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N.B. Power deal more politics than economics

Release Date: December 21, 2009

Hydro-Québec is proposing to purchase 56 per cent of New Brunswick Power's electricity generating capacity, as well as its transmission system and other assets, for $4.75 billion. But the public cannot adequately judge the merits and drawbacks of the proposed sale because the asset value has not been appraised by a competitive bidding process in the open market. Therefore, the public interest is not served by what amounts to a backroom political deal.

The acquisition of N.B. Power's nuclear, hydro, and petroleum-fired power plants would increase Hydro-Québec's capacity for generating electricity by 6 per cent (2,166 megawatts). Hydro-Québec also would gain control over the transmission network connecting New Brunswick to the New England power market, a portion of which the company currently leases from N.B. Power. Hydro-Québec would also acquire the valuable carbon emissions allowances from the thermal generation facilities at Coleson Cove and Belledune, in the event N.B. Power ceases operations there.

For its part, N.B. Power would collect enough cash to pay off some $4 billion in debt for which the taxpayers of New Brunswick currently are responsible. The proposed deal also calls for a five-year freeze of residential rates, and discounts for New Brunswick industrial and commercial customers. 

But New Brunswick taxpayers can only wonder whether Hydro-Québec's offer reflects the true worth of N.B. Power's assets. Moreover, the actual value of the rate freeze and rate cut provisions will depend entirely upon future prices of electricity, which routinely fluctuate based upon the costs of fuels, the demand for energy, the operating levels of the power plants, and a variety of other factors. Consequently, what might seem to be an attractive deal-at least politically-may not necessarily be economically sound.

According to N.B. Power's latest annual report, the net book value of its transmission system, terminals, and substations is $413 million. Applying that figure to the proposed purchase price means Hydro-Québec would be paying about $2 million per megawatt of electricity for N.B. Power's generating capacity. How that compares to N.B. Power's production costs is unknown. But that is essential information for evaluating the purchase offer.

Québec residents also should wonder whether the proposed purchase by Hydro-Québec would be to their benefit or detriment. For example, will the debt load from financing the acquisition affect their rates? What are the benefits of additional capacity in another province, and are those benefits commensurate with the costs?

If the New Brunswick government is serious about getting out of the electricity business, officials should strive to maximize the value of N.B. Power's assets through a public and competitive bidding process. That requires an independent appraisal of the assets to determine a reserve price. Moreover, the province should declare government-owned utilities such as Hydro-Québec as ineligible to bid in order to promote privatization of the system.

Neither Hydro-Quebéc, N.B. Power, nor their regulators have adequately performed due-diligence on this deal. Absent competitive bidding and thorough cost-benefit analyses, taxpayers in both provinces should oppose it.

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