Reintegration of NB Power

Description and Background

The Province of New Brunswick will amalgamate the NB Power group of companies into a single vertically integrated Crown utility.
In October 2004, the Electricity Act divided NB Power into five separate companies, providing a legal and financial structure to support a decentralized organization. These companies were NB Power Holding Corporation (Holdco), NB Power Generation Corporation (Genco), NB Power Nuclear Corporation (Nuclearco), NB Power Transmission Corporation (Transco) and NB Power Distribution and Customer Service Corporation (Disco). In addition, Genco had two subsidiary companies: NB Power Coleson Cove Corporation (Colesonco) and NB Coal Inc. (now known as Mine Reclamation Inc.).

New Brunswick Electric Finance Corporation (EFC) and the New Brunswick System Operator (NBSO) were also created as independent organizations. EFC was created, in part, to take on a portion of NB Power’s debt in order to reduce debt levels in the NB Power companies to a more commercially appropriate level. The NBSO was created to maintain the adequacy and reliability of the integrated electricity system and to facilitate the operation of a competitive electricity market in New Brunswick.

Within this organization, Transco is the only subsidiary with a commercial capital structure that includes debt and equity – the remainder of the utility has no equity and meets its capital financing requirements entirely through debt. Transco generates revenue from the Open Access Transmission Tariff (OATT), which is regulated by the New Brunswick Energy and Utilities Board (EUB).
    

What is “OATT”?

The Open Access Transmission Tariff (OATT) provides the foundation for the basic conditions and rates for use of the transmission system. The NewBrunswick SystemOperator is currently responsible for seeking revisions to the OATT. All revisions must be approved by the NB Energy and Utilities Board (EUB) and are subject to public scrutiny.

Disco is the only other NB Power company that is regulated. This means that much of NB Power’s operations – including all of its generating facilities and most of its head office activities – are not subject to regulatory oversight and scrutiny.

At the time of reorganization, an interim governance structure was established with the NB Power companies sharing a common Board of Directors and a common President/CEO. The plan was that this structure would evolve as the competitive electricity market evolved and separate Boards and CEOs would be established for each NB Power company.

The landscape has changed since 2004. In particular, the competitive market has not developed in New Brunswick as anticipated – and given what has occurred in British Columbia, Ontario and elsewhere where competitive electricity markets have also failed to thrive – there is little likelihood that it will happen. Across the country, new generation assets have not been built by private sector market participants to the extent predicted upon adopting a competitive electricity market model. Developers have found it very difficult to secure financing for new projects because financial institutions and other investors will not finance an independent power project without a long-term utility power purchase agreement in place as a secure source of future revenues. New generating facilities are often not cost competitive with existing or heritage assets, as the current construction costs must be factored into the price of their electricity.

For a variety of reasons, including the fact that the competitive electricity market has failed to develop in New Brunswick as anticipated, the interim NB Power governance structure remains in place. A common Board of Directors and a common President/CEO continue to make decisions in the best interest of customers based on NB Power as a single entity.

In order to improve transparency and the opportunity for meaningful cost reductions, NB Power will be reintegrated into a vertically integrated utility and the Electricity Act will be updated to reflect this simplified structure. In addition, Government will review New Brunswick’s electricity market policies and implement structural and operational changes to improve efficiencies and cost effectiveness, including the reintegration of the system operation functions of the NBSO within NB Power.

The major elements of the proposed new NB Power structure include:

1. The Customer Service business unit will be comprised of Disco and Transco.
   
   a. Transmission revenue requirement will be separated from the consolidated NB Power and submitted and reviewed by the EUB as required, in order to maintain compliance with U.S. Federal Energy Regulatory Commission (FERC) rules for exporting electricity to the United States.
   b. The Transmission business will be granted a deemed capital structure with a regulated rate of return on transmission equity (ROE). A ROE greater than the current range of 8.5 percent to 10.5 percent will be requested for new interconnects in order to maximize the advantage we enjoy from New Brunswick’s geographic location as an energy hub in the international northeast region.
    
   
2. The Generation business unit will be comprised of Nuclearco and Genco.
3. The Corporate Services unit will be comprised of activities such as Human Resources, Corporate Relations and Communications, Finance, Legal and Shared Services.
4. The Business Development unit will be responsible for external marketing initiatives such as bidding on Standard Offer Supply contracts in
   New England and elsewhere, supply contracts to other Maritime utilities (such as Maritime Electric Co. Ltd. in PEI) and other business opportunities such as third-party development partnerships that would benefit the province.
5. The proposed structure anticipates that the debt of NB Power currently held by New Brunswick Electric Finance Corporation will be transferred back to the utility. This will allow for increased transparency of NB Power’s financial situation and assist with debt management.]
6. To facilitate greater accountability and transparency in rate setting, the entire NB Power organization will be subject to regulatory review and oversight by the New Brunswick Energy and Utilities Board.
   

What are NERC and FERC?

The Federal Energy Regulatory Commission (FERC) is an independent agency in the United States that regulates the interstate transmission of natural gas, oil, and electricity. The North American Electric Reliability Corporation (NERC) is the electric reliability organization in the United States that establishes and enforces reliability standards for the bulk-power system.

A vertically integrated utility model is consistent with the utility structure in other Canadian provinces such as British Columbia, Saskatchewan, Manitoba, Québec and Nova Scotia and would meet all the U.S. FERC market licensing and export requirements. This more open and transparent structure will help improve NB Power’s relationships with the EUB, customers and other key stakeholders. It also promotes regulatory transparency by making all utility costs subject to regulatory scrutiny.

A vertically integrated utility presents additional opportunities for efficiency in administration and operational functions. In 2011, NB Power conducted a benchmarking review and compared its operating and financial performance to that of various integrated utility industry peer groups both in Canada and the United States. NB Power must further reduce its costs by approximately $30 million per year to become a top quartile utility in North America. Full integration is paramount for NB Power to move in this direction.

Our experience since 2004 has shown that New Brunswick faces challenges and barriers associated with being a small jurisdiction and a small electricity market area that preclude a competitive electricity market from thriving. The 2004 competitive electricity market model has not worked for New Brunswick. As a result we have an electric utility structure, a market structure and rules that are overly complex and provide little or no value to New Brunswickers. Reintegration of the utility will address these issues.

Key Objectives Served by this Action

Low and Stable Energy Prices – Reintegrating NB Power will have a significant impact on internal costs as staff, overhead and other resources are more efficiently and effectively utilized throughout the organization as opposed to operating in“silos”as is the case today.

Effective Regulation – Reintegration will also provide the opportunity to subject all of NB Power’s operations to regulatory oversight and review, rather than just the transmission and distribution companies. Increased scrutiny by the New Brunswick Energy and Utilities Board will ensure NB Power continues to operate in the most efficient and effective manner possible.