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Thursday 11 October 2018


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.  
ICF identified the the minisplit heat pump as the single biggest energy saving option available to consumers under today’s single-rate system.  ICF put the breakeven cost of a minisplit at about 9 c/kWh: as long as consumer rates are above this level, the ratepayer would derive long-term economic benefits from the installation and use of a MSHP. 
Nalcor’s two-tier rate concept effectively puts heating energy consumption into the second block energy rate – the first block of 1000 kWh is needed for all the normal non-heat needs of the typical household.  By pricing heating energy below 9 c/kWh, the ICF report shows that minisplits are non-economic meaning consumers would be better off using regular electric heating.

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.