Thursday, 7 April 2016

PUB SHOULD SAY "NO" TO AT LEAST PART OF PROPOSED RATE HIKE

When the "expert witness" for Newfoundland Power gave testimony to the PUB on April 4, 2016, in support of Newfoundland Power's (NP) General Rate Application, one part of the evidence was disturbing in its clarity. NP is seeking a rate increase with effect from July 1, 2016 of 3.1%. If granted, the increase will up NP's return on equity to 9.5%.

This piece will not deal with whether NP's Application is reasonable in its entirety. Of interest, here, is the Utility's claim to a risk premium and its rationale justifying the higher return. Roughly a third (0.9%) of the proposed 3.1% relates to this demand.

Readers may recall that prior to Muskrat Falls sanction some people, including this Blogger, suggested the Province's electrical distributor should weigh in on the debate over Muskrat. Newfoundland Power stayed mum. But since DARKNL, NP has expressed a flood of concern, and with an urgency larger even than a Spring freshet on the Lower Churchill.

The Company has belatedly discovered that its financial interests are threatened by Muskrat Falls. Newfoundland Power decided to join members of the 2041 Group and others, to support a request for an expanded Terms of Reference of the PUB's Inquiry into the cause of DARKNL.

At issue, among other things, is reliability and security of the electrical supply from Muskrat Falls, recognizing that Nalcor proposes to shut down the Holyrood generation capability, and that the Labrador power will be delivered over an 1100 KM. transmission line.

Said NP in its Submission: "the eastern part of the system (the North East Avalon) is also the location of the largest and fastest growing loads. Following the commissioning of the Labrador in-feed....it is not clear how long-term reliability and security of power supply will be maintained at that time".

There is the matter of "technical uncertainty" and NP has invoked the problem of rural population decline, too. But Newfoundland Power has another concern; something called "demand compression".

The Utility expects that the high cost of Muskrat power will reduce electricity sales and thereby increase the Company's capital risk. Low electricity consumption will reduce NP's revenues and profitability. The Company wants to be compensated for that higher risk and it wants that compensation to start July 1st.

NP acknowledges there is only one source of revenue. Compared with populous Ontario, which refurbished the Darlington Nuclear Plant at an enormous cost, this Province has only 300,000 ratepayers to shoulder the $9.05 billion financial burden of Muskrat Falls.

While the assertions are self-serving for NP, the Company is a credible entity and offers, at least, the value of perspective; whether one agrees with it or not.

The following is from pp. 18-20 of the PUB transcript wherein Mr. Ian Kelly, representing the PUB, is examining Mr. James Coyne V-P Concentric Energy Advisors; a Consultancy. He is an "expert witness" representing NP.

You might note that the cost and risk which the "expert witness" describes is actually your cost and your risk, too, as ratepayers. Don't race past the top of page 20. You won't want to miss a word:   






Rather startling declarations, aren't they?

Muskrat Falls represents "360 percent of the rate base of Newfoundland Power and NL Hydro combined (currently $2.5 billion)......"  (the "rate base" is the value of the assets on which the utility is permitted a rate of return, prescribed by the PUB, as the regulator).
Then there are the comments of Mr. Coyne: "...four to five times differential in its relative impact on customers....no other North American utility exposed to this level of risk....Nalcor projects over 50 percent price increase..."

If only the NP's parent, Fortis Inc. and its former CEO, Stan Marshall, had had the balls to speak up when his customers needed him to do that, prior to sanction.

I suggest, in consequence of not having the balls, the PUB should deny NP the part of the increase attributable to its claim to enhanced risk.

Companies need to understand, while their first responsibility is to shareholders, the interests of customers should not be ignored in that pursuit. Besides, in this case, NP badly miscalculated in not recognizing that the "shareholder" and "ratepayer" interests are perfectly aligned.

Such a lack of good judgment does not warrant reward.

While we thank NP for belatedly confirming what others tried hard to get them to acknowledge about the Muskrat Falls project, long ago, the PUB needs to remind the Utility that screwing up has its costs.

Newfoundland ratepayers will pay dearly for Muskrat Falls. That is a certainty.

But they should not have to pay for the same error twice!

18 comments:

  1. Bravo... Fortis have committed a great error here. By their silence, they were a willing accomplice to this Muskrat Falls fiasco. Now they seek a higher profit due to the increased risk the project will bring to their sales and revenue. That is not how a regulated utlitiy works. Their profit as a percentage (not absolute dollars) is relatively risk free. Their profit in terms of percentage should be linked to bond yeilds, etc. It should be decreasing. The return on equity they are requesting, for a risk free investment, is too high. To say their investment is now riskier, and their profit should be higher is what gives corporations a bad name.

    There should be no increase.

    In fact due to lower bond yeilds, lower inflation, and indeed threat of deflation, NP should actually be making a lower rate of return now compared to what they have made over the last 20 years.

    Our electricity system in this province is in a crisis. Part of the problem is that the PUB is filled with political appointments. The PUB is part of the problem.

    It is time to put competent people in charge of the PUB, and Nalcor. Merit based appointments, instead of politics, and nepotism.

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  2. Well worth the read Des. While it is commendable to point out that NP did not, early on, bring up the risks associated with Muskrat that they now highlight and that, accordingly, they now request that the PUB mitigate by way of a rate increase (and NP is indeed deserving of criticism), I think you are, in effect, letting government off the hook by suggesting that NPs duty to its customers is equivalent to its duty to its shareholders. While I would perhaps wish it were so, I think that that position is not well founded --- in short, nice to think about, to wish for, to want, but in truth that duty was and is first and foremost a duty, responsibility, obligation of government (and Nalcor). That is where 99% of the blame belongs, and we must not lose sight of that (let's not allow NP, or the PUB, to become scapegoats for government's/Nalcor's intentional, deceptive, immoral disregard for its own citizens/customers.

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    1. You are quite right, Anonymous, the Government and Nalcor should not be let off the hook for Muskrat. Neither should Fortis or its subsidiary, Newfoundland Power, become a scapegoat for their decisions. However, as any reader of this Blog can confirm, Nalcor and the Government has been held to account repeatedly for Muskrat, certainly on this platform.

      That said, there are a good many who must share some of the responsibility for the decisions taken; especially individuals and Companies who possess an expertise in matters of energy distribution, finance, engineering, and large scale construction. NP and its parent, Fortis, is certainly one of those.

      While other individuals and Companies, as a matter of choice, did not exercise what some would regard as their civic duty, (some were boosters of the project) NP's obligations, as one possessing specific expertise, are magnified because it possesses this expertise and because every rate payer contributes to NP's business/customer relationship; thus enhancing the long term financial interests of the Company.

      NP has worked hard to build an image, over many decades, as an important member of this community.
      It is fine to be a good corporate sponsor; but is that merely about "image", the "photo-op"?

      When a society needs a qualified corporate citizen to speak up at a critical time, one in which its financial integrity is challenged by unwise political decisions, and Muskrat sanction was surely one, yet the Corporation refuses the challenge, its sincerity should be called into question. Its responsibility to customers, and it does have one, is ignored. In such a case the customer is nothing more than a revenue generator, as befits the bottom line.

      When a company fails in its civic duty, censure is appropriate.
      We should not scapegoat NP, or lose sight of who, ultimately, is responsible; but we should point out Newfoundland Power is a Company that has failed the whole Province. People can debate whether it deserves censure. But, I suggest it most certainly does not deserve reward.

      For that reason the PUB should reject Newfoundland Power's Application for a rate hike.

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    2. I agree. NP is one of many who should have stood up and NP may very well have had a special responsibility (given its expertise) to do so. As a customer, it is hard for me to see how NP should now be compensated for an increased risk which they should have foreseen and perhaps could have helped prevent.

      Keep up the great work Des. Maurice Adams

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    3. I heard through fairly reliable sources that NP thought MF to be so ridiculous that the project would be shelved before it even became reality. If true NP, and specifically Mr. Stan Marshall, should be held to account. Mr. Marshall, by his silence, failed both the ratepayer and shareholders and an explanation should be demanded. Keith

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  3. Did not intend for my 10:48 comment to be Anonymous --- Maurice Adams

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  4. Of little notice in these hearings is the CDM(Conservation Demand management) study by ICF International and the Mini-split heatpump Research Study ( the latter filed with the PUB just on Apr 1, 2016, after an order by the PUB 3 years ago.
    As expected, Nfld Power suggest these systems will not save on system peak demand, contrary to many studies and manufacturer's data.
    Doing my own research on these, the last two night we have electronically monitored an operation (called Co-operation) where one uses the heat pumps and then go to baseboard heaters. The result: an increase of 7kw with baseboard heat. As this is a fairly large house, an average house could expect a 2kw reduction on peak load (Nfld Power suggest a 0.5 kw increase in peak load)
    The issue is whether these should receive incentives as was done in Nova Scotia and new Brunswick. Beyond peak demand reduction, there are very large energy savings for customers, typically 60 percent reduction on heat energy and over 30 percent on yearly energy whole house energy bills.
    When viewing Nfld Power loyalty to shareholders and customers; assess their record on keeping Nflders in the dark on this. Their study shows some 4000 of these now in Nfld, 65 percent make a decision by word of mouth by a neighbour or friend, 5 percent heard about them from the power companies!. About 90 percent are very favourable as to energy savings and operation. Have not seen their report listed in exhibits at PUB yet, I got it 2 weeks ago. It has some merit, but not research as one might expect from engineers. They propose no incentives! That's good for shareholders, not so good for customers.Nfld Power is to be cross examined by Tom Johnson on this issue on Apr 12. Winston Adams Logy Bay

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  5. I disagree with Maurice as to Nfld Power duty; it is mostly to shareholder, and customers are only a concern when going forward when very large rate increases, customers will substantially reduce their use of electricity and a loss of revenue to Nfld Power. Nfld Power has traditionally enjoyed a good favourable opinion by customers, and as long as that is 90 percent they little care about meaningful savings to customers in efficiency measures, as this keeps their revenue high. They continue this approach. No change there. Their duty there has and continues to be the shareholder, not the customer. I agree with Des, Nfld Power had an opportunity to speak out on the risks of Muskrat Falls and didn't. They are equally if not more responsible at forecasting future energy loads and peak demand, which they are now showing much lower than forecast. Winston Adams

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  6. For readers who may be interested in saving on their power bills, and the few who wonder if mini-split heatpumps can actually reduce peak demand (as this is important whether rotating outages are necessary during cold weather) I make these comments;
    Maurice has produced a chart on his web site Vision 2041 which shows him saving energy and also suggesting a reduction of peak load during winter. I say "suggesting" because, his meter reading indicate a monthly average, whereby a peak demand may occur on one particular cold day, which his average does not identify that peak.
    Real time monitoring with recordings in 5 minute intervals and showing hourly average do indicate conditions at peak times.
    This is what has been demonstrated for the past 2 nights.
    Last nite, at about 0 degree C, a COP of about 4.7 was recorded, meaning baseboard heaters were using 4.7 times more energy.
    The night before, at about -8C , the COP was about 3.6 , meaning the baseboard heaters were using 3.6 times more energy.
    Projecting this to about -18C, we can expect a COP of about 2 at those conditions.
    For an average house using 4 kw of heat, this means only 2 kw is needed at -18C. For 160,000 residential units in Nfld, this is a reduction of 320 MEHAWATTS, on our system, no small amount, assuming my calculations are correct...... please correct me if some error here. Nova Scotia promotes this as a HEATING REVOLUTION. New Brunswick gives incentives just because they reduce their system peak demand ( which is much less severe as ours) Winston Adams

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  7. Would you expect to heat a large house with a toaster? 3300 sq ft plus a 300 sq ft garage. R2000 yes, but with a toaster or equivalent? Well last night , at 0 degree C, as referenced above, this house is operating with 3 outdoor minisplits with 6 indoor heads, one of which serves the garage. At a load of 1400 watts total for all 3 units, each using less than 500 watts. just checked my toaster, it says 900 watts. So, not equal to one toaster, but less than 2 toasters. REMARKABLE, IS IT NOT? These are Panasonic dual head units , but several others brands are also excellent.
    Winston Adams

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    1. What are the BTU's of your Panasonic dual head units?

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  8. I have a Daikin multi split (four zones, inverter driven) and it is powered on a 20 amp, 220 volt circuit. It can heat the house on the coldest days and has never cut out due to low temperatures in its 2 years of service. The most it can draw is 20 amps (about 4400W) so that is the theoretical peak since any more and the breaker would trip. If instead I use my electric baseboards, the worst case is having about 10,000 Watts of baseboard on simultaneous. This 10KW peak is certain to happen after a rotating blackout since the whole house would be cool and all thermostats would be simultaneously triggered. Using heat pumps drastically reduces peak demand.

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  9. I made a boo boo, as I sometimes do. I said the unit used 1400 watts. It recorded 1000 watt total for all 3 units. This implies units are so lightly loaded they now cycle. So closer to the toaster load of 900 watts. maybe some toaster use more than 900 watts.... but th etoaster comparison is valid for 0 degree C for such a large house.... REMARKABLE.
    As to the Daikin unit, 4 zones in my opinion is undersizing for our area, but not by much. At real cold temperature, at a COP of 2, your unit may need 5000 watts to replace 10000 watts of baseboard. It undersized some you may lose some efficiency , but only at extreme cold conditions. Winston

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  10. I heard from sources close to Fortis that the MF project had them pondering the balance being a good corporate citizen against their duty to shareholders. The fear was that if they went public against the project that this vindictive government would pass legislation that would punish them and harm their shareholders.

    The 2012, the following was added to statues "a retailer or an industrial customer shall not develop, own, operate, manage or control a facility for the generation and supply of electrical power or energy either for its own use or for supply directly or indirectly to or for the public or an entity on the island portion of the province."

    This is quite something to shove through on December 22 when people were preparing for Christmas. I think GovNL was worried that the refinery might use waste gas to run their own turbines if electric prices got out of hand. Or perhaps if prices soared, renewable sources might take off and they needed to nip wind farms in the bud.

    I think what Fortis did (choosing profit over people) was amoral but not expected.

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  11. To Bernard Waye: the capacity of the Panasonic with 2 heads running is 20,200 Btu rated capacity but max capacity of 24,600 btu , for heat pumps these are rated at 47F conditions, not low temperature , whereby they produce less capacity as the temperature goes lower. They are rated at minus 15c but run lower than that. Also they have blue fin (very important for salt resistance,it triples the life of outdoor fins agaiinst salt corrosion, Some other makes have this, some do not. Highly recommend blue fin. Two capacities of indoor heads are available, I recommend the higher capacity ones. These units have HSPF of 8.8 Running amps at rated capacity 8.1 Power input at rated 1850 watts. Min power input 420 watts. As you can see from the set up in the house noted, at 0 C temperature they are at real min capacity. It may appear that they are over capacity, but at -20C they are very capable and do not overload. The advantage of excess capacity is that they always run at below rated capacity, and due to this the performance is better then the factory rates them. This is proven by Usa testing labs. It is a big bonus in operation, and most minisplits has this capability. Contractors generally undersize and homeowners often get half to 75 percent of savings possible with correct sizing.If units overload at cold conditions then they do little to reduce the power system peak load. That means Holyrood or gas turbines running. Unfortunately, I expect 90 percent of installations are somewhat undersized, but still save the customer a lot on their bill. Winston

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    1. Thank you for the reply, as always a clear succinct response.

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  12. On your prior article on PP3 arrangements: I notice in On Site magazine that there is a 330 million law suit over the McGill University contract, the contractor saying the owner caused delays etc...... and I wonder where such things will lead wit Muskat falls delays.

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  13. Lawsuit article (globe and mail link) --- http://www.theglobeandmail.com/report-on-business/snc-and-partner-file-330-million-lawsuit-against-mcgill-university/article29491164/ Maurice Adams

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