NOVA SCOTIA UTILITY AND REVIEW BOARD
IN THE MATTER OF THE PUBLIC UTILITIES ACT R.S.N.S. 1989, c.380, as amended
-and-
IN THE MATTER OF an Application by Nova Scotia Power Incorporated and a Hearing for Approval of Certain Revisions to its Rates, Charges and Regulations
TO: Nova Scotia Utility and Review Board
3rd Floor, Summit Place
1601 Lower Water Street
Halifax, Nova Scotia B3J 3P6
c/o Nancy McNeil
Regulatory Affairs Officer/Clerk
FROM: Andrew Younger MLA
Nova Scotia Liberal Caucus
Bank of Montreal Building
5151 George Street
Suite 1401
Halifax, NS B3J 1W4
Public Submission
I submit my comments IN THE MATTER OF The Public Utilities Act, R.S.N.S. 1989, c.380, as amended IN THE MATTER OF an Application by Nova Scotia Power Incorporated for Approval of Certain Revisions to its Rates, Charges and Regulations: P-892/Matter 04104 being held before the Nova Scotia Utility and Review Board. I also offer these comments in light of the proposed settlement agreement published on September 19, 2011. I submit these comments as the Energy critic for the Nova Scotia Liberal Caucus, as a Member of the Legislative Assembly for Dartmouth East, and also as a citizen and ratepayer.
I also intend, in this submission to briefly comment on the Application by NewPage Port Hawkesbury Corp. and Bowater Mersey Paper Company Ltd. for Amendments to Nova Scotia Power Inc.'s Load Retention Tariff and for a Load Retention Rate: P-202/Matter M04175 as it relates to the general matter at hand.
Both of the current applications referenced above should be refused on their merits. Neither application is sufficiently supported by the evidence presented to be approved.
The settlement agreement as proposed in my view is only marginally better for ratepayers and does not address the critical issues of accountability and value for rates which are at issue in this hearing. The settlement proposal leaves the door open for Nova Scotia Power Incorporated to simply seek an increase in rates at a future date based on factors it is only temporarily removing in this agreement.
RATE OF RETURN
Nova Scotia Power Incorporated originally requested the board increase its allowed rate of return. NSPI already enjoys a generous rate of return compared to the stock market. This is evidenced in the fact NSPI parent Emera has routinely noted that NSPI is a substantial contributor to its own returns. The proposed decrease in the rate of return, while a start, does not address the issue at hand which is whether NSPI is entitled to such a generous rate given the level of risk which has been removed over times from shareholders.
For the sake of comparison, NSPI at its current rate of return is a very safe and generous investment for shareholders and investors. Data from the Dow Jones Industrial shows that the average returns of all stocks between 1899 and 2010 are approximately 9.4%, divided roughly equally between price increases and dividends. NSPI’s current return fits exactly in that average. This is despite the fact that the average return on the same index for the period 2005 to 2010 was a combined 4.2% (price plus dividend), and for a ten year period 2000 to 2010 was 3.1%.
It might be argued that the returns for NSPI should only be compared to other regulated utilities. In North America NSPI returns are in the middle of the pack by that comparison. When compared to Standard and Poor’s annualized returns for energy stocks over the past three years and five years, NSPI’s returns are generous to say the least. Standard and Poor’s lists the three year average return to August 2011 for energy stocks as a loss of 3.06% and over five years the total return was still only a positive 3.66%
NSPI argued their demand for a higher rate of return was warranted by a need to attract investment and stay competitive. There is no evidence that NSPI’s current rate of return hurt its ability to raise capital or other investments. In fact, there appears to be not a single project that NSPI can point to that they were unable to fund as a result of the current rate of return. While NSPI may suggest that a higher rate of return would result in lower interest paid on loans, this possible savings to ratepayers is dubious as it results in ratepayers being forced to pay higher rates to cover the increased rate of return itself.
If anything, the board should consider the fact decisions by the board, through legislation, and changes in relative responsibilities of Emera and NSPI, have resulted in less risk to NSPI and shareholders, thus making NSPI a more attractive investment which, if anything, warrant a significant reduction in a regulated rate of return, not an increase. These changes include the introduction of the Fuel Adjustment Mechanism which eliminated all risk associated with fluctuations in fuel cost for the company, as well as the decision by the provincial government to eliminate the risk for NSPI in power purchase agreements for renewable energy by appointing an independent administrator, and decisions by the board of NSPI to utilize Emera Utility Services as an apparent preferred supplier of installation services, something the board has previously commented on.
There was and is no proven benefit for ratepayers of Nova Scotia Power Incorporated in the demand for an increased rate of return. The settlement agreement moves to reduce the rate of return marginally, but the overall question of whether the rate of return is still too high given the reduced risk faced by NSPI remains unanswered.
MULTI-YEAR RATE PROPOSAL
Nova Scotia Power Incorporated has indicated a desire for a negotiated settlement with interveners and presumably the board, which would result in guaranteed rate increases for NSPI over the next three to five years. While this has been represented as providing predictability in future NSPI customer rates in all classes, this is inaccurate.
NSPI already benefits from the Fuel Adjustment Mechanism (FAM) which results in rates being automatically adjusted (most often increased) in relation to actual fuel costs paid by NSPI.
The effect of this is that NSPI would enjoy very little, if any, risk with multi-year guaranteed rate increases. NSPI would also enjoy the benefit of not having to appear before the board over the period of the deal. While such an arrangement would conceivably result in lower legal and regulatory costs for ratepayers over that period, those savings would likely be so small as to offer little practical benefit for ratepayers. With a multi-year rate guarantee provided by the board, NSPI would be assured coverage for expenses and would still have confidence knowing that should fuel prices spike, they would not be forced to absorb those costs as the FAM provides them automatic relief.
The board will recall that it has already approved rate increases for the coming years in an effort to smooth (defer) some of the underestimated fuel costs from past years which NSPI has previously sought to recover. The practical effect of this for ratepayers is that no matter what magnitude of rate increase is approved (if any) by the board in the current applications these will be added to already approved increases which are scheduled to take effect in future years and also, presumably, future adjustments resulting from the Fuel Adjustment Mechanism.
It is my position that NSPI has been less than forthcoming with the public, interveners, and the board by stating that a multi-year rate agreement would result in predictable environment for rates, when in fact this could not be further from the truth when the Fuel Adjustment Mechanism and previously approved, deferred rates, are considered.
Load Retention Rate: P-202/Matter M04175
The proposed Load Retention Rate is being considered as an add-on for this hearing. At a very basic level, Bowater-Mersey and NewPage Port Hawkesbury Corporation have suggested that they require a lower rate than proposed by Nova Scotia Power Incorporated in order to remain competitive.
This application proposes that all other rate classes pay more for electricity in order to accommodate this lower rate.
The applicants are applying under a provision which permits an application if a customer may switch their load to a competing energy supplier and thus negatively impact the stability and survival of NSPI’s system and finances. There appears to be no indication that the applicants in this case have plans to seek energy from an alternate supplier so the application could, and should, be refused on this basis alone.
However, if the board considers further the merits of the survival argument presented by the applicants, then the board is duty-bound to also consider the precedent such an application could result in.
There are many businesses, large and small, which are impacted negatively by high, and rapidly increasing, power rates. Each of these would be entitled to make the exact same application, and said applications should be approved if the application currently before the board is approved.
There is no question that high energy rates have impacted the economic viability of paper mills in Nova Scotia and elsewhere. It is also true that other businesses across the province have similarly been impacted by power rates which are uncompetitive with other provinces and states. Arguably most other businesses are impacted by a greater degree by the power rate spread than are either Bowater-Mersey or NewPage Port Hawkesbury Corporation. This is because the applicants already benefit from an interruptible rate for electricity.
This rate is premised on the fact that NSPI can request the applicants to shut down their facility should loads rise above what NSPI can provide at a given time. That interruptible benefit to NSPI has a market value which is factored into the rates already. Given the rarity in which NSPI triggers electrical shutdowns at these facilities, that market value may even be overvalued, yet the mills benefit from it, and in turn already enjoy lower power rates than some other jurisdictions which have similar facilities.
This is not to say that all electricity rates in Nova Scotia are not high. They are very high, in large part due to an over reliance on fossil fuels such as coal. However, the argument, as strong as it might be for the applicants that their rates are a burden, is much stronger for small businesses in the province that given the power rates they pay compared to other jurisdictions. It is also stronger for residential customers, which is not only an affordability issue, but is also an issue of economic activity as the high cost of living – including power rates – impacts the ability to retain people in Nova Scotia and thus maintain a workforce.
The applicants are faced by a myriad of challenges. These include an unfavourable exchange rate for their industry, a general decline in demand for high quality papers worldwide, a stubborn recession greatly impacting some of the applicants’ largest potential clients, increased costs associated with fuel, taxes, government fees and regulation, transportation, and labour costs which cannot (and should not be reasonably expected to) compete with some other jurisdictions. None of those, with the possible exception of some issues related to fuel, transportation, and regulation, are within the purview of the board. While electricity is certainly one issue, the recent bankruptcy filings by NewPage Port Hawkesbury Corporation and its parent company in the United States, indicate that the biggest issues faced by that company are related to demand and debt level issues.
The board should take note that in response to IRs filed as part of this hearing the applicants were unwilling to commit to maintaining staffing levels or economic generation even with the revised, lower, tariff in place. For this reason alone, the merits of the application are worth putting in question.
There is no NSPI ratepayer that is not facing a heavy burden as a result of past and proposed increases to electricity rates in the province. NewPage and Bowater-Mersey are no different. It is undeniable that they are faced with a burden brought on by steadily increasing costs, including energy costs. But this is true of all other rate classes, and the survivability of all businesses in the province – large and small – is worth consideration, not just two companies.
Demand by NSPI For Increases Resulting From NewPage Impacts
With the recent indefinite closure of the NewPage Port Hawkesbury plant Nova Scotia Power Incorporated has demanded of the board that it be granted permission to collect additional funds from ratepayers to make up for what it believes will be significant losses resulting from the closure. NSPI has also suggested that it should be granted permission by the board to collect security deposits from certain companies, or users of a certain size, before providing service to them. Modified handling of this issue remains in the proposed settlement agreement, however it is clear that NSPI still intends to charge ratepayers for costs which I submit could be avoided or substantially reduced. Both of these requests should be refused.
NSPI has previously indicated that the NewPage Port Hawkesbury plant accounts for approximately 13% of energy produced by the company. It has indicated a plan to keep all facilities and staff operational during the NewPage shutdown, though without fuel usage. NSPI does not appear to have pursued the option of selling excess energy onto the New England grid at a price equal to, or more likely higher than, what NewPage was paying NSPI. Such actions would in fact provide savings to all other ratepayers. In other applications NSPI and its parent Emera have stated there is a demand for energy in the New England market. If this is accepted as fact, there are opportunities for NSPI to reduce costs for ratepayers.
NSPI has also given every indication that it intends to proceed with the already approved biomass project in Port Hawkesbury. This will produce even more energy at a time when excess energy will already be available on the Nova Scotia grid. In deciding to proceed, one must assume NSPI has made internal decisions that there is a market for this energy. Therefore there must also be a market for the 13% of excess energy which will be available during the NewPage shutdown.
The request for a security deposit by large energy users by NSPI borders on the ridiculous. This has the potential to be a significant deterrent for new, large scale, economic activity in the province. Many large companies struggle with cash flow and this application is a direct attack on the cash flow of existing and potential companies which may consider Nova Scotia as an option for locating their operations. NSPI has the ability, like any other creditor, to appear before a bankruptcy process in the event of a company shutdown. NSPI has the option to cease delivery of services if a customer falls behind on payments to NSPI. There is no reason for NSPI to be allowed to put further burdens on economic development in Nova Scotia.
It should be recalled by the board that during the hearings on the biomass project which NSPI is now proceeding with, NSPI and NewPage Port Hawkesbury both independently responded to IRs submitted by the Consumer Advocate by indicating that there was little to no risk associated with NewPage ceasing operations. NSPI in the settlement agreement has gone the complete other way saying of Bowater-Mersey that “The future of Bowater Mersey Paper Company is also uncertain”. NSPI has proven it is not able to predict the relative economic strength of companies operating in Nova Scotia. It may be reasonable that it cannot make such predictions; however, it is also reason why NSPI should not be given the authority to levy security deposits.
The board must refuse these requests by NSPI insist that the company explore all options for raising new revenues outside of the existing rate base. This includes exporting any excess energy resulting from the indefinite shutdown of NewPage.
BONUS STRUCTURE
Nova Scotia Power Incorporated has indicated in the settlement agreement that it will cover the cost of executive bonuses through Emera and shareholders. They further indicate this is a one-year promise and may not apply to future years. In the current application I support the removal of bonuses from the rate base. However, the board should require that this be made permanent.
NSPI has indicated that the feel executive bonuses are a valid part of the rate structure. However, a review of the targets that must be achieved for bonuses clearly shows that bonuses are awarded almost exclusively for issues which primarily benefit shareholders, not ratepayers. This is the strongest and most damning evidence that shareholders should always be expected to pick up the cost of bonuses for NSPI executives. Ratepayers should only be expected to cover costs which clearly and demonstrably benefit them and the delivery of electrical service to customers.
DEMAND FOR STRANDED ASSETT FUNDING FOR LED LIGHTING
Nova Scotia Power Incorporated has demanded of municipalities and other lessors of street lights costs associated with the stranding of current incandescent roadway lights and their replacement, as per Nova Scotia law, with LED or other energy efficient lighting as provided for by Governor-In-Council. Provisions to this effect remain in the settlement agreement. This should be denied.
Nova Scotia Power Incorporated and Efficiency Nova Scotia Incorporated, as well as other entities, have previously stated before the board that load reduction will result in cost savings to NSPI and thus ratepayers. While NSPI has been quick to seek funding for the cost associated with accelerated depreciation (the stranded asset) it has not been quick, nor clear, on outlining the savings associated with decreased load on the grid.
These savings may come not only from direct fuel costs, but as well the reduction in load provides options for NSPI. NSPI can continue to produce the same amount of electricity and sell the excess at a profit for the benefit of ratepayers. Or NSPI could generate less electricity and take advantage of being able to meet environmental regulations for emissions with reduced requirements for additives such as sorbents and operation of electric and other pollution control systems.
It would also be expected that reduced energy usage as a result of the roadway lighting conversions combined with efficiency programs would extend the lifespan of current environmental and generation equipment as presumably it would not be operated at the same levels given the lighter load. These are cost savings which should come back to ratepayers, and one could reasonably expect these to more than compensate for the shortened depreciation of non-energy efficient roadway lighting.
SUMMARY
With respect to Nova Scotia Power Incorporated and the applicants for the Load Retention Tariff, there is insufficient basis to warrant approval of the rate hikes, new rates for interruptible industrial customers, nor addition burdens on ratepayers resulting from the indefinite shutdown of NewPage. The settlement agreement, which a marginal improvement, fails to address the major issues which ratepayers rightfully demand answers of NSPI for.
While the board is tasked with duties prescribed by the Public Utilities Act R.S.N.S. 1989, c.380, as amended with respect to the rate hearing, it also has a duty to consider the public interest. Nova Scotia Power Incorporated is a private company operating as a monopoly in a regulated environment. In the monopoly situation with a guaranteed rate of return there is little incentive for NSPI to find savings or efficiencies in their corporate environment. It is incumbent on the board therefore to force NSPI to find those savings and efficiencies. It is also the duty of the board to ensure that NSPI is held to account and that the needs of ratepayers are considered the priority.
The board will be aware that increases in rates for electricity have more of an impact that just a higher bill for customers in all classes. Higher electricity bills have a trickle down impact which I encourage the board to consider. Higher municipal rates result in higher municipal expenditures and higher property taxes. Higher small business and other commercial rates result in pressure on the price of goods and services (usually increases), or where price adjustment is not sustainable in the market, it can lead to layoffs. This has already been demonstrated in a recent demand to the board by gasoline retailers for a higher margin, in part to offset rising electricity prices. For universities, hospitals, and other institutions, the impact of higher electricity prices can be directly correlated to reduced services and higher fees. The result of these changes in that residential customers end up paying more than once for higher electricity prices as they not only face higher bills at home, but also face the trickle down costs in everyday expenditures.
The board can take a number of steps on a go-forward basis with respect to Nova Scotia Power Incorporated which I would encourage it to take.
· * Nova Scotia Power Incorporated should be ordered by the board to submit to a performance and value for money audit by independent auditors approved by the board. The results of this audit should be made public by the board and made available for public comment following its completion. Nova Scotia Power Incorporated should be required to report within 30 days of the audit’s filing as to how it plans to address any recommendations.
· * Nova Scotia Power Incorporated should be required to provide for and ensure a further separation of duties, overlap, and other matters from the parent company Emera. It appears that the companies are increasingly less transparent in the division of roles and responsibilities between the corporate entities. In light of increasing rates NSPI should be required to provide more transparency.
· * Nova Scotia Power Incorporated should be required to provide a 15 year rate outlook including forward-looking estimates on rate levels and anticipated dates where ratepayers in all classes are likely to expect stabilization of rates.
· * The application by Nova Scotia Power Incorporated for costs associated with the phase-in of LED or other energy efficient roadway lighting should be denied.
· * On the basis of comments and reasoning I have previously stated, the board can and should require that executive bonuses be considered a cost to shareholders and not applied to costs against ratepayers on a permanent basis.
· * Application P-202/M04175 with respect to the Load Retention Tariff should be denied in full on the basis that the situation faced by the applicants with respect to higher electricity costs is the same as faced by other classes, and therefore it is not appropriate to impede the economic viability of one rate class in an attempt to improve the viability of another class.
