Competition Is A Great Way To Discipline Power Rates

Nova Scotia Power (NSPI) has picked an inconvenient time to ask for bigger profits. Customers are facing rate increases of 10% over three years. They are also being buffeted by spikes in costs for gasoline, foods, and housing.

Rate increases are vetted by the Utilities and Review Board. As noted in this space in February, the increases in rates are caused in part by increases in fuel costs and the government imposed requirement that coal plants be shut down by 2030, well before their useful lifetime. The profits increase requested by NSPI adds to the mix.

Capital costs are financed by a mixture of borrowing that has cost perhaps 3% and equity provided by Emera, NSPI’s shareholder. Rates are currently set based on a target rate of 9% with a range of 8.75% to 9.25%.

Emera/NSPI have asked that the potential range be increased to 8.5%-9.5% and to be able to receive half of any extra above 9.5%.

They have also asked for the equity proportion of the asset cost to be increased from a targeted share of 37.5% to 42.5%, reducing the borrowing share provided by a corresponding amount. Deploying this extra capital would increase their profits by 13%. The Maritime Link, held in a separate Emera subsidiary, is financed with 30% equity and 70% debt.

Speaking to reporters after Emera’s annual meeting in Halifax, CEO Scott Balfour said: “If Nova Scotia Power isn’t generating a competitive return for Emera shareholders, it gets very hard to be able to attract that capital so that those investments can be made on behalf of Nova Scotians in order to achieve the vision and the expectations that we all have of cleaner energy and more reliable energy.”

Emera’s comment seems to be a shot across the bow of the UARB as well as the government, which is keenly engaged with the matter. It is not immediately obvious why not being able to deploy more capital at the same rate they have been receiving is a problem.

In support of its position, Emera has commissioned reports claiming that the equity portion of capital is low compared to shareholder owned utilities in other Canadian provinces. They suggest that at current levels there is a risk of downgrades by rating agencies, resulting in increased borrowing costs for NSPI’s customers.

Evaluating the credibility of the reports is well beyond the scope of this space. But there may be other ways of addressing the issue.

The yet to be defined Atlantic Loop is crucial to any plan to eliminate carbon electricity generation. Emera was asked whether they would participate if the prospective returns did not meet their requirements. They responded:

“We remain committed to the Atlantic Loop project and our efforts to secure federal support to directly benefit customers. We believe the Atlantic Loop is the best solution to meet ambitious 2030 climate goals while minimizing the burden on customers in Nova Scotia and Atlantic Canada. We’re encouraged by ongoing discussions and hope to have something to announce by the end of the year—a timeline that’s important if we’re to meet the 2030 goals.”

Well, that’s sort of good to hear. It was promised in a throne speech 21 months ago. Those negotiations have dragged on far too long, but it may not be Emera’s fault.

They declined to indicate what kind of investments would not be made on behalf of Nova Scotians if the profits did not meet Emera’s requirement.

Many investors would find a reliable 9% return to be quite attractive. For example, Nova Scotia has sinking funds that are accumulated to repay bond issues when they mature. A 9% return is much higher than what the province pays in interest rates. Perhaps the difference could relieve ratepayers paying for hidden subsidies.

The pension plans for teachers and public service workers have combined assets of about $13 billion. One or both might be interested in small equity positions in NSPI.

The Maritime Link to Newfoundland was financed by 70% debt and 30% equity. Like it, the Atlantic Loop will mostly involve infrastructure outside of Nova Scotia. If Emera finds 30% equity to be unsatisfactory for the Loop, other parties could compete to provide the finances for the work.

As for new renewable projects within Nova Scotia, there is an existing method that invites wind farm proponents to compete for the right to develop new installations, none of which require much capital from NSPI. Large scale solar proposals should be made to compete within the same process.

None of this should be interpreted as an invitation to government ownership of NSPI. As it is, government interventions in the rate setting process have done more harm than good, almost always hurting ratepayers.

NSPI has a monopoly most of the time. Alternatives to them should be explored wherever possible. The outcome of a well-managed bidding competition is much more valuable evidence than any consultant’s report.

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Reference Material

Power Plays

Nova Scotia Power Inc. 2022-24 Financial Outlook (Redacted)

Nova Scotia Power Inc. 2021 Annual Report to UARB (Redacted)

Halifax Budget Committee 2022/23 Fiscal Framework

Environmental Goals and Climate Change Reduction Act

The Unintended Consequences of the Atlantic Loop

How Canada Intends to Achieve its 2030 Emissions Targets

Nova Scotia Power Integrated Resource Plan

Comments on NSPML Compliance Filing

Nova Scotia Utility and Review Board Decision

Maritime Link Compliance Filing

Comparison of Electricity Prices in Major North American Cities

NSPI 2009 Integrated Resource Plan Update Report

Summary of Existing Generation Plant

Comparison of Demand to Supply

Slides from recent NSPI Presentation

The Power Mess on Long Island

Primer on the Process of Hydraulic Fracturing

Nova Scotia Hydraulic Fracturing Review and Public Consultation

Contributions of Utilities Regulation to Electrical Systems Transformation: the Case of Nova Scotia

Nova Scotia Electricity System Review Report

 

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