It's The Economy, Stupid

Thanks again to my little friend for sending me all those links.  If you would stop cursing and slandering, I could post your comments.

This article in the Globe & Mail is right on point. Here’s a relevant piece:

How’s it going? Just listen: “I’ve cut wood all my life. Pulp wood. Box wood. Logs I get sawed. Everything. “But I don’t cut no pulp any more. You can’t sell it. And if you can sell it somewhere, you have to ship it, so it’s not worth anything to you. It’s the same thing everywhere. The mills shut down and you can’t sell your wood. “I’m too old for it to matter much to me. But it still makes you mad. And I’m God damned mad.”

This article was supposed to be about the Oympic torch passing through the Miramichi but they caught up with the wrong guy.

That’s the most frustrating thing about this thing with NB Power.  The whole point is to try and beef up the business model for industrial activities like forest products. 

The populist movement should be about saving industry – not obstructing efforts to save industry.  Thatt’s what we get when the populist movement is fomented by folks in cushy urban centres with good jobs or from the comfort of academia.  This gets projected out and the average New Brunswicker – many of them like this guy above – lash out against this move to level the industrial power cost playing field with other industrial jurisdictions.   That’s the paradox that I can’t get my head around.  People in the Miramichi should be demanding cheap power to bolster the changes of industry coming back to the region but instead we get the opposite reaction.

Let’s be clear about one thing.  A lot of people on this blog and on the CBC and Facebook and everywhere else it seems are talking about those damn industrial companies getting a massive subsidy.  It’s being framed as if some greedy fat Wall Street bankers are taking the money and stuffing in a Swiss bank or something.  That’s laughable.  These companies make investment decisions – just like CBC’s decision to cut back on their New Brunswick programming – the boards of Fraser and AV and every other industrial company in this province make decision where to invest their money.  UPM did not exit the forestry business.  They left the jursidictions where they felt the business model was the weakest.  Same with Abitibi and many others.

Cheap industrial power is about saving and supporting good paying jobs mostly in rural New Brunswick.  That’s the bottom line.   It’s about guys like the person quoted in the G&M and thousands like him.  It’s about a failure of public policy combined with companies that decided it was easier to leave New Brunswick than to a) make capital improvements to their facilities to make them more competitive and b) decided against trying to work with government to try and address the shifting business case for their industry in this province.

The next time you rage against the man and feel good about it -read this story in the G&M.  I did and it bugs the heck out of me.

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Thanks to my little friend who sends me every single story the CBC runs hammering the NB Power Hydro Quebec deal – I guess it saves me some leg work.

I have been thinking about the CBC quite a bit lately.  I like the CBC.  I know several reporters over there and I do radio commentary from time to time. 

But I think their posture on this NB Power thing is totally inappropriate.  Just about every story I have read from the CBC web site or heard on the radio has been singularly to chip away at the deal – multiple stories every day.

Just about all – there are some that are silly – but just about all of these angles on the story are legitimate – I’m not suggesting otherwise. 

But if the CBC was fair it would provide all the angles from both sides.  This is the largest public policy decision in a generation and the public, which like me views the CBC as a credible source, is only getting one side of the story.  And that’s a shame.

The irony is that people love to hammer the Telegraph-Journal for its bias but if you really look at it (and I do) the TJ editorial and op/ed is mostly supportive but the actual stories on the deal are covering both sides of the issue (thanks again to my friend for sending every negative story from the TJ).

The CBC is disinvesting in New Brunswick – has been for years.  And as someone who would love to see a media industry grow here – documentary production, specialty channels, movie production, etc. – this has been disappointing.  There is great talent in New Brunswick and I think we could have really done something in this area.  I had hoped that when McKenna was chairman of Canwest – he would have thrown us a bone- put some development work down here – but that was not to be.  The CBC as well – nothing here but a little retail presence.

And now it seems to be doing everything in its power to scuttle what I believe to be a good faith effort to address a serious issue that threatens our competitiveness as a location for business investment.

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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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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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Since we are talking energy policy these days I was reminded of an idea a few folks (including myself) floated a few years ago.  The idea was for the NB government to take a stake in the Sussex natural gas deposit and use the gas to fire a natural gas electricity plant.  Since the government would own the gas, the operating costs would be relatively low and the government could have offered that power for whatever rate it wanted -subject to a tax-based ROI.  In other words, you create great jobs that pay high taxes and you will get cheap energy.

The idea was immediately discounted and turfed of course.  This is New Brunswick.  Danny Williams went ahead and bought a stake in Hibernia south (in addition to the federal government investment in the original hibernia).  New Brunswick owned NB Coal and controlled its own supply of coal at one point.

But heaven forbid that the government get in the business of owning gas.

I realize this is a small idea in the big scheme of things but innovative thinking matters – particularly in the long term.

A report came out last week indicating a whole lot of gas under our feet.  Between Sussex and Elgin there’s an estimated 67 trillion cubic feet of natural gas trapped in a 300-metre-thick shale formation that starts two kilometres down.  In the not too distant future this gas should be economically viable (the current Sussex gas is from the same system).  Maybe at that time we can get old Danny to hobble over here and negotiate for us.

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One of the things you have to admit about the NB Power/HQ situation is that a lot of people will fight tooth and nail against something.  Wouldn’t it be interesting if we saw the same level of passion about doing something to move the province ahead?

For those that love the status quo, here is what you are fighting for:

Employment Growth (1999-2008) – Annual Employment Figures – Industrial Aggregate

Source: Statistics Canada. Table 281-0024 – Employment (SEPH), unadjusted for seasonal variation, by type of employee for selected industries classified using the North American Industry Classification System (NAICS), annual (persons).

Even I had to check and recheck these numbers after hearing both Premiers Lord and Graham talk about leading Canada for employment growth.   As the Dire Straits song goes “one of them must be wrong”.

Here is the manufacturing employment data:

Employment Growth (1999-2008) – Annual Employment Figures – Manufacturing

Despite all the huffing and blowing in Ontario, manufacturing employment has dropped more in New Brunswick than in Ontario.  Obviously  the absolute drop in Ontario is far greater and hence we get billions in bailouts and a whole new Federal development agency but the point is still valid – relative to the size of the economy, New Brunswick’s total manufacturing employment decline has been the worst in Canada.

So keep fightin’ the good fight – kill the NB Power deal, rant against the evils of big business, and all the righteous causes you are so passionate about and you’ll keep the status quo – and you’ll keep this kind of pathetic economic performance.

I’ll give you two examples and these are really independent of NB Power.  There was a lady who posted a major rant against Shawn Graham a few posts ago – just tore him a new one.  Because it is rare to see a lady post here – at least with a name – I googled her expecting to find she is the riding president for the PCs or something.  The first Google hit was essentially the same rant on the Facebook site (it’s nice that people can reuse their content over and over again) and the second was an article in an Alberta paper talking about her and that her kids have had to move to Alberta.  In that article she stated something like we must do something now to reverse this trend of our kids moving away – there are no jobs and no opportunity (I am paraphrasing her because I don’t want to reveal her name – I am not singling her out).  The question is why isn’t she and thousands like her equally passionate about moving the province forward?  Why isn’t she demanding that her MLA demand that BNB camp out in Toronto, and Raleigh and Delhi until we can pry global investment out of those places and bring good jobs here?

The second example is our friend Mikel – who will spend hours researching comments made here to trash any good or potentially good idea that is put forward – all while sitting from his perch in one of the most successful economies in North America.  Wouldn’t it be interesting if he spent those hours trying to figure out how to attract global industries here?

It’s always easier to destroy than create.  Spock told us as a matter of cosmic history it is always easier to destroy than create (Star Trek 2).    We see lots of that in New Brunswick.

The one thing I ask of all those blood boiling crusaders on the NB Power file – win or lose that battle I hope you find a way to channel that passion to things that might actually move us ahead over the next 20 years.

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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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The Province of Ontario is supporting a new commercialization centre that will help digital media entrepreneurs build new companies and create jobs. The province plans to invest more than $26 million in The Communitech Hub: Digital Media & Mobile Accelerator, a new centre that will help emerging digital media companies grow and succeed in the global market. In particular, The Hub will look beyond the entertainment sector to focus on companies creating hardware and software for industries, including advanced manufacturing, healthcare and finance. Based in Waterloo Region, The Hub expects thousands of jobs could be created over the first five years by serving entrepreneurs across the province.

It seems to me that these types of incubators can be successful but in the case of New Brunswick if I were recommending something like this I would target entrepreneurs in New Brunswick and beyond.  Waterloo is teeming with talented software types that have built their careers inside larger firms and may now be ready to move out of RIM, Google, Adobe, Siebel, Sybase, McAfee and others* into their own venture.  I’m not sure targeting kids right out of school for this type of activity is the best move.

*According to Communitech there are 30 publicly traded IT firms in the Waterloo area.  Wouldn’t it be interesting if New Brunswick had five or six?

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For you long time readers, we revisit this issue of democracy and economic development on occasion – not because I have any particular insight into the area but it certainly is fun.

Take the issue of protests on the Legislature. They are virtually always a protest against a proactive move of government (not always). When governments have moved to cut hospital bed cuts to try and rein in health care costs, protests at the Legislature ensue.

When the Lord government tried to trim back farmer subsidies, protests at the Legislature took place – government backed down.

I was working at the Legislature as a page with McKenna made the unfortunate attempt to force Snowbirds to pay for health insurance while in Florida for 4 or more months of the year. The logic was fairly simple. They aren’t paying taxes for a third of the year, should they get Medicare coverage while in Florida? Bedlam ensued. Never take on Seniors or Farmers. Those two groups are sacrosanct in this province.

Now we have the NB Power sale – some say there were 200-300 hundred, the CBC reported today it could have been over 1,000 and they were a raucous bunch reading from their cue cards.

My point is not that I am against protest – I would just like to see protest about things that are fundamental to moving the province forward. Where are the protests demanding more focus on attracting industry here? Where are the protests demanding efforts to keep industrial power rates competitive to shore up some of the most important employers in rural New Brunswick?

Exhibit A:
When Bernard Lord saved the A.V. Nackawic pulp mill he was treated like a hero. I remember the media reports. Women were openly weeping – they were so thankful that the mill would be staying in town – even though it was with less workers and it cost the taxpayer $67 million initially and millions since then.

Now when a government moves to make a structural change that should end up making that mill competitive in the long term and save those jobs beyond the subsidies, the governments get pilloried – likely by many of the same people that were weeping just a few short years ago.

This goes beyond the Heritage Pool or transmission rates so I don’t want to go down that rabbit trail in this post. It’s about people drawing a link between efforts to create a competitive environment for vital industries, or drawing a link between trying the effectively manage the costs of government and efforts to keep tax rates competitive, etc.

Of course these protests are virtually always organized by a group – environmental, labour, etc. – rarely is it some spontaneous act of public will.

Maybe the answer is that the CFIB or the Chambers of Commerce or the Business Council should organize protests at the Legislature demanding action on economic development. Demanding that the province raise its spending on research and development to the level of the government of Ontario (10 times more than us). Demanding that the province do something about NB Power before the industrial rate structure drives more industry out of the province. Demanding that the province attract more industries here to at least replace the big employers that have left.

I’m only half kidding.

Fundamental change in this province will be driven by the people. Minister Murphy last week talked with almost holy reverence about the “Tim Horton focus group”. Maybe it’s time the Tim Horton focus group to start debating the issues of economic development.

I’ll take a double/double.

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New Brunswick has failed to meet population growth projections set about a decade ago by a regional economic think-tank, and actually recorded a reversal in its population count.  The Atlantic Institute for Market Studies (AIMS) said shrinking population numbers hit all four Atlantic provinces hard over the last 10-years, as detailed in a report released yesterday which followed up on a study first published in 1998. Furthermore, the study said the problem threatens to develop into a crisis because further regional population declines are being predicted for the future.  In 1998, the collective population of all four Atlantic provinces was predicted to increase by about 35,000 people over 10 years. Instead, the new report says the region’s population decreased by 47,000 people in that time. “New Brunswick actually stands out as sore thumb both on the population side and on the labour shortage side,” said Charles Cirtwill, president and CEO of AIMS. “We projected back in 1998 that New Brunswick’s population would have grown by about 25,000.  “It’s actually declined by 7,000.”

It must be nice to work for AIMS. On one day you can complain about the government for trying to do things that restrict out-migration and on the other you can hammer them because of the results of out-migration.  Cake and eat it too.  Where do I sign up?

Anyway, I am now old enough to remember all these old initiatives.  There was not real interest in population growth in 1998.  Come on.  Bernard Lord’s Prosperity Plan never mentioned out-migration or population decline once – not one single whisper.   To be honest I think some policy makers see out-migration as a good way to reduce unemployment.  This has been the view from the Ottawa think tanks for more than a decade but I think some here agree. 

As I have said ad nauseum we don’t have a population crisis – we have an economic crisis.  People in Calgary age at exactly the same pace as in New Brunswick and yet they can’t build elementary schools fast enough.   If the New Brunswick economy was creating enough good jobs each year we would have very little out migration and immigrants would be far more interested in moving here.

But what is the normal policy response to a population crisis?  Try to force young people to stay by offering them tuition rebate bribes.  Churn up the number of immigrants settling here and hope more of them stay.  Beef up the EI system – make it just a little more lucrative – so that people won’t move to Alberta or Saskatchewan.  And, of course, my favourite – announce another round of funding for small business the engine of the economy.

We need to fix our structural economic challenges, folks.  Businesses are not investing here – at least not enough to generate economic economic activity just to keep our people here – let alone grow the population.

The current government prefers grand schemes – broad-based tax cuts, selling NB Power (which I agree with under the right conditions), reforming education – they believe that structural changes are needed.  Fair enough.  We can debate that but, in the end, I believe the best way to generate sustained economic growth for a generation is to focus on a few key industries that have growth potential and shaping public policy to see business investment flow into those sectors.

The structural stuff matters but I really don’t think it will work without the second part.  If you have the best education system in the world – you end up with better exports of people.  We know from the data there is a direct correlation between the level of education and out-migration from New Brunswick.  The more you proceed up the education chain, the more likely you are to leave. 

Tax cuts are fine as a dividend for strong economic growth but as a stimulus of economic growth?  I can’t find any data to support this – particularly for a small province.

My point is that governments have to focus.  It’s not that they focus on one thing to the exclusion of all others but they need to have a focus.  I thought Graham’s was going to be economic renewal.  It was the self-sufficiency agenda. 

Too much political capital expended at the structural level while ignoring a practical economic development agenda many end up being a mistake.

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