Energy subterfuge – a lesson in strange language

I’m told the Energy Minister, Craig Leonard, is one of the brightest lights in the Alward Cabinet.  The strange, almost weird, language used in this article makes me wonder.  It is possible the journalist misquoted him or the words got jumbled but..  Here are some passages:

Leonard said NB Power has a debt management plan and is not having difficulty covering its payments.

NB Power has significant stranded debt.   ‘Making its payments’ is like you have a $500k mortgage on a house worth $200k but you are able to make your payment every month that cover interest charges and a small portion of principal.  Eventually, someone is going to pay big time.

He said it is incorrect to add together the deferral account for Lepreau, which is expected to reach $2.4 billion, and the utility’s net debt of $4.6 billion.  The deferral account is where expenses relating to the purchase of replacement power and other administrative costs are placed, to be paid over the next 30 or so years.  “You can’t lump them together.” Leonard said of the utility’s debt and deferral account.  “It (Lepreau) will be on the books as an asset rather than as debt and the point of that asset is it acts like an account receivable, and over the next 30 years people will pay for the Lepreau refurbishment through their rates.”

That’s about as fishy as a five day old Pickerel washed up on the beach.    A deferred revenue account is just an accounting trick – but it still has to be paid back just like debt and it incurs interest payments just like debt.

The deferred revenue account is what is killing Enbridge Gas NB.

As for the refurbishment of Mactaquac, I don’t see this happening at all.  It’s too huge a debt load.    There’s a reason why the Energy commission made several references to purchasing power from our neighbours.  We will eventually be buying our power from Hydro-Quebec and still paying down this huge debt over 30? 40? years.

There are no easy answers but trying to position NB Power as as company in good shape with a business model based on low power rates for customers – is fast becoming fantasy.  I think these guys know it and the public posture is meant to reassure New Brunswickers.

Tom Adams, an energy consultant and nuclear safety expert based in Toronto, said the debt levels at NB Power threaten the economic stability of New Brunswick.  “The scale of NB Power’s debt casts a shadow over the whole picture of public finance in New Brunswick,” Adams said in an interview Friday.  “This debt is guaranteed – it’s sovereign debt. The electricity decision-making in New Brunswick has turned the province into the Greece of Canada.”

I have met Tom Adams – he’s an interesting cat.  I think his comments are the flip side of Leonard’s.    Leonard would like people to think that a deferred revenue account is an ‘asset’ for New Brunswickers – i.e. a value for taxpayers rather than $2.4 billion more the utility will have to extract from New Brunswickers – and Adams would have us believe we are Greece.

Neither one is right.  Because of a variety of decisions, New Brunswickers are going to have pay down a huge debt burden over the next few decades even as more generation assets are mothballed.    This is why I disagreed with the three year rate freeze.  The government should have imposed reasonable increases and used the money to pay down debt but politics and energy are a toxic mix in this province.  Further, we may lose large industrial projects if the rates are not changed or a new workaround is found.  We used to have cheap energy – now we do not.

As for Adams, out total debt burden (government and NB Power combined) is still within a reasonable range of the average of Canadian provinces.  If the government doesn’t balance the books soon, that could change but right now it is not at a crisis situation.  I would put NB Power and power rates at a far higher crisis level than overall sovereign debt in New Brunswick.  I would further put Enbridge and natural gas related debt (mostly Leonard’s definition of an asset) at a critical level.

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5 Responses to Energy subterfuge – a lesson in strange language

  1. richard says:

    ” The government should have imposed reasonable increases ”

    but, as you say, that would be politically difficult. Especially so in a province where incomes are stagnant. If incomes were growing, then that would be an easier sell. We have a double whammy here insofar as tax revenue is concerned; low and stagnant incomes but a need to service utility and govt debts.

  2. anon says:

    I agree that there needs to to transparent and frank discussion about energy. It has been used as a political tool (like freezing rates as an election perk or construction projects for politcal gain) for too long. The public is restless when there is talk of 3, 4, or 5% increases when compared to Europe, we have low rates. Then there are others proposing more wind energy as if it is some sort of free energy supply. Depending on who’s numbers you accept, wind is in the $0.40 kwh range. That would be a 300 to 350% increase over our current power rates; are the people proposing more wind prepared to pay 3 times their current power rates? I doubt it.

    Bottom line, there is no free lunch. Generating energy, from any source, costs money (and will have some environmental impact). The assets are expensive and it will result in debt. The numbers are big; so are energy revenues when looking at a 30 year return on assets. An effort to educate the public about debt and future revenues is needed. If an understanding that there is a difference between debt for government over spending and debt for assets that generate revenue, then I guess New Brunswick should exit from the energy business but I think that would be a mistake, since energy could be a critical strategic resource.

  3. I think you are right on that. People just need to be told they will be paying considerably more for future power because of the debt burden. It’s another example of pushing costs off to a future generation. It hampers our ability to develop new generation assets which is why it is likely that we will end up buying more power from Quebec or elsewhere. it is possible that merchant power generation will emerge but the cost of servicing old debt will still have to be added to the future rates. The last time I looked NB Power’s debt was something like $20k per customer. That will have to be amortized into the rates.

  4. mikel says:

    Actually, we know it was GRAHAM who turned NB into Greece. Credit rating agencies lowered NB’s credit rating as a result of lowering income taxes-NOT because of NBPower. Nobody MADE Graham lower income taxes, and you certainly don’t do it EARLY in your mandate, and certainly not when you are dumb enough to sell off public resources-which defeats the whole point of lower taxes as an election strategy. Instead, Graham got three years of media reports trumpeting lower credit ratings-which means taxpayers get hit twice with higher provincial borrowing rates. Not to mention that CBC frequently pointed out that most of the tax savings went to the highest income earners.

    As for Mactaquac, hydro power is the CHEAPEST form of power out there. NB would probably still get the same low rate because there is virtually no way for Mactaquac NOT to make money. I think the ROI on that dam over the past, what, 30 years, has been something like 400%.

    I’m no accountant, but I do know a few accountants and MOST accounting is ‘sleight of hand’-if you don’t believe me, go watch “Enron-The Smartest Guys in the Room”.

    But the crux does come down to energy policy. And if you think there are ANY bright lights in the government, I should remind you that even their energy task force has backed off banning baseboard heaters in new developments-all because, as they say, New Brunswickers don’t understand that it is only NEW developments, and so they’ve been getting a lot of criticism. So get this straight, they are backing down off of what ‘may’ be sound policy based on the negative feedback they’ve been getting from people who have misunderstood the policy! Now, who is dumb enough to do that?

    However, I do find the thinking here strange, since the election all the media and comments have been talking about how broke the province is. How significant cuts have to be made. So I really don’t see the mass anger out there. I mean come on, less than 5% of the province joined a facebook group to protest the sale of NBPower. So what is the fear here-that NB will turn into Egypt because their power rates go up? Power rates go up all the time.

    The real fear, I suspect, is that for a young family who is staying in their home for more than ten years, it is cheaper to go off the grid than sign on with NBPower. My parents pay $2500 a year for their power. In ten years that would pay off any investment in solar panels, wind turbines, and energy efficiency. But they are getting old, so may not get that return. However, for that energy cost, a person is an idiot to NOT be going green.

    And there is always the Ontario Hydro route-you raise the rates during the busiest times, and keep them the same or only moderately higher for peak times. That way the increase is up to residents.

    I finally do have to point out that the ‘worth’ of a company-particularly a company with a guaranteed monopoly, is NOT determined by its assets, but by its customer base.

  5. richard says:

    ” The last time I looked NB Power’s debt was something like $20k per customer. That will have to be amortized into the rates.”

    We have been extremely fortunate that interest rates have remained low. Otherwise debt servicing costs would be taking a much bigger bite out of revenues.

    The NB public has been very resistant to rate increases and I am not sure whether politicians have the courage to lay out the facts. We have a province with one of the lowest median incomes – incomes that are quite stagnant. Rates have been kept artificially low for several years and that has led to expectations of continued low rates. Rate and tax increases will cut deeply into what little discretionary income is available. Given that, few will have the funds to invest in getting off the grid.

    The current govt seems to be praying that something magical will happen that will make these problems go away. I think the best thing for them to do would be to give the EUB more power to investigate and report. Let them air the dirty laundry. Perhaps that would help adjust people’s expectations re power rates.

    Relatively inexpensive power is available from HQ right now; HQ might be feeling some pressure to sign agreements given the competition from NG in US markets. Even if NB Power can reach a power purchase agreement with HQ, rates will jump due to debt servicing and refurbishment costs. I can’t see NB Power taking on much more debt in order to refurbish hydro plants. We are going to be a net importer of power from now on.

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