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.