New Brunswick

Poor planning at root of failed NB Power debt strategy, says expert

NB Power has used too much wishful thinking in its budget planning and, with the Higgs government setting a deadline of 2027 for the utility to pay down $500 million in debt, more realistic financial projections are needed from the company, its rate hearing heard Tuesday.

Robert Knecht blamed overly rosy projections of costs and expenses by utility planners

The Energy and Utilities Board is in the second week of hearings into NB Power's application to raise rates two per cent beginning on April 1. (CBC)

NB Power has used too much wishful thinking in its budget planning and, with the Higgs government setting a deadline of 2027 for the utility to pay down $500 million in debt, more realistic financial projections are needed from the company, its rate hearing heard Tuesday.

"We're running out of time," Robert Knecht, a U.S.-based utility expert and long-time observer of NB Power, said about the seven years it has left to fix its debt problem.

Knecht, a principal with Industrial Economics Inc. of Cambridge, Mass., who has testified at multiple NB Power hearings over several years, was hired by public intervenor Heather Black to review its latest application for a two per cent rate increase.

Under questioning from NB Power's lawyer, John Furey, Knecht told the hearing the utility's strategy of implementing low but steady rate increases over many years to build up profits and pay down its debt has failed to make much headway.

Knecht blamed overly rosy projections of costs and expenses by utility planners for the failure.

U.S. utility expert Robert Knecht told NB Power's rate hearing Tuesday the company has failed to pay down debt because its long-term financial projections are routinely too optimistic. (Industrial Economics)

"I would understand how a rational person could decide how the current mechanism isn't working and we need to use a different mechanism," said Knecht.   

"To me, we just need to fix the current mechanism to be a little less optimistic." 

Province sets debt target

Last November, the Higgs government sent NB Power a mandate letter telling the utility to treat debt reduction as its "first and foremost" priority and rid itself of at least $500 million of what it owes by 2027.

That has put the utility on the clock to reach what Knecht calls "a very difficult financial requirement" in a finite amount of time.

"The company needs to come in with a credible scenario that says, 'Here's how we're going to hit this target in the six or seven years we have left,'" he said.

NB Power has been working for several years already to reduce its debt load but without much success. It has, with some small exceptions, stuck to a plan of applying for a series of two per cent rate increases to slowly and steadily build equity in the company.

At its rate hearing in June 2015, NB Power executives projected those annual increases would be enough to whittle its debt down to $3.95 billion by March of 2021, an $889 million improvement over six years.   

Instead, at this year's hearing the utility now projects its debt in March 2021 will be $4.9 billion, almost $1 billion higher than planned.

What happened?

A host of unexpected problems with both expenses and revenues have eaten up much of the money generated by the rate hikes, and Knecht believes more realistic budgeting could have absorbed some of those misfortunes.

NB Power's Point Lepreau Nuclear Generating Station generated 10 per cent less electricity than projected during its first seven years after refurbishment. That has contributed to the utility missing several financial targets. (CBC News)

Vicious storm damage, poorer than expected performance by the Point Lepreau Nuclear Generating Station following its refurbishment, lower than traditional water flows through hydro dams and other problems have taken turns attacking NB Power's bottom line — downsides, Knecht said, the utility has a history of not properly planning for.

As an example, he pointed to current NB Power projections for the next 10 years.  

Those include modelling that assumes the Point Lepreau plant will have no further significant problems and the federal government will allow New Brunswick to impose lighter carbon taxes on NB Power generating stations than current federal rules allow.

The ice storm that ravaged northeastern New Brunswick in January 2017 cost NB Power $30 million to deal with, 10 times its storm damage budget for the year. (NB Power/Twitter)

"The things that I worry about are some of those big-ticket items," said Knecht.  

"Making sure that capacity factor at Lepreau reflects both upside and downside potential and that there is some reasonable assessment of what carbon costs are going to be and not simply using a forecast that just a best-case scenario." 

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