Guest Post by PlanetNL
PlanetNL16:
Needles in Haystacks, Symptoms of An Ongoing Accountability Problem
Participants and followers of the Muskrat Inquiry and earlier
Muskrat reviews suffer simultaneously from information overload and yet a
dearth of the vital information they are often seeking. Nalcor and Government may have provided reams
of materials but much of it is window dressing that gives little insight into
key decision-making issues. Take for
example the Commissioner’s direct message to former Premier Williams that there
is no evidence of anyone inside Government performing a critical review of
Muskrat information supplied by Nalcor.
Too often it appears that the more important the issue, the
less there is to be found. In today’s
post we revisit the issue of post-Muskrat rates being based on a two-tier
declining rate scheme as a tiny but significant new nugget of information has
been found about it. Such a rate scheme
would be a huge change in policy and one deserving of considerable study, yet
it was buried in a mundane technical report with no basis of justification or
analysis to defend it.
….
The
Evidence
Back in August, the PlanetNL12 posting broke the news of a
two-tier declining rate scheme and credited Dwight Ball and Stan Marshall for
developing the notion and keeping it secret.
The only notion of proof it existed came in the verbal testimony of a
Hydro manager in rate application hearings at the Public Utilities Board.
It is now clear though, Ball and Marshall are not the creators
of this rate concept although it’s very apparent they like the idea and will
attempt to see it through. The recently
discovered evidence was found in a 2015 document therefore it was former Nalcor
CEO, Ed Martin who was responsible for approving the two-tier rate scheme.
The cover and title of the key document is provided
below. Consulting firm ICF was hired by
NL Hydro and Newfoundland Power to provide an assessment of Conservation and Demand Management opportunities in the province. There are near identical reports for the
commercial and industrial markets segments using the same data.
Recently revisiting the more than three-years old ICF report, some
numbers all too easy to overlook in such a technical document, suddenly
revealed their meaning. The simple translation is that NL Hydro and
Newfoundland Power provided ICF with the planned post-Muskrat second block
power rate and it’s a stunner – only 5 c/kWh.
What
Should We Make of 5 c/kWh?
In PlanetNL12, it was estimated that the two-tier domestic
rate would comprise a rate of 22 c/kWh for the first 1000kWh/month and all
energy in excess of that amount would be priced at 9 c/kwh. As Newfoundland Power’s distribution cost
runs about 4.5 c/kWh, it seemed reasonable to allocate an equal amount to NL Hydro
to cover some basic costs of generation and transmission.
The recent discovery of Martin’s 5 c/kWh planned rate means Hydro
will only collect 0.5 c/kWh on second block energy sales. It is glaringly obvious Hydro would be
selling power at well below their required operations and maintenance cost. Such an approach defies the normal logic of
cost-of-service models for rate design.
Why would Martin, and presumably now his successor, want to sell
a large percentage of their sales at a loss?
Disincentive
to Leave Electric Heating
The 2015 ICF report provides a calculation on the key issue. CDM studies assess a wide range of consumer efficiency
measures but we will concentrate on the biggest one – space heating which is
predominantly done with electric resistance heating in this province.
The Utilities (predominantly Nalcor/Hydro but let’s not forget
that Newfoundland Power was intimately aware of the plan in 2015 and perhaps
earlier) undoubtedly had a good idea of what numbers to give ICF. Simply put, they intend to set a blatantly
low enough price to discourage consumers from abandoning conventional electric
heating.
No Export
Alternative for the Power
We can also interpret this giveaway rate strategy as an
admission by Nalcor that export energy markets are non-existent. If they had a better economic option, why
sell power to their existing customer base at such a huge discount? Other than the contractual obligations with
Emera in the Nova Scotia market, Nalcor’s rate design action indicates they
knew in 2015 (and potentially earlier) export revenue opportunities were improbable. Nalcor is essentially saying they can’t fetch
any export buyers at even giveaway prices, better to give it away locally for
peanuts.
The
Optics of Keeping Energy Sales Up
In PlanetNL12, the declining two-tier rate scheme was
identified as the antidote for elasticity.
There is no question that a massive increase to our existing single rate
system will have consumers flocking in droves to abandon conventional electric
heating for minisplit heat pumps. The
Nalcor plan will stop this in its tracks.
Load growth would be unlikely but the overall energy demand may remain
fairly constant.
As for increasing revenues to pay for Muskrat, the two-tier
scheme won’t have a major impact except to concentrate the greatest pressure on
the middle-class. Hint to Premier Ball,
targeting the middle class is usually not a wise electoral strategy.
The main goal of the two-tier scheme is not about the
economics but simply about optics. Nalcor
and Government, the sponsors of Muskrat, are simply refusing to allow Muskrat
energy usage in this province to shrink to zero. The current figureheads, Dwight Ball and Stan
Marshall, want to lay claim to having saved the project and found some use for
the power other than within Nova Scotia.
The ongoing secrecy of Ball and Marshall about such an
important topic speaks volumes. The rate
design idea they have been sitting on for years and are likely to soon formally
announce does not have to make any great economic sense, it has not been up for
review, and a professional independent analysis probably has never been
done. How is such a pattern of behaviour
anything but a continuation of the same unaccountable management style of their
predecessors?
In a later phase of the Inquiry, let’s not be surprised if the
Inquiry Commissioner will turn to Ball and Marshall and say he is surprised there
is no evidence from early 2016 or anytime later that they properly reviewed the
merits of continuation of the project and engaged in no productive studies to
make Muskrat less of a burden to ratepayers and the Province.
Coming Up
In Future Posts by PlanetNL
Dwight Ball's assertion that neither ratepayers or taxpayers
will pay anything toward Muskrat is viewed strictly as election campaign hype. What he has done recently though is give us
some clues as to what his secretive strategy may be and that includes raising
rates and applying substantial Government-funded mitigation fuelled by adding
new long-term debt.
A revised revenue model is in the works that explores what is
presumed to be Ball’s master plan – a gamble wagered well into the future. Today's post on two-tier rates is actually a
key element in defining some of the variables applied as inputs within the
revenue model. The model and the issues
are rather complex, so it may take several posts to deliver this analysis.
Muskrat “dividends” and “benefits” will also be reassessed
based on $12.7B project costs and folded into a had-they-known revision of the
DG3 Cumulative Present Worth (CPW) numbers. CPW Is the basis on which Nalcor gave a $2.2 billion advantage to Muskrat Falls over the "Isolated Island" option (which included small hydro projects, wind and combustion turbines). The drama is not
whether Muskrat will finish second-best but by how much.