There is an interesting side-bar to the proposed purchase of NB Power by Hydro Quebec. NB Power’s generating output or capacity, when Lepreau is operational is 3959 MW. Its export transmission capacity is 2,677 MW. Hydro Quebec’s interconnects with New Brunswick have a maximum transmission capacity of 1,100 MW. When the Dalhousie plant shuts down (300 MW) next June and with Lepreau (635 MW) out of the picture for at least the next eighteen months, should Hydro Quebec purchases NB Power, virtually all of its interconnect capacity would be needed to move replacement power to New Brunswick. There would be little or no surplus for export in a peak demand circumstance.

That’s hardly justification for Hydro Quebec’s offer to purchase NB Power. Unless, I am missing something, this deal only makes sense if Hydro Quebec can increase its interconnect transmission capacity by a multiple of five to (a) enable replacement of NB Power’s higher cost thermal generation (b) enable replacement of NB Power’s high cost combustion turbine generation and (c) enable the export of 2,677 MW of power. Otherwise their costs would be too high.

There is another consideration. Twenty five years from now, Newfoundland will have the right to reclaim all of its Upper Churchill Falls generation from Hydro Quebec. In the meantime, if Newfoundland should add the 3,500 MW that Danny Williams has been talking about and he finds a way to finance and lay an underwater cable to Cape Breton he could have as much as 9,500 MW of renewable power for sale in the Maritimes and New England. That would create serious competition for Hydro Quebec.

Now before you run off and say, hey let’s wait for Newfoundland, consider the implications of waiting. This week NERA Consulting delivered a report to the New Brunswick Legislature examining the cost implications of selling NB Power to Hydro Quebec versus not selling and continuing its operation. NERA is a global consulting firm with 450 economists and offices in North America, Europe, Asia and Australia. They advise utilities, governments and regulators on the economics of regulated industries. They have no financial interest in the MOU between New Brunswick and Quebec. Their analysis includes consultations with NB Power and the New Brunswick Department of Energy. Their assumptions are projected over a period of 30 years.

I have read the report. Its assumptions are very conservative and therefore have to be considered in this debate. Here are some key observations. In the period 2011 to 2040, rate savings for NB Power’s residential, commercial and wholesale customers are projected at $3.2 billion and savings for large industrial customers are projected at $2.1 billion. The timing of benefits differs between the two groups because the industrials receive an “immediate rate match” (30% reduction) with Hydro Quebec’s industrial rates while the benefits to residential, commercial and wholesale customers build over time as a result of the five year rate freeze.

In NERA’s report, it is assumed that with no sale, NB Power’s rates would increase by 3% a year for the next five years, while barely covering operating expenses and interest payments. There is no contingency for unexpected expenses or unexpected plant shutdowns. Inflation is assumed at 4% as opposed to the Conference Board of Canada’s forecast through 2030 that averages about 2%. Just as an aside, I can remember inflation rates in the high teens.

There is an assumption that beyond 2012, Lepreau would operate at an average 91 percent capacity factor through 2023, followed by a decline in capacity, consistent with projections provided by NB Power. There is no allowance in the report for increases in fuel costs beyond inflation (oil, gas, coal or uranium) but there is an assumption that NB Power would require additional power resources in 2012.

On the flip side where Hydro Quebec buys NB Power, there is an assumed saving of $2 to $3 billion dollars for the refurbishment of Mactaquac. Hydro Quebec picks up $4.7 billion of NB Power debt and delivers $5 billion of rate relief over the next thirty or forty years. That does not include the value of shielding New Brunswick from rate increases that could be generated by carbon regulations, higher fuel prices, foreign exchange downturns or the cost of capital to replace or refurbish existing facilities.

Even though the NERA report makes no recommendations and distances itself from any liablility in respect to the use of its data, I think it is a compelling piece of work that favours the sale of NB Power to Hydro Quebec. Waiting for Danny Williams and the recovery of the Upper Churchill Falls generaating capacity is not an option. Indeed, it is frought with uncertainty because their sixty five year old generating facilities will surely demand major refurbishing over the next few years and who is going to pay for that?

W.E. (Bill) Belliveau is a Shediac resident and Moncton business consultant. He can be contacted at bill.bellstrategic@nb.aibn.com