Politicians Have Trouble Understanding Power Rates

Posted August 5, 2016

Both the engineering and the finances of electric utilities are devilishly difficult to understand. At the same time, the cost of electricity is politically sensitive, as is the environmental impact of any form of generation—including fossil fuels, nuclear, and renewables. Premiers meddling in areas that they don’t fully understand often create big problems for their provinces and for themselves.

Thus, Ontario created a large chunk of wind and solar power that was neither cost-competitive nor necessary, based on the existing fleet of generating plants. Leading up to the election of 2011, a pair of gas-powered plants were cancelled for purely political reasons at a cost of more than $1 billion, all of which will be covered by ratepayers. Ontario still has excess production which it is exporting at a price less than what it cost to create it.

British Columbia is building the massive Site C hydroelectric plant in the face of opposition from environmental and Aboriginal groups. The government hopes to export much of the resulting power to Alberta’s oil sands plants. In response to federal environmental approvals, members of the Aboriginal community feel that Prime Minister Trudeau has reneged on his commitment to the United Nations Declaration on the Rights of Indigenous Peoples.

Alberta has, meanwhile, decided to implement a carbon tax. Premier Notley’s government was surprised to discover that the independent power producers were not required to pay the tax unless they can pass it on to their customers. Bizarrely, the province is suing the Alberta Utilities Commission (in other words, itself) for making that ruling, which has been in effect since 2000.

The previous Progressive Conservative government of Newfoundland and Labrador (NL) bypassed its utility regulator to force approval of the Muskrat Falls project, which is now forecast to come in $4 billion over budget and three years late. This will be an enormous burden for domestic customers, whose rates are estimated to almost double—potentially adding $150 to an average monthly bill.

In Nova Scotia, the possibility of participating in the Muskrat Falls project has been championed by Emera and made possible by the previous NDP government. The tag line was that we would get 20% of the power for spending 20% of the cost on the Maritime Link, which provides transmission through Nova Scotia to access points to the New England grid.

Fortunately, we do not own any of the $4 billon overrun in NL construction costs—but we will still be impacted by the delay.

Emera makes its money by providing capital for projects. The greater the cost and the longer the time frame, the better it is for Emera. As long as the Utility regulator (UARB) approves the financial arrangement, ratepayers are on the hook for the payments.

The $1.56 billion cost of the Maritime Link is funded by capital from Emera that will be paid back over 35 years, a bit like a house mortgage. This might work fairly if the Muskrat Falls project and the Maritime Link project were completed at roughly the same time.

Apart from being overpriced, the power from Muskrat Falls was not needed before 2020, but NL insisted on a 2017 start. Ironically, the construction delays in Labrador mean that 2020 is when power will first become available.

The Link is expected to be finished in 2017 so Emera will be expecting interest to be paid starting then, even though the link is not being used.

Emera has been a steadfast and effective advocate on behalf of the Muskrat Falls project. They know the business and should have been as well informed as anyone about the potential for construction delays in NL.

Why should Nova Scotians pay for all of the interest on that $1.56 billon investment for two to three years if the transmission is being little used for their benefit?

The UARB has some scope to limit how much of the interest cost is being charged to ratepayers. It will be interesting to see what it decides.

Muskrat Falls