other factors that need to be considered in this deal?

    I am not pro or con on this as of yet but the over riding thematic in this document is to reinforce the deal. It is certainly not out of the realm of possibility to suggest that was the purpose in having NERA brought in.

    The NERA document is a great first start in the info share that is required to allow NBers to really understand what is involved in this deal.

    For the average joe like myself dissecting it is no easy task. Certainly intersting to try though.

    Appreciate any and all feedback and further insight re my comments and the NERA paper.

  14. Anonymous says:

    So, let’s assume that this is a good deal and we are selling our assets for their debt and the $5B in rate relief. Depending on the calculations, the L class users, 45 companies, will be receiving a $1 billion dollar injection from the sale of these assets (some analysis shows this a little less, others a little more).

    I suspect that $1 billion to 45 companies is probably the largest single government support to business that New Brunswick has ever made yet, these companies have not been identified, there has not been a commitment to invest, modernize, expand, no strategy, nothing. That is close to $25 million per company, or 45 Bricklyn projects. Not saying they should not get it, but there ought to be some commitment from them (to put things in perspective, $1 billion at the going rate of $10,000 per job would mean 100,000 jobs). We also should be looking to attract other major companies to the province.

    I would love to see some discussion regarding what New Brunswick could be doing with this billion dollars. It represents an enormous economic development opportunity and it seems to be passing us by with little thought or strategy. If we are injecting a billion dollars with no commitments for job creation, is it not the equivalent of a bail out?

    David, if you were back at Business New Brunswick and had a billion dollar budget, what would you do with it?

  15. mikel says:

    Thanks Peter, good points. I don’t know about number 1, there is a date on there that says November/09. That consultants are white knights is a little specious, look at the Lamrock case, but things being equal I did hear that this was where Graham got his numbers.

    For number 2, you can’t argue praising their conservatism and then state they are being liberal about carbon regulation. The volatility of fuel prices can push the numbers in EITHER direction. As large industry continues to flee ALL North American jurisdictions, we MAY see the cost plummet. But its true, it could go EITHER way.

    Number 3, I read through the report and couldn’t find transmission or distribution costs. This reflects on the heritage pool ceiling and NB Power-IF NB produced the juice to supply itself, then those costs really wouldn’t change (except the profit motive), however, by closing numerous thermal plants which supply almost half NB’s power, and IF Mactaquac needs major work, and IF there are problems with Lepreau, THEN those costs will be higher-thats not mentioned in the report (let me know where you see it).

    For inflation, thats a larger question and central to the point about privatization. A chief problem with private markets is when ‘things get bad’ (and they do) then companies axe jobs, which brings consumer spending down, which prolongs the recession. Where government has control, IF inflation is at 15% (and sometimes fuel costs aren’t included in that, which means the utility would be somewhat immune), then the government can increase debt, only increase certain customers, or just freeze the increase at a certain level as they did a couple of years ago.

    However, again, I worked with a lot of researchers and am well aware that who pays the bills usually gets answers they want. What would be nice would be the numbers they recieved for ‘working closely with the department of finance and NB Power’. Then WE could do the analysis.

    And again, by not allowing for increases in wind power and other production generators, and by skipping over any potential profits NB Power may earn, THOSE aren’t exactly conservative numbers. If you look at the year to year, there is a HIGH fluctuation. The last years we have are 07/08, which show net earnings of 80 million, the year before 30 million. However, technically there was a loss because they recieved payment of 115 million from Venezuela for the court case.

  16. mikel says:

    A couple more points, for point number 1 above, the NERA DOES say ‘november, 2009′, and it also states “on october 29 NB Power…” So this report IS recent, so recent its not even up at the NERA website.

    Second, on the $5.6 billion, lets SAY that its possible that its only actually 4 billion (which they admit). Of that 4 billion 38% of the savings will accrue to the large industrial users. Doing the math, the ‘savings’ then goes down to $2.5 billion. That’s not insignificant, but in perspective its equalization payments of only two years.

    For the inflation, its interesting that their assumption is 1.8% when for the next five years its in the 2.2-2.5% range. Now, these guys are ‘experts’, but maybe somebody can tell me how they happen to know that for five years inflation is going to be almost 1% below what it will be for the next twenty years.

    Peter’s point on transmission and distribution costs IS actually right there on page 7. They ‘assume’ that HQ T&D will be the same as currently with NB Power. Again though, once over the heritage pool limits everything comes down to what is termed “fair and reasonable”. In this it comes down to how much trust people put into their regulatory system. It WILL be regulated by the EUB, however, that much is stated.

    What WOULD be interesting is if Hydro Quebec and NB Power (since they have this report) would put IN WRITING and in the contract exactly what the rates would be. I suspect people would argue that that’s impossible for the same reason that people will criticize this report.

    One big caveat here should be mentioned-that this report assumes “Business as usual” at NB Power. Meaning, no emphasis on conservation, no investment in renewables. These are things that the 20,000 people at facebook are now saying is NOT an option. So never underestimate the power of a well organized lobby group. Good points though Peter, thanks for the analysis, I pretty much used it verbatim in arguing the opposite view at the facebook site (and got a few people pretty irate there as well:)

  17. mikel says:

    Sam, the capital cost investments are a bit of a problem, even at the facebook site there are people stating that they are not included. The NERA report states that they are included in the HQ deal (meaning they are not a cost factor for New Brunswickers). In the MOU (page 8) there is the scenario for the capital costs, namely, that Hydro Quebec will pay NB Genco the equivalent of one years production in order to mothball the plant, but will be on the hook for no other costs.

    I haven’t crunched the numbers, but a ballpark figure would be to take how much Coleson Cove produces and multiply it by the market rate. That is how much will be paid out. The question then becomes, what does it ACTUALLY cost to dismantle such a structure. Any difference in there will be a cost that NB is responsible for.

    For Mactaquac, the only thing NBers are on the hook for is any potential costs that the feds may require for environment costs over and above project cost. So most of the main capital projects ARE ‘somewhat’ covered by HQ, except over and above heritage pool costs and subject to some of the other terms you can find on page 8 of the MOU.

    As Peter states, inflation is a constant in the HQ model, but what I couldn’t find in the report is mentioned above-the affects of inflation on the ‘stand alone’ model. Meaning, how are NB Power costs affected by inflation. Labour is covered in collective bargain agreements, so that effect is negligible (except pension costs which revert back to NB). I don’t know what other inflationary pressures there are-the cost of fuel isn’t ‘exactly’ inflationary as it is too volatile.

    One thing not mentioned often is the cost of Mactaquac-thats 2.5 billion, a fair chunk of change that nobody is talking about much. But they already have a projected cost for that, which no doubt takes inflation into account. One thing that would be interesting would be to go back ten years, find out inflation for those years, and compare them to NB Power price increases.

    For your other problem, the rate increases under the MOU aren’t much of a problem to calculate, just change the inflation rate. However, for the stand alone model they ‘assume’ WAY too many variables about what MAY happen within NBPower. Assuming all things are equal though, we have the same problem-there’s no knowing what will happen with NB Power rates.

  18. mikel says:

    There’s been a lot of discussion at the facebook group so just wanted to apprise the many new readers of some new topics. The NERA report really focuses on a particular model it got from NB-NOT HQ. The REAL crux, as far as I can see, for future power prices for NBers is in section 5, where it says that future increases will be set by legislation and/or contract on the basis of “a fair and reasonable return on equity for the asset owners”. That’s HQ, so really, until somebody presses Graham into admitting just WHAT is a fair and reasonable return on equity, ALL projections are moot.

    WIth five plants maybe closed, ‘fair and reasonable’ COULD mean what Quebec could sell their power for elsewhere. If it doesn’t mean that, then they are about the worst businesspeople I’ve ever heard of.

    Keep in mind also that NB Power often LOSES money, or doesn’t make much, but Quebec isn’t going to be interested in that option. But until we find out what a ‘fair and reasonable return’ (ie. profit) is, according to the ‘contract’, most of these models aren’t worth the paper they are printed on (I do think the NERA ‘assumed’ no profit for the stand alone, but can’t remember what they said about the MOU deal).

  19. Anonymous says:

    No offense, please, but is there anything (or anyone) that Mikel agrees with?

  20. Anonymous says:

    @mikel
    Mikel says “I don’t live in Bolivia…”. I meant to say this long time ago, but I think now is the time: all the posturing around this NB issue reminds me of the low-intellectual level political debate that we see once in a while in developing countries. As the name of this blog says, “It’s the economy, stupid”. (again, no offense intended)

  21. mikel says:

    Hard not to take offense at one line with no other comment:)

    To answer the question though, absolutely, in fact MOST of the comments here: #2, #5, #7, #8, #10, #13, #14, and I also tend to agree with my own. It’s actually ONLY David’s comment about the CBC report that I disagreed with-and I stated why-according to the NERA report itself. Some have points I may disagree with, for example one guy mentioned that NB HAS natural gas, but thats doesn’t do any good NOW. I meant natural gas availability, and I can sympathize with the frustration at needing to replace a boiler and not having any access to natural gas. My parents have also been hmming and hawwing, but the price still remains quite high so it isn’t that competitive. Again, HERE it would make ZERO sense to have an oil furnace, its a no brainer and this year it looks like we’ll see our lowest rates in five years, meanwhile Enbridge wants to raise NB rates substancially.

    I’ll check my bill again for the question by Peter, but again, generation is linked to the CPI, but the MOU clearly states that rates after the fourth year will be set by subtracting transmission and distribution rates, which will be based on a ‘fair and reasonable return on equity’ for HQ. So as I said on Facebook, until the two governments come out and specify WHAT is a ‘fair and reasonable return on equity’ there is NO way to remotely predict future rates. That’s page 7 section 2.3 and 2.5 of the MOU available at lowerratesnb.ca.

  22. W McLean says:

    Point of information: it’s “Lower Churchill”, not “Lower Churchill Falls”. There is only one Churchill Falls, not a “Lower” one besides.

    The Lower Churchill (not Falls) project would be located — if ever built — at Gull Island Rapids, and possibly with a second, less feasible site at Muskrat Falls.

  23. mikel says:

    Sorry Peter, NB’s energy policy will be aligned with Quebec’s, and ontario’s is way too different to compare. We actually have a REGIONAL power utility (sort of like St. John). So there is no breakup between generation, transmission and distribution. We have an ‘electricity cost’ which is the competitive rate, and makes up roughly 35% of the bill. ‘Delivery’ includes BOTH transmission and distribution costs, the physical assets to deliver power. That makes up roughly 45% of the bill. Then there are regulatory charges which cover administration (around 7%) and a debt retirement charge to pay off the old Hydro One debt (7%). Then taxes.

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