Power generation: how to finance it

A letter to the Editor: Regina Leader Post Wed July 18/07 by John R. McClement


Power generation: how to finance it

It has been reported that SaskPower's board will meet this summer to consider all options open to supply the rising demand for electrical power.
As important as that decision will be, the most important decision for Saskatchewan taxpayers will be how the government chooses to allow SaskPower to finance this multibillion-dollar capital investment.
Will the corporation be directed to return to the Crown utility model -- all debt -- or will it be allowed to continue partnering and using the business model of funding major capital investments: a debt/equity mix? In 1998, using the business model of financing, SaskPower chose to avoid the debt necessary to build new power plants and signed a deal to purchase the total electric output from 467MW of generating capacity being built in Saskatchewan by Alberta investor-owned utilities.
SaskPower's 2006 financial statements show that while the decision to purchase met the debt-ratio target, they as well show SaskPower is committed to pay $5.7 billion over the remaining 20 years of these 30-year power- purchase contracts -- a commitment $1.5 billion more than the corporation's total assets.
Moving to the business model of financing and partnering with the private sector has been a costly diversion for SaskPower. It has already increased the cost of power, which is reflected in the rates and the Crown has foregone the return on an investment of about $700 million. And over the term of the deal, it will likely cost Saskatchewan people in well in excess of $1 billion -- with no assets to show for it.
The shareholders of Alberta Utilities will be the big winners, a power sale with a guaranteed return for 30 years. Ironically, SaskPower doesn't have any customers under contract to purchase power for more than 10 years, if that long.
Simply put, the Crown corporation advantage is being able to totally fund its capital requirements through provincial borrowing. This gives SaskPower at least a four-per-cent advantage in the cost of financing capital investment over the debt/equity model.
SaskPower's priority, historically, has been to add new generation capacity as required and ensure the lowest cost of power. Up until 1998, SaskPower did provide power at competitive rates, developing the resources within the province to meet power demands within the province.
Most jurisdictions in Canada have found that debt-funded Crown utilities has been the way to ensure the lowest-cost electricity. Manitoba Hydro, with its cost of electricity about half that of Saskatchewan, has totally developed its hydro with debt financing.
Many billions of dollars of capital will be required to fund new power generation. And if power rates are to remain competitive with other jurisdictions, it is time the NDP directed SaskPower to return the Crown corporation debt-financing model. No more of this privatization by partnering with private sector companies.
And if the Chambers of Commerce are concerned about the cost of power for their membership, this is a change they should support.
The Leader-Post (Regina) Wed 18 Jul 2007 Page: B11 Section: Letters Byline: John R. McClement Source: The Leader-Post