Energy Probe

W.E. (Bill) Belliveau
Times and Transcript
August 28, 2010

As Prime Minister Harper rattles around the Arctic pumping the need for fighter planes and Arctic sovereignty and warning of Russian bomber threats that justify the recently announced $9 billion dollar purchase of U.S. manufactured fighter planes, NORAD, the North American Aerospace Defense Command says that at no time did Russian bombers enter Canadian airspace this week.

Coincidently, a few miles away in Nunavut a huge chunk of ice broke off Ellesmere Island. Scientists estimate the size of the ice chunk at roughly the size of Bermuda. Could this be another piece of the global warming threat and is anybody paying attention?

On another matter, notes to the 2009 (year ending March 31, 2009) Financial Statements of NB Power relating to refurbishment of the Point Lepreau Generating Station say that “costs of replacement power will be recovered from customers over the station’s operating life and reflected in . . . charges, rates and tolls to customers.” Meanwhile, it will defer costs and capitalize interest payments – a method of creating paper profits. It does not reduce the need for cash. In an early 2010 election undertaking, Progressive Conservative Leader David Alward has promised voters a three-year freeze on power rates if his party wins the Sept. 27 election.

With the greatest respect for Mr. Alward, one has to wonder about the feasibility of his promise. Cost over-runs and power replacement costs for the Lepreau refurbishment could be $2- to $3-billion before it’s finished, if it is ever finished.

Let’s be optimistic and assume the nuclear generator will be up and running by January 2012 and total costs of over-runs and power replacement costs prove to be as little as $3 billion. Based on notes to the financial statements referred to above and assuming a plant life of 25 years, the charge to ratepayers for capital recovery would be $120 million a year (not including interest costs). With five per cent interest rates the annual cost of interest would be another $150 million, more than double the reported profit of NB Power in 2009 ($70 million). How does a rate freeze fit into that scenario?

NB Power has already warned that it needs future rate increases to pay for the financial setbacks of the $1.4-billion refurbishment at Point Lepreau. Interest and capital recovery alone would require a rate increase of at least seven per cent ($40 million per point) and that could be on top of revenue-losses over three years – the result of a rate freeze – short-term gain for long-term pain.

Norm Rubin with the Toronto-based energy watchdog group Energy Probe says he is concerned that NB Power might be forced to go too far in cost-cutting efforts in order to freeze the power rate, postponing such things as required maintenance. “You have to be careful that you don’t put too much financial pressure on a utility, especially one that’s always been Crown-owned and hasn’t been pressed before,” he said.

Rubin says freezing rates without knowing when Atomic Energy of Canada Ltd. will complete the refurbishment of the Point Lepreau nuclear power plant (2.5 years behind schedule) is “a recipe for disaster.”

To be clear, Energy Probe has an agenda. Founded in 1969, the organization believes that nuclear power is uneconomic. It claims to have been successful in stopping the construction of all nuclear plants in Canada proposed since that date.

Even though the province’s 90-year-old power utility is saddled with a debt of $4.75 billion, Alward says his idea is feasible based on an analysis done by a former NB Power vice-president and two consultants.

Mr. Alward is also promising to appoint an energy commission to map the province’s energy strategy for the next decade if he wins the Sept. 27 election. His party’s “discussion paper”, including the recommended three-year rate freeze, relies on analysis by Darrell Bishop, a former vice-president at NB Power. Bishop told a news conference that “lower fuel prices, combined with a recent three per cent rate increase” has put NB Power in a position where it can operate profitably despite the rate freeze.

Nobody in the world can guarantee future energy prices. Any cost assumptions based on future energy prices are guesstimates at best and wishful thinking at worst. David Alward’s counterpoint: “NB Power is in good shape and is able to allow rate freezes going forward over the next three years and still pay down the debt (because) it is still a profitable company.”

Energy Minister Jack Keir says he is astonished at Bishop’s participation on the Tory panel considering that just a year ago, when he was NB Power’s vice-president of generation, he was requesting rate increases for the utility. Bishop is not a financial analyst or a cost accountant; he is an engineer with some high-level experience in customer service and marketing.

Kevin Bissett, The Canadian Press
Winnipeg Free Press
August 24, 2010

FREDERICTON – New Brunswick’s Conservative leader is promising to freeze power rates for 2 1/2 years if he’s elected next month, but one expert questioned the wisdom of that proposal as the province’s utility grapples with a massive debt.

In his first major policy announcement ahead of the Sept. 27 vote, David Alward said Tuesday energy bills for residential and industrial customers would hold until March 2013 if he were elected premier.

Alward said New Brunswickers need price certainty and that the freeze would give him time to develop an energy plan.

Even though the province’s 90-year-old public power utility is saddled with a debt of $4.75 billion, Alward said his idea was feasible based on an analysis done by a former NB Power vice-president and two consultants.

“This is something that people with a bunch of experience and expertise have put a tremendous amount of work into and we feel very confident with the work that they’ve done,” Alward said in an interview after making the announcement in Saint John, N.B.

“Not only can New Brunswickers receive a rate freeze but also NB Power will still be profitable and we will be able to pay down debt as well.”

Alward said the analysis would be made public Wednesday.

Norm Rubin with Toronto-based energy watchdog group Energy Probe said he was concerned NB Power might be forced to go too far in efforts to cut costs in order to freeze the power rate, postponing such things as maintenance.

“You have to be careful that you don’t put too much financial pressure on a utility, especially one that’s always been Crown-owned and hasn’t been pressed before,” he said.

Rubin said freezing rates without knowing when Atomic Energy of Canada Ltd. will complete the refurbishment of the Point Lepreau nuclear power plant, which is 2 1/2 years behind schedule, is “a recipe for disaster.”

He said rising energy costs have to be paid at some point.

“Eventually the rising costs have to be met with rising rates.”

Liberal Energy Minister Jack Keir said it’s irresponsible to promise a rate freeze without knowing what oil prices will be in six months or when Point Lepreau will be back in service.

“Without knowing any of the unknowns in the electricity sector he’s determining right now that NB Power doesn’t need an increase,” said Keir. “I’m bewildered and don’t understand what he’s doing other than electioneering.”

Keir said the government has made efforts to control power rates by putting the various divisions of NB Power back together as one company and giving the energy and utilities board more teeth to regulate the utility.

He said the government is also continuing to press Ottawa to pay for cost overruns arising from the refurbishment of Point Lepreau.

The government attempted to sell NB Power to Hydro-Quebec last year in an effort to stablize energy rates. But the deal was scrapped earlier this year after the government faced fierce public outcry over the proposal.

Christine Dobby
Telegraph-Journal
August 23, 2010

Sector: Experts agree: David Hay’s comment regarding CIBC’s investment in nuclear project purely speculative

Is this the dawn of a new era of nuclear investment in Canada?

The former head of NB Power, soon to be installed as vice-chairman with CIBC’s investment banking team in Toronto, said in a recent interview that the bank might consider investing in a project such as the second New Brunswick reactor Areva Inc. is floating.

“These are enormous capital requirement projects, so I would hope that we’d be able to provide some capital to a project like that, you know, as it gets nearer to fruition,” said David Hay, who will join the Canadian Imperial Bank of Commerce (TSX:CM, NYSE:CM) on Sept. 7.

But energy analyst Tom Adams said in an interview these comments are likely “extremely speculative.”

When it comes to the utility sector, Adams said, “The banks are very active in marketing securities and offering loans – this is a big area of business for them and Mr. Hay, because of his background, has a special insight into the utility sector, what its borrowing needs are going to be, and how to manage them.”

But in terms of direct investment in nuclear projects, he said, “I don’t take these comments from him about potential investments in what is, at this stage, a speculative Areva reactor, to be particularly material.”

Adams said the prospect of investment by a large bank into a merchant nuclear plant, “a plant that’s created on a stand-alone basis and is selling its power into the market,” is “extremely remote at this point.”

Canadian banks have long been involved with the nuclear industry in Canada, according to Adams. However, he said they have gone into those projects “shielded from the consequences” by loan guarantees and other protections from governments, which have almost always been involved in Canadian nuclear projects.

“The repayment record is outstanding for those investments because they’re all taxpayer guaranteed,” Adams said.

Bruce Power in Ontario, Canada’s first privately owned nuclear generator, is owned by a handful of private investors.

Norm Rubin, the director of nuclear research at Energy Probe, said it’s conceivable that banks were involved as “lenders or facilitators,” in that project but said he does not think any were involved as direct investors.

As for the prospect of CIBC investing in a reactor project with Areva in New Brunswick, Rubin too is unconvinced.

“Maybe CIBC will join the list of gutsy nuclear cowboys that used to have money – I hope not, you know, we need banks in Canada,” he said.

Rubin said that nuclear projects have a track record of disappointing investors.

“This is a technology whose capacity to break your heart is almost unlimited and I think most investors know that.”

Toby Couture, an energy analyst now based out of London, England, said in an email that he takes Hay’s comments to mean CIBC would do its due diligence, examine the business case and consider whether investment makes sense.

“As I see it, no bank is going to invest in nuclear projects in North America without corresponding guarantees similar to those being offered in the U.S. – loan guarantees, guarantees on the power purchase agreement and so on,” Couture said.