Sunset industries?

CBC is quoting APEC’s Elizabeth Beale suggesting that the NB Power deal is supporting a small group of large companies with limited growth potential.  Maybe so but when I go through the top 20 export industries from New Brunswick making up 94% of the value of all exports – 15 of them are electricity-intensive industries.

My column this morning in the TJ argues there is no reason to believe our industrial backbone is in some kind of sunset stage.  It’s a cute and convenient term but not really relevant.

I realize it is titillating to use this argument to stir up anger against the deal but just so we all deal with facts – in all jursidictions in the world large industrial users pay considerably lower than commercial or residential users. 

A couple of years ago I prepared this chart below.  it basically shows the spread between industrial and residential rates in these jursidictions.  For example, the industrial rate in Wyoming was just over half the rate (per kWh) of the residential rate.  At that time, New Brunswick had oen of the smallest spreads between the industrial and residential rates in provinces and states that have a number of large industrial users.  You will not hear this on the CBC.

 

As for Elizabeth Beale, she and her group have been on the record numerous times warning that high cost electricity is threatening the future of the forestry industry in the Maritimes.  Here  is a table from a report published by APEC in 2007.  You won’t hear about this on the CBC.

 

 

And this is from that same report:

“Sustained increases in electricity costs for large industrial users, principally driven by the region’s reliance on oil fired power generation, putting Atlantic forest companies at a cost disadvantage compared to those in many other jurisdictions”

So the HQ deal levels the power cost playing field for New Brunswick and eliminates New Brunswick’s long term reliance on oil fired power generation.  Just like Beale wants.   But she doesn’t like it?  Why? Again you won’t hear this on the CBC but the only reason must be because Nova Scotia is not in the deal.

I say bring them in.

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15 Responses to Sunset industries?

  1. Anonymous says:

    Well, part of the reason not to like it is there is no data to substantiate it is a good deal.

    Check out this article:
    http://telegraphjournal.canadaeast.com/opinion/article/868414

    which highlights that by securing a customer base with rates locked in at nearly double, the deal generates $2.4 billion in the first 5 years for HQ.

    Now, before you run off and say there is nothing wrong with a deal that is good for both sides, I’ll point out that the starting point for a ‘good deal’ should have been rate equivalency with Quebec. Perhaps the ending point would have been a modest premium to cover the increased transmission costs to get power to NB. Instead, the starting point, as confirmed by both HQ CEO Vandal and Premier Graham, was rate equivalency only for the 20-45 L class users in NB and a locked in 100% premium for commercial and residential users. Not a great negotiating tactic.

    Add that to the fact that a market valuation for NB Power has apparently not been completed (as confirmed by ‘James’ on the government web site below).

    *****
    11.23.2009 at 4:30 pm | James from Gov. of New Brunswick :

    Concerning this question – What is the market value for NB Power? Who completed this and when?

    Since NB Power has close to $5 billion dollars in assorted debts, it has no market value. NB Power has not made enough revenue in the past to put it on secure financial footing, placing NB Power in a weak position. Simply, it owes more than it is worth.
    **************

    Let’s get past whether we should be selling and who we are selling to and evaluate if this is a ‘good deal’ or the best deal we could have gotten. The facts so far are:

    – we do not know the market value of what we were selling
    – we erroneously think what we are selling an asset that has no value
    – we only asked for rate reduction in one of 3 categories
    – our starting point for negotiations was offering to pay a 100% premium on 2 rate categories for 5 years

    As you point out, great deal negotiated for the select few in L class and to some extent we will all have indirect benefit from that. But what about the other two rate categories for which we did not even request rate reduction? What about leveraging the maximum benefit from our assets which our negotiators thought were worth nothing?

    We have poorly negotiated his deal.

  2. mikel says:

    First, is this the rate for ONLY large industrial users? Another recent report states that large industrial users have benefitted because small and medium industries have paid higher rates than large, putting THEM at a higher disadvantage. So are there two separate rates?

    Second, I don’t want to make this personal but a main complaint of this blog has ALWAYS been to complain about the nature of the large exporters. The message was that if you took away Irvings oil exports, NB has a miserable export mix, almost non-existent.

    Third, IF industrial rates needed to be subsidized further, then that’s something NB Power CAN do NOW. As somebody else mentioned, to go along with that you’d want some kind of written guarantee that it will actually benefit the province.

    Fourth, there are various types of ‘large industrial users’, what is the mix? While forestry companies in NB are at a ‘disadvantage’ in power rates, that neglects to mention other advantages, such as guaranteed access to crown land (in fact monopoly access), VERY generous tax breaks and tax credits and outright bribes such as the 10 million Irving got last year just for threatening to move.

    The simple fact there is that IF it was so beneficial, those companies would move. Is Fraser going to move to Tennessee? Well, they might, but they no longer have access to NB forests. We have to be careful here because it is actually the liberals policy to HELP that blackmail along. Namely, their recent change to forestry policy that lets companies take the wood out of the province for manufacture. Previously, if it was cut in NB, it had to be worked in NB. So a company can’t simply pack up and move to Quebec. With the liberals changes though, thats no longer an option.

    Finally, again, the large industrial users in NB have been shedding jobs for years. So how many jobs is actually worth the deal? The pulp mill in St. John only has 300 employees, how many are in ALL the industries in this category? Fraser is in bankruptcy, so this deal really proves that it is NOT power rates that are the problem with forestry companies. It’s doubtful they will be helped, at least not for many years.

    Keep in mind that several years ago large industrial users all joined hands to demand these lower rates. It’s VERY possible that this deal was designed simply to meet that demand. They either get the Quebec rates, or else NBers may be convinced that to support them they need to finally give in and grant those rates.

    But its very true that this comes down to ‘how long can you go’. And keep in mind that the above also neglects a big piece-taxes. Property taxes are often substancially higher in the US for large industries, and state and federal taxes MAY be much lower than NB’s. For a company just because you pay higher on one line of the balance sheet doesn’t mean you don’t (can’t) save elsewhere. And energy savings MAY very well be money that lines Irvings pockets because its a private company, we simply don’t know their financial condition. THey own the entire production line-land, pulp, paper, newsprint, media. Good info though-but are you only picking the states that show the largest gap? What about the others?

  3. Doehead says:

    New Brunswickers are not selling out to Quebec .Period. Go take a vacation!

  4. Paul says:

    I see doehead picked the perfect pseudonym.

    David. Where do the general service customers land in your spread sheet? HOw do small business rates in the other provinces compare with small business in NB? Energy costs for small business play an important role, although David thinks industrial industry have a more influential impact on the health of local economies, it is small business that is going to carry the north for awhile. It’ll be awhile before big industry start lining up to our cheap power rates and drawn in by the 20 new consultant hiring bureaucrats on top of the 100 or more that already exist up here.

    Right now the only Industrial users in my neck of the woods is Xstrata (Brunswick Mine & Smelter) which is closing in 2011 or sooner. So no net benefit for business in the north in the deal in the short to medium term.

    While I have come to the conclusion that selling NBPower to HQ is not, in principle, a bad thing. I still have some concerns on how the rate reductions are allocated. Industry said that they received more than they requested, yet small business, pays more than the fair cost of electricity. It appears to be a widely accepted fact that they are charged unfairly, and a rate freeze is not necessarily in their best interests. In fact, the EUB was looking at reducing their rates to be more in line with the cost to deliver the energy. So the deal is actually worse for small/medium business (general service customers) than status quo.

    http://www.cbc.ca/canada/new-brunswick/story/2009/11/23/nb-theriault-eub-nbpower-540.html

    As a small business operator, with a large portion of my costs (25%) in energy, I do not think the deal is in my best interests especially when the EUB was in the process of dealing with the inequity.

    Bottom line, as a self interested business person, just like the large industrial customers, this deal is not good for me or my business, so I should oppose it.

  5. richard says:

    “In fact, the EUB was looking at reducing their rates to be more in line with the cost to deliver the energy. ”

    They were supposedly looking at it, but no firm plans were in place to address it. Would the rate reductions come into play in one year, five years or 10 years? Depending on when that would happen, would that still be of a net benefit for small businesses such as mine, given the rate freeze proposed as part of the sale? After all, NBP was asking for 3% next year and unknown hikes for future years.

  6. mikel says:

    Ok, I did some reading and am confused. What exactly does ‘spread’ mean above? I found a listing of power rates in the US (http://www.eia.doe.gov/cneaf/electricity/epm/table5_6_a.html). The biggest spread above is Iowa, which makes it look like there is a far more massive ‘spread’ than the 50% difference (6.12 industrial to 11.41 residential). Ironic there that in this case Iowa’s industrial rate is cheaper than NB’s, but for residences its more expensive. Both of those by the way have seen substancial increases over the past year (more than 3%).

    Iowa is a good example above of just how meaningless power rates are for NEW jobs. Iowa has had virtually NO net new job creation in manufacturing in the last 20 years. They are barely holding onto the very few manufacturers that remains, and most of those are no longer big job providers.

    In fact, in Iowa, only 4000 jobs out of 95,000 jobs are in the manufacturing sector anymore. Most are in insurance, health care, etc. Nb’s industrial rate is certainly ‘competitive’, lower than virtually the entire northern seaboard over to Pennsylvania. It’s HIGHLY doubtful that manufacturers further away from that are going to pack up and move to NB, the distance would mean supplies would pay such high costs in transportation that no net savings would be realized.

    Of the largest exports, it still has to be mentioned that 70% of exports are energy, and the LNG terminal provides very few jobs. The oil refinery hasn’t been hiring new people, and of other exports, 11% is forestry. Seldom mentioned is the US’ tax credit on black liquor, which also contributes to the ‘lack of competition’ in Canada.

    But these ARE sunset industries, as the OECD has said for years, its knowledge industry jobs that need attention if canada is going to compete.

  7. Paul says:

    @richard; “The regulatory board directed NB Power to start closing that gap by moving industrial and residential rates up and restricting increases to small business. But the proposed sale of the utility to Hydro-Québec means that won’t happen.” quote from the story I linked to above.

    I believe small business were in line for a freeze at a minimum, and very likely a rate reduction, which under the scenario proposed in the sale that the category is now in lock step with residential rates, and will be subject to increases after the five years. Very likely that category of business will continue to pay higher rates than would be otherwise equitable. I really don’t understand why all the reduction went to the one class. It seems shortsighted.

  8. mikel says:

    Just did some more reading, I wonder if Iowa and Tennessee can also count on their home state to do like NB just did and pay more than HALF of the refit of their sawmills like in Plaster Rock. By that scale Fraser has ALREADY gotten its savings for the year.

  9. You should have kept reading. One of Iowa’s most energy intensive industries is the highly subsidized ethanol production industry. Tennessee is also one of the most generous states for handing out incentives – although they are mostly tax-based incentives. The Tennessee equivalents of Fraser are getting their share of support.

  10. Anonymous says:

    We are selling assets to ‘invest’ $1.6 billion in a small group of companies that are L class rate users. We are giving them this revenue with no commitment from them to sustain or expand operations. The government is refusing to identify them. However, a couple dozen make up the group. Big users (not necessarily in order) would be:

    1) Irving pulp mill in Saint John: Located in NB because of access to our forests. Energy cost is a factor but a gas fired generater was under consideration in sync with the LNG terminal
    2) Irving refinery: Here partially because of the port and not going anywhere (tough to pack up and move a refinery).
    3) Sussex Potash mine: Here because the potash is here (already negotiated a good deal for that) and was proceeding with development based on the existing power rates
    4) Xtrata Zinc in Bathurst: Shutting down in 2011 as the zinc is gone
    5) Fraser pulp mill: in bankruptcy before power rate issue was discussed. Struggling to compete with low labour and fiber costs. Power rates are one of many challenges.
    6) Irving Tissue plant: see 1)
    7) McCain Foods: Here because potatoes are here
    8) St Anne Nackawic: Have already diversified their product to take advantage of the fiber available in NB
    9) Flakeboard: NG prices where their big issue until the power issue came along. Sounds like subsidied power could keep them alive longer
    10) NB Coal: Shutting down bacause Grand Lake is closing

    I think others on this blog could help complete the list of heavy power users who are already having their power rates subsidized by commercial and residential users. My point is, we are giving these guys $1.6 billion and getting no commitment in return. Many of the above will remain here regardless of the power deal. A couple will leave (or close) regardless. Yes, a couple may stay open longer with the lower rates. Not very exciting expectations from a historic investment in business.

    David, you started this blog to stimulate discussion on economic development. Shouldn’t we be debating where we should invest $1.6 billion in economic development? Where can we get the most bang for the buck? Should we extend the life of Fraser’s pulp mill for a few more years or perhaps attract a major RIM operation? Should we make the potash mine even more profitable or attract an electric car manufacturer to the province? Should we help Xtrata increase their profits for their last year of operation or develop the biofuels industry? Should we let the Maid Marian dig coal with no customers or attact a major data center? Should we put money straight on the bottom line for McCains or negotiate with them to increase employment?

    Nothing against any of these companies but we are selling a major asset and we should be questioning how we utilize the proceeds not handing them over without any commitment.

  11. richard says:

    “I believe small business were in line for a freeze at a minimum”

    But there’s no time line. When would these reductions to small business kick in, and what would the rates be when they kick in? 3% higher than now; 10% higher than now? I think we have to compare apples with apples and oranges with oranges.

    There is nothing I can see in the proposal that would prevent the EUB from adjusting rate differentials after the 5 yr period, post-sale.

  12. mikel says:

    Ethanol production is a MUCH different industry than Pulp. The fact is, with technological enhancements and better production processes, there is simply NO WAY for pulp to be a ‘growing industry’. Now, that’s true, it may not be a ‘sunset industry’. If the province continues its forest giveaway-which is much more lucrative, than, say, the southern US where most landowners are private so are re-imbursed at market values, AND lowers energy rates-its obvious that that means there are VERY few costs to the pulp industry.

    They could wipe out every tree in the province for almost no cost-but also for almost no employment. According to Irvings own data its forestry end provides far more jobs than the 300 at the pulp mill. So it would make sense to use this as an opportunity to re-align forestry policy away from pulp altogether. In the southern US, its very true that TN has lower power rates, but in the ENTIRE US, pulp now employs less than 8000 workers. Whether thats worth it is the appropriate question.

    I’m of course not saying NO subsidies should be given, but like I said at your article, rates are a separate issue from the sale of NBPower. As I’ve said, this may simply be a way the large industries make an end run to rate reductions, the reason it didn’t happen before is public protest, because people are WELL aware of just how many subsidies the forestry industry has gotten over the years, and how few employees they have.

    That’s why there really needs to be different classifications of industry-and those are POLITICAL decisions. A manufacturing company that has a growing market and employs more and more people SHOULD pay less for energy, because IT is ‘subsidizing’ the labour force (so to speak). But for pulp, we are talking about an energy intensive industry that employs fewer and fewer people, demands more and more subsidies, and uses huge natural resources for a benefit that doesn’t accrue to NBers.

    Those are political decisions that will not be possible without NBers public ownership, its true that that MAY not be possible anyway, but that remains to be seen.

  13. Maybe I am naive but I don’t think that levelling the playing field for industrial power is some kind of subsidy. As I have said before that is a false statement in my opinion. NB has lower residential rates for power than Nova Scotia – has for decades. This has been worth billions to New Brunswick households. Was it a subsidy? Getting power rates in line with other industrial areas in North America is an energy policy objective but I don’t see it as a subsidy. By that definition just about everything the government does is a subsidy. The $60 million for the Belledune port is only helping a handful of companies – subsidy? The $50 million the governments (fed/prov) spend on fisheries management – very beneficial to one specific sector -subsidy? The NPV of that expenditure is worth billions. Why not take that and invest it elsewhere that doesn’t just benefit one industry? The hundreds of millions spent on tourism infrastructure – subsidy? It only benefits one rather low impact industry. The billions spent to subsidize universities in the province -subsidy?

    You can argue you don’t agree with the choice of the government to try and find a mechanism that provides competitive industrial power (it is still cheaper in Manitoba and BC and in Labrador if you are in one of Danny’s pet industries) but this other line of reasoning – to me – is a stretch.

  14. mikel says:

    Well then you really need to define subsidy at the outset. The reality is that in the atlantic northeast the ONLY place with lower industrial rates is Quebec. And as said, THEY are losing pulp mills and manufacturing as well.

    The places with the lowest power rates for industry are in the midwest, none of that industry is pulp. They have rates as low as 6 cents per KW/h. So IF NB doesn’t match that 6 cents are they ‘not competitive? It’s true that many american states are generous subsidizing new industry, but NB has been no slouch. So in order to evaluate ‘not competitive’ we need MUCH more data. The reality is that energy rates for large industry are stated as being TOO LOW, its impossible to match the competitive nature of other regions-the province is too small and has too cold of winters, and has a dollar no longer on par and the US is no longer buying the lumber.

    And like I said the government is paying more than HALF the price of investments for Plaster Rock. At some point it just makes sense to tell Fraser to get out and nationalize it. HEck, compared to Fraser, NB Power’s management are rocket scientists. This is a company that hasn’t invested in its mills in decades, and couldn’t even capitalize when most other canadian provinces had softwood tariffs on them.

    But again,the subsidy question is separate from the equity question. You don’t NEED to sell the utility to lower rates. Its a public utility, but it has become obvious to a lot of people that subsidizing Irving is counter productive.

  15. Anonymous says:

    The government has clearly stated that the NB Power sale is a $10 billion deal; $4.75 B in cash and the remainder in rate relief in lieu of cash.

    So, A public asset is being sold and a major portion of the proceeds are being given to a specific group of industrial rate users. Not to get hung up on semantics but it does fit with this:

    sub⋅si⋅dy /ˈsʌbsɪdi/ [suhb-si-dee]
    1. a direct pecuniary aid furnished by a government to a private industrial undertaking, a charity organization, or the like.
    2. a sum paid, often in accordance with a treaty, by one government to another to secure some service in return.
    3. a grant or contribution of money.
    4. money formerly granted by the English Parliament to the crown for special needs.

    When $1.6 billion of public money is invested in industry, I think it is worthy of discussion, strategy development and some deliverables/commitments. I have no problem with helping industry grow and investing in our economy but I suggest it is reckless to provide $1.6 billion in value (in the form of rate relief in this case) and ask for nothing in return. We do it for every other type of loan, grant or investment, why the free ride in this case?

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