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Thursday 31 August 2017


When government agencies engage in self-aggrandizing claims, they really should try to support them with something more than rhetoric.

The public awaits PUB approval of a NL Hydro sponsored electricity rate increase of 6.6% in 2018 and another 6.4% in 2019. The PUB has adequate reason to reject at least a part of the request.

Hydro’s Rate Application (Vol. I, page 3.5) reads that the rates increases are necessary because: 

Hydro has prudently increased investment in its capital program. In 2016, Hydro spent approximately $204 million on capital work (infrastructure). In 2017, Hydro plans to spend $370 million. These investments, including the new transmission line TL267 from Bay d’Espoir to Western Avalon, are necessary to secure the long-term reliability of the system for Hydro’s customers. (bold added)  

On its face, the reader might think that the Crown’s “regulated utility” as distinct from Nalcor, which is not subject to PUB rules has carefully looked after the public interest. An independent review of Hydro suggests that Hydro behaves no differently than its parent as far as prudence is concerned.

How do we know that? 

Because the PUB had the Liberty Consulting Group conduct an independent review of Hydro's management, planning and forecasting history, and maintenance records. The analysis was something pretty darn close to a forensic audit (which didn't shut down the operation, as Stan Marshall asserts about auditing the Muskrat Falls project).

The Liberty Group confirmed that DarkNL and other outages occurred because NL Hydro was incompetently managed.

Liberty cited failures in the “operation of key transmission equipment”, including a failure to replace “transformers” and maintain “major circuit breakers”.

The Report reads: “... shortage of generation capacity... raises questions about Hydro’s operation” that it “did not complete recommended maintenance activities on the equipment that failed…”

Now, let's return to Hydro's assertion that prudence underscored the proposed rate increases.

The Application notes that, between 2015 and 2019, Hydro will spend an average of $210 million per year on capital works (page 3.43) and, from 2017 to 2021, an average of $194 million annually.

To pay for these expenditures, 2018 billings required from NL Power customers will grow to $452.8 million from $412.7 million in 2017, representing an increase of 6.6%.

In 2019, NL Power will need to increase the billing to ratepayers again (raising the sum necessary to service Hydro’s fast-growing debt and NL Power’s operating costs, subsidize industrial users and remote rural customers using diesel) to $498.5 million; hence, the second increase of 6.4%. Taken together, the increases represent a rate in 2019 of 12.03 cents per kWh plus HST, or 13.83 cents per kWh.

The reader should bear in mind that this rate does not include the cost of the Muskrat Falls project. NL Hydro has spent capital to beef up the Island system to accommodate Muskrat power which bolstered the need for higher rates, too.

The capital works also involve a multiplicity of upgrades throughout the island grid system that were deferred by Hydro. Taken together, they are putting upward pressure on power rates which, alone, destroy the thesis that the original cost estimates on Muskrat on a blended basis could be absorbed by ratepayers.

The third transmission line to the Avalon from Bay d’Espoir is also financed in these numbers.

On the issue of prudence, by Hydro’s own admission, the third TL was needed several years ago due to the growth in electrical demand on the northeast Avalon, and because it would reduce fuel consumption at Holyrood. When first pursued, oil prices were much higher than they are at present, giving the investment an immediate imperative. 

But NL Hydro repeatedly delayed the Application to the PUB possibly fearing that the equivalent of 176MW being spilled in Central Newfoundland would weaken the justification for sanction of the Muskrat Falls project.

Formally, an Application arrived in the offices of the PUB in 2011, just prior to its submission of Muskrat.  Preferring that the PUB hear the Muskrat Application first, Nalcor withdrew the request for the Bay d’Espoir TL upgrade. 

Back then, Hydro estimated the capital cost of the TL at $204 million.

What is the cost of the TL now, you ask?

The new number is $292 million (source: page 3.5 of Hydro’s Rate Application). The figure represents a difference of $88 million to be tacked on to the rate base which the public will be expected to pay for, even though there is no evidence that the delay was a prudent measure. 

The scheme to favour Muskrat shows up in a multitude of places. The extra $88 million is in addition to the equivalent of millions of dollars of spilled water which occurred as Nalcor froze up the political and regulatory process with its own mind-numbing falsified plan for Muskrat.

Therefore, when Hydro (or its parent) makes any claim about prudence, you should know that that attribution lost any appeal to the truth a very long time ago.
Troubled Waters: Nalcor Spills Millions

What is the point of recounting Hydro's culpability?

The PUB has the right under the Electrical Control Act to refuse any costs Hydro wants added to the rate-base found to be neither legitimate nor reasonable. In this context, costs generated as a result of incompetence, wilful neglect, or conflicts of interest warrant a similar response. Notably, for the very first time based upon the findings of the Liberty Report the PUB refused Hydro some such costs last year for reasons of imprudence”. 
Hopefully, the Board has not lost its resolve to hold Hydro to account.

Two more points are worth noting: First, Premier Ball is telling people that he can’t let rates go above 17 cents per kWh. It is a false promise. The difference between 13.83 per kWh the rate that will be imposed in 2019 and Ball's 17.0 per kWh figure leaves an amount that is essentially a rounding error on the rate increase needed to finance Muskrat.

The galloping increases in capital expenditures by NL Hydro combined with the cost of Muskrat make the Premier's claims transparently unattainable. The Premier is not telling the truth.

Secondly, Hydro wants the PUB to create a “Deferral Fund” into which monies saved from fuel consumption at Holyrood from “off-island” sources (i.e. Upper Churchill Recall power) to “mitigate” post-Muskrat power rates.

Of course, the PUB has no obligation to accommodate either Hydro or Nalcor in this case. The request is simply inappropriate and unwarranted. 

The PUB is still under an Exemption Order on the Muskrat Falls project.

In fact, the Board recently completed a lengthy process at the end of which upon Nalcor’s repeated intercession and insistence the Grand River Keepers of Labrador were refused inclusion of a possibly unstable North Spur and a defeated Water Management Agreement. The PUB felt compelled to say that those matters were not within the scope of its Hearings into the issue of supply and the reliability of power on the Island.

Nalcor with the government’s approval shook off the scrutiny of the PUB following its decision not to approve the Muskrat Falls project in 2011. But the company still wants the PUB out of its hair; its independence a nuisance when accountability is sought.

Nalcor wants the convenience of Hydro’s “regulated” status AND to evade the scrutiny it abhors.

In short, the public should not let Nalcor pick their pockets without the obligation of first exposing its sordid history of abuse of authority, its litany of falsification for the purpose of obtaining sanction and its waste of public money. 

At a minimum, the Government should be forced to rescind the Exemption Order and allow rate applications on Muskrat to be adjudicated through the “front door”.

That is the battle for which the Consumer Advocate should now be girding. 

But, like the last one, the current Consumer Advocate leaves little doubt to whose tune he dances.

It will be worth watching if he falls in line with the wishes of Nalcor and the Liberal Government that appointed him, Dennis Browne having already capitulated to their dismissal of the call for an immediate forensic audit.