Not that I want to raise this issue, again, but I listened to the Spin Reduxit podcast for this week and wanted to make a little clarification as is my wont. Let me say first, however; that I hope the Spin Reduxit podcast continues as we don’t have a lot of this type of online audio commentary on NB politics and I am increasingly relying on audio for my information needs.
I think it was Dan McHardie that said large industrial electricity users were ‘subsidized’ by other rate classes insinuating that they were getting a deal and pushing up the rates of the other guys.
While this may be true on a superficial level (i.e. take NB Power’s total costs and divided them per kW and then look at the rates paid by various classes) but the truth is – as mentioned by Gaetan Thomas on several public occasions – that the large users are critical to his business because of a basic accounting concept called contribution margin. I have talked about this before but it is worth mentioning again.
NB Power’s cost structure is relatively inelastic meaning that if the company loses a large customer (say $5 million/year in revenue), it can only decrease its costs by a marginal amount meaning the loss of that customer would be a huge blow to NB Power. McHardie’s inference is that the large guys are being subsidized. If they are, why not let them leave NB Power for good? Presumably, NB Power’s books would be stronger if the big guys are subsidized (be definition). But that ignores contribution margin.
In a corporate setting – say a private sector utility – the supplier of electricity could reduce the rates paid by large users right down to the point where the contribution margin effect drops to zero (i.e. the loss of the large customer can be compensated by an equal reduction in cost).
Now at some point in the future when we are buying half or more of our electricity from hydro-Quebec, it may make sense to drop the large industrial users if their rate is below the cost of buying the power (a real subsidization). However, NB Power will have still have significant stranded debt servicing costs on top of the cost of buying power from HQ or wind producers, etc. (what, you didn’t realize the debt associated with all that wind power was not on NB Power’s books?).
I have argued for – and mostly lost the argument – that energy prices should be determined with at least one eye on economic development. If we want to attract new energy-intensive projects, we should try to have rates that are competitive. There is a greater public good argument that could and should be made here.
I’m not saying it isn’t a complicated calculus but someone somewhere should be thinking long and hard about this.
I believe that we should have an NB Power Industrial or some other separate entity that can price energy competitively for large industrial projects (for example, a new natural gas fired electricity plant right now could offer rates – with full debt service costs – well below current industrial rates at NB Power). I realize that moving large industrials out of NB Power’s current client mix would be problematic for NB Power but I would at least like to see some scenario planning in this area.
What we normally end up with is a few, isolated workarounds (like what NS Power is doing with the forestry industry in that province) but that isn’t growth oriented. That is focused on salvaging a few large mills. I would like to see a power regime – electricity and natural gas – that is set up fro growth.
Now some would argue that cheaper energy doesn’t matter and we should focus elsewhere. Okay. Give me the elsewhere.
I was kind of hoping New Brunswick could have attracted a slew of data centres. I realize they are energy hogs and don’t provide a lot of jobs (but the jobs are good paying). I just liked the idea of Google, Yahoo!, Microsoft, Amazon, etc. putting down roots in New Brunswick. If we had an “NB Power Industrial” model, maybe that vision could have worked.
PS (added a bit later):
Just to head off the usual criticism that I am a lackey of the province’s large industrial companies, this really isn’t about them. I am searching for the next growth engines for the New Brunswick economy. When I read that Enbridge isn’t forecasting a single new large industrial client in their next 10 year projections – that is what pisses me off. The three big industrial customers that are upset now are a concern for me but my biggest worry is that we have all this natural gas – from offshore NS, from LNG and even from local sources – and it’s priced for industrial users at the highest rates in North America (except those clients with a single end use franchise – they have competitively priced gas).
Even NB Power, if you read the forecasts of the NBSO, just assumes no new large load.
It’s s pathetic if you really think about it. We are all in the process of engineering our own slow decline and not even recognizing it.
I want NB Power to be forecasting a 50% increase in industrial load over the next five years (as optimistic provinces such as Ontario build into their projections).
I want Enbridge to aggressively forecast 20 new large industrial clients over the next decade.
That will mean hundreds of new jobs and tens of millions in new tax revenue for government.
I’m sick of this managing decline mindset in New Brunswick. The Dept. of Finance tells the universities to get ready for fewer students. The Department of Education is figuring out what schools to close. It’s all about managing decline.
Let’s manage growth, folks. Let’s expand our economy. Let’s drive an economic expansion that requires young families to move here and repopulate our schools. They can’t build schools fast enough in Alberta.
I spend my days thinking about how this place could grow and it seems like everyone else is thinking about how to manage decline.