Owning the Power
Posted November 25, 2012
Nova Scotia is not the only jurisdiction where politicians enthusiastically criticize their power utilities. New York Governor Andrew Cuomo has had especially harsh words for the Long Island Power Authority which has made a hash of recovery efforts from hurricane Sandy.
It is, however, somewhat awkward for the Governor that the authority is owned by the State of New York, and that the board and many management positions are political appointees. In other words, he is the one who has high level responsibility for the mess.
Nova Scotians are unhappy with their power rates. The latest survey from Hydro Quebec shows why: Halifax has the highest residential power rates of the twelve Canadian cities that appear in the survey.
Premier Dexter suggests that if only NSPI had not been privatized, these problems would not exist. But New York is not the only place where publicly owned power utilities have embarrassed themselves and their governments. New Brunswick Power has had huge cost overruns and delays on its Point Lepreau refurbishment. Manitoba Hydro (which was hired by the Newfoundland government to support the Muskrat Falls project) has proposed its own large hydroelectric project. But the Manitoba government has asked its Public Utilities Board to examine whether a natural gas generation alternative would be more cost-effective.
Politicians spend a lot of time talking about high executive compensation as if that was the cause of the high power rates. A little simple arithmetic shows that in fact its impact is rather small.
In fact, government policy is a much more important factor. It is not coincidental that power rates in the last five years have gone up the fastest in Ontario and Nova Scotia. Both provinces have arbitrary goals for renewable electricity generation which add to the cost for consumers.
An even more fundamental consideration is the way NSPI earns its profits. This is determined by the return (currently a little over 9%) on shareholder investment in power generation and transmission. So NSPI maximizes profits if it maximizes the number of these projects and the proportion of shareholder capital (as opposed to much less expensive borrowing) used to pay for them.
It is therefore not surprising that Emera/NSPI have little appetite for importing electricity from New Brunswick or Quebec. By comparison, the Muskrat Falls project allows Emera to profit from an investment of well over $1.2 billion (how much over we still have not been told). One suspects that the great enthusiasm for Muskrat Falls and related Maritime Link would suddenly disappear if the investment in construction and transmission lines were to be done entirely by Nalcor, Newfoundland’s power utility.
What if the Maritime Link were to be financed instead by the Province of Nova Scotia, at today’s rates which are well under 4%? It might save ratepayers close to $40 million per year. Are the risks that Emera is assuming really worth that much to electricity customers?
The point here is not to deprive Emera/NSPI of any profits. It is to argue for a change in structure, so that the utility is rewarded for finding lowest cost alternatives rather than the highest capital spending.
This is a policy issue. This is where government can make a real difference without having to spend much money.
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