PlanetNL11: A Fair Rate Concept for Post-Muskrat
Premier
Dwight Ball has been justifying a massive rate increase to 18 c/KWh as fair
because he suggests it is comparable to rates paid in our neighbouring Atlantic
Canadian provinces. Such logic might
succeed if only it were true: in the last PlanetNL post, it was clearly
demonstrated that the expected rate in those provinces would be 12 c/KWh.
The
Premier’s admission of error has not been heard, therefore it appears Ball is
sticking to his plan to punish ratepayers despite the widespread harm it will
cause.
In
this post, a case is developed for a post-Muskrat rate that would be fair to
ratepayers. But it’s sure to be a solution the politicians will fear. The outcome may shock many. The future
proposed rate is coincidentally - and surely to Premier Ball’s chagrin - 12
c/KWh.
Muskrat
Was Not Approved By Ratepayers
NL
ratepayers are represented by the provincial Public Utilities Board (PUB). Utility boards are required to review all the
plans of the utility and to demand that the case for investment in new
infrastructure is both necessary and the least cost approach. In the case of Muskrat Falls, the existing
legislation that would have had the PUB do an extensive evaluation of Muskrat
and all possible alternatives was denied by a political act from Government
with the passing of a piece of legislation excluding Muskrat from review.
If
given the opportunity, would the PUB have approved Muskrat? Not a chance.
There is little reason to doubt that the PUB would have rejected the
elaborate and confusing Muskrat economic justification produced by Nalcor and
approved by Government. Their analysis bore
no resemblance to conventional utility submissions for capital work. Had Nalcor been ordered to reformat its
calculations using conventional engineering project economic assessment
methodology - while using a correct load forecast (not inflated by 50%) - and to
give consideration to a broader set of alternatives, Muskrat simply would not
have seen the light of day.
Muskrat
was a political project created by overzealous officials elected by an
overwhelmingly misled public. Ratepayers did not elect Muskrat on a ballot and
the PUB did not approve it in a hearing.
There is no evidence in the least that suggests ratepayers are
responsible for project sanction and the massively increased cost of service
resulting from Muskrat. Despite these
facts, the current group of politicians in control are eager to pin a large
share of the burden on ratepayers.
True
Cost of Service Numbers Emerging
NL
Hydro recently submitted a document at the General Rate Application hearings
ongoing before the PUB. The Board demanded
a better explanation for Hydro’s strategy to start next year in collecting
revenues toward Muskrat costs before they are properly due in late 2020. Finally, some simple numbers are presented to
illustrate the grotesque error of Government’s forced sanction of the project.
Firstly,
the cost of running Holyrood was presented as a share of the energy rate when the
cost is averaged over the entire annual Island electricity sales. Holyrood makes up 1.8 c/KWh of the electricity
rate. This is broken down into 1.2 c/KWh
for fuel (on the assumption of average $85/barrel heavy oil costs) and 0.6
c/KWh for operations and maintenance.
Now
remember - the fundamental reason for Muskrat was to substitute for
Holyrood. It was supposed to be
cheaper. Instead, Hydro is now revealing
that before any Government subsidy, Muskrat will become a 12 c/KWh component of
the Island electricity rate.
Hydro
is now compelled to substitute a 1.8 c/KWh cost with one that is 12 c/KWh,
nearly 7 times higher. It’s insane.
This
is the simple bottom line analysis that Nalcor and Government couldn’t ever let
the PUB expose. It is why the PUB, representing ratepayers, could not be
allowed to decide upon the sanction of Muskrat.
Even had it been half the construction cost, and if oil cost doubled – mistruths
the PUB would have likely rejected – Muskrat would still cost at least double
that of Holyrood. It was never close to
being the right solution.
Allow
the PUB to Assess Eligible Costs
Proper
project screening principles suggest that a replacement for Holyrood could have
been found at the same cost or preferably less.
It is entirely reasonable to believe that such alternatives were
available just as other jurisdictions have done over the past decade.
On
the assumption Muskrat will successfully operate, the PUB should be directed to
hold a hearing to evaluate the most likely alternatives that were available and
identify a specific solution and calculate the cost of service. The board would then rule that this cost
shall be recovered from ratepayers while the remainder of the Muskrat investment
and costs would be ruled as imprudent and ineligible for recovery from
ratepayers. The utility and its
shareholder, Government, must bear the excess cost. Former PUB Chair David Vardy agrees this is a
legitimate and well understood solution in the practice of utilities
governance.
The
foreseeable domestic rate in 2021 would likely be about 12 c/KWh. Avoided would be issues of rate shock and
energy sales decline. Ratepayer revenue
would be stable. Government would also
beneficially exit the artificial rate mitigation game and improve its focus
where it needs to.
The
downside is the colossal addition to Government’s long term debt and a
substantial increase to the annual deficit.
It is vital, however, that the legacy of Muskrat debt should be parked
where it originated. The coming fiscal crisis needs to be fully represented on
the books of Government and not pawned off on ratepayers. A responsible Government would know this is
crucial to future negotiations. We could
only wish we had one.
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N.B. David Vardy, a former Chair of the Public Utilities Board, will be posting a related article, building upon the concept raised by PlanetNL. Look for that post on Wednesday.
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N.B. David Vardy, a former Chair of the Public Utilities Board, will be posting a related article, building upon the concept raised by PlanetNL. Look for that post on Wednesday.