Political Meddling With Electricity Rates Is Counterproductive
Posted December 9, 2022
Premier Houston’s intervention on power rates is making a difficult situation worse. Here is why.
Start with your electric bills. They are calculated to pay for:
- The people who manage the power plants and transmission.
- The fuel consumed by those facilities, including federal carbon-based levees.
- The cost of electricity from other sources: independently owned wind farms, surplus electricity from solar installations, Muskrat Falls hydroelectricity, purchases from other jurisdictions when needed.
- Subsidies for customer efficiency projects
- Paying off previous investments in facilities.
- Profits for NSP
The Nova Scotia Utility and Review Board regulates NSP. Its role is to ensure customers receive safe and reliable service at just and reasonable rates.
Customers are able to support or challenge NSP’s proposals. Many groups do. Residential customers, small businesses, and large industrial users each have knowledgeable representations whenever NSP’s budgets or new investments are proposed.
Electricity prices are set based on a return of 9% on the shareholder equity part of investments in power generation and distribution. Variations from the expense budget will reduce or increase the profits; the possible increase is limited to what would raise the return on investment to 9.25%.
NSP pays penalties for service deficiencies such as excessive delays in restoring power after storms.
Fuel costs are volatile, so the estimates on which electricity prices are set for a year can be significantly high or low. That occurred in 2022. The spike in prices for coal, oil, and natural gas resulted in a $114 million deficit to be covered in future years, with interest on the balance paid to NSP.
This process is not perfect but it provides transparency and customer participation. It works best when politicians leave it alone.
Earlier this year, NSP asked that the potential ceiling be increased to 9.5% and to be able to receive half of any extra above 9.5%, and for its share of the profitable investments in new assets to be progressively increased. These changes would have increased NSP profits by $100 million by 2024.
The provincial government barged in before the UARB had a chance to rule on NSP’s proposal. Legislation tabled on October 19th restricts the rate increases the UARB can grant to those needed to pay for fuel and to improve reliability of the grid. Any increases related to reliability cannot be more than 1.8 per cent over two years.
Given the spike in prices and the carryover from 2022 the rate increases due to changes in fuel costs will be significant. “Fuel costs are unavoidable — they have to be paid,” said Tory Rushton, Minister of Natural Resources and Renewables.
On November 25th NSP announced an agreement with representatives for residential customers, small businesses, and large industrial users among others. It would mean residential customer rate increases of 6.9 per cent in 2023 and 6.8 per cent in 2024. It also withdrew NSP’s request for a higher profit ceiling
That excess over 1.8% is entirely due to increases in fuel costs and spending on customer efficiency projects. Customer advocates worry that it is not enough. Their support of the agreement does not bind the UARB but it is influential.
Premier Houston’s actions have already damaged the interests of ratepayers. Downgrades by agencies that rate NSP’s debt, attributed to political interference, mean that borrowing costs will be higher for years. His intemperate November 28th letter risks causing further downgrades.
He is contesting the need for more money for fuel. Maybe he didn’t get the memo from Minister Rushton. In 2022 fuel has cost $114 million more than budget. That has to be recouped and prices for 2023 are still high.
Houston asserts, with the benefit of hindsight, that NSP should have hedged coal costs. Was NSP supposed to know more than 12 months ago that Russia was going to invade Ukraine?
He likewise blames the UARB for approving the Muskrat Falls deal in 2013. This space opposed that contract but acknowledges the considerable constraints put on the UARB’s choices by the then NDP government. Political interference hurts ratepayers.
Houston’s letter has some valid arguments, but he appears to think that this is a battle in which NSP must be vanquished. He claims that the UARB’s purpose is to “Protect Nova Scotians.”
That is not how the Board operates. Its role, as quoted in Houston’s letter, is “to ensure customers receive safe and reliable service at just and reasonable rates.” The UARB understands the need to support customer interests while keeping NSP viable. So do the customers.
Rating agencies rightly worry when politicians go on crusades against regulated utilities. If Houston keeps this up there could be further downgrades, in which case NSP will struggle to obtain new loans at any price from its traditional lenders.
Heavy-handed political interference is toxic. Tying NSP to a whipping post will not protect Nova Scotians. Houston has made his arguments. To avoid further damage he should declare, well in advance, that he will respect the UARB’s decision when it is announced.
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