RATE MITIGATION - GRASPING AT STRAWS

Written by Des Sullivan and David Vardy
(with research and analysis contributed by PlanetNL)

The Ball Administration asked the PUB to examine alternatives to offer ratepayer relief from unaffordable Muskrat Falls power. Because the cost of rate mitigation is too large to be imposed on either ratepayers or taxpayers — not that they can be distinguished — the public should be wary that the PUB is possessed of a magic wand. The Government has essentially kicked the “mitigation” can down the road, too.

Having declined to suspend the project to examine the wisdom of continuation vs termination, the Premier was right to engage the PUB for the purpose. Unfortunately, the Provincial Government offered the PUB and its Consultants absolutely no guidance as to what interventions may be available from them or the Federal Government. Even a plethora of nips and tucks won’t suffice given the magnitude of the problem, yet they must know that MF threatens not just the public welfare but our collective solvency and, hence, the Province’s sovereignty, too. 
In this context, readers should bear in mind that the requirement to meet the conditions of the Power Purchase Agreement (PPA) imposed on NL Hydro by Nalcor, to make the Muskrat Falls project financeable, is approximately $800 million. After subtracting Holyrood costs and some modest export sales, island ratepayers likely face a problem of $600 million in new revenue requirements, nearly doubling the amount that they now pay.  

Does any reasonable person think that raising electricity rates won’t cause power consumption to drop from its current flat-lined position, impacting both sales and revenues, too? We suggest that Nalcor will be exceedingly lucky if it succeeds only in maintaining demand given the flood of heat pump installations in recent years, which may actually require a rate drop to staunch.  

It is fine to engage the expertise of the Liberty Consulting Group and Synapse Economics given the size and complexity of the problem. But it is not fine for public expectations to be foolishly raised; nor is it fine to give the PUB an impossible task. 

Liberty and Synapse have both filed preliminary Reports. Their reading suggests that an exhaustive process is underway to uncover the mitigation formula that has eluded the “international experts” at Nalcor and the Finance Department, too.  

The Liberty Consulting Group is not new to this Province. They were engaged by the PUB following DarkNL to assess why the lights were out for days in January 2014, and later to assess issues of reliability, recognizing that Muskrat is at the end of a climate-challenged 1100 km extension cord. They were none too complimentary towards Hydro, noting its neglect and mismanagement of our electrical system. 

Liberty has now been tasked to “identify cost savings opportunities” including “alternative cost savings initiatives and rate mitigation approaches.” 

While, again, the Study is at a preliminary stage, it is clear that Liberty’s focus is on the financial structure of the project. It intends to assess the “magnitude and probability of producing material changes to the Base Revenue Requirements.” In plain English, it wants to consider stripping out the dividends inscribed in the PPA — but only for Nalcor and the province, not for Emera who are entitled to dividends of $70 million. It is considering the idea of adding to the MF debt as a way of addressing rate mitigation in the early years after commissioning. Are we hearing: don’t just kick the problem down to our grandchildren, let’s include the great-grandchildren, too?

Of course, who would ever think that interest rates might rise in the meantime!

Otherwise, Liberty is looking for savings by examining the corporate structure of Nalcor as well as “resources, processes, activities, and costs of Nalcor business operations.” It is seeking savings from human resource duplication. It even suggests that certain operations can be performed more efficiently by Newfoundland Power. This may be part of the answer, but the size of the problem demands big-money solutions. 

Liberty should be showing the Province a path for tearing up the Power Purchase Agreement — not fiddling with it. The public should understand that the PPA is constructed on the basis that MF is financially self-supporting. Whether the project was ever able to claim that status is moot; the current price tag of $12.7 billion makes it an impossible prospect. Fully implemented, the PPA will be not just be economically distortive, it will have a significant negative social impact, especially on lower income groups. 

That said, it seems unusual that the challenge given the PUB requires not one but two Consultants. It is clear that no one has a ready answer to such a knotty problem. Indeed, the two preliminary Reports offer important insights and different approaches. Yet neither Consultant has come close to identifying a magic bullet. 

In contrast to Liberty, Synapse will make several assessments that, had they been independently conducted in the beginning, might have thrown Nalcor off its myopic path. Synapse is re-examining Nalcor’s optimistic (to be kind) load forecasts for the province, taking into consideration ‘elasticity of demand’ in relation to the impact of higher rates.

Synapse notes that “retail sales in 2030 could be as much as 4 to 11 percent lower than they would be without MFP, depending upon how much the project increases retail prices.” The Consultancy does not suggest how far demand may drop if the rates necessary to pay the cost of Muskrat are tacked onto your electrical bills.

Synapse wants to see an inter-seasonal levelling of power demand. They point out that “Winter peak sales in January are two and a half times greater than the off-peak sales in August.” They want to use enhanced Conservation and Demand Management (CDM) Programs to lower the winter peak, ostensibly to free up more power for export.

This strategy is troublesome. First, we will be awash in power and CDM programs will cost more money — unless the game is to lower demand via higher rates. Could more spending to reduce local consumption now make any sense?

Second, Synapse sees Nova Scotia, not the Northeastern U.S., as the most likely market for the additional surplus power. The key attraction would be offering more “firm” power as opposed to the block of off-peak energy already contracted to Emera. 

Viewing the prospect positively, Synapse may see the increase in firm energy availability as an opportunity for another thermal plant to be shuttered in Nova Scotia. The power “might” command a higher rate than non-firm power, too, which is selling pretty cheaply at MASS HUB — an auction destination for short-term sales in the north-eastern U.S.

It is also true that in NL, CDM may have had some hidden value in reducing the need for backup generation. (Planned in conjunction with heat-pump installations, it might have robbed Nalcor of MF sanction.)  It would obviate the need for many MWs of new combustion turbine construction, diesel storage and consumption.

Of course, there is a strong likelihood that CDM programs and the continued penetration of heat pumps — now at 13% according to Synapse — may put Muskrat Falls’ generation completely outside NL’s demand orbit. That is to say, a further lowering of demand may require all the power from Muskrat to be exported. But that won't make our problem go away. Export power commands far too low a price to sate the shareholders and bondholders and pay operations and management costs.

On a different level, readers should note that the Synapse strategy puts us in a position of reliance on Nova Scotia, taking the place of Quebec, much the same as Williams and co. claimed Muskrat was lifting us from. 

An idea that will capture the imagination — but not the pocketbooks — of many, Synapse is examining increased “electrification” of the province. Its preliminary work suggests that the furnace oil trade should be worried. Then, too, it has an eye on the electric car market, which is promising for GHG emissions, but won’t goose demand a sufficient amount nor soon enough to serve as a viable revenue source. Besides, electric car buyers want cheap electricity to offset the high cost of those models.

Synapse suggests: “Increased sales will help the utilities spread the fixed MFP costs over more customers, and increased revenues will help bring in more funds to cover costs; both effects will help to lower costs for ratepayers.” Who would disagree with the theory?

The problem is that NL does not have time on its side. Even if they make sense — for which purpose their final report is necessary — time, minimally, is what Synapse’s ideas require. Liberty, on the other hand, is playing in the margins; it is tough to imagine that their ideas will free up more than a few million dollars, when ideas to save several hundred million are required.

Nalcor, for its part, filed an empty, directionless response to the PUB last week in response to the two Consultant reports. It is clear that they are leaving the decisions to Government, who appear content to string along the public leading up to the Provincial election.  Given the meanderings of the Consultants and the deliberate lack of direction from Government and Nalcor, the PUB has a thankless task to cobble together their preliminary rate mitigation report next month.

Those who believe that NL taxpayers can contribute subsidies for rate mitigation, while we parley with an array of untested ideas, likely don’t understand the imminent presence of the “debt” wall that the Budgetary deficit and Muskrat is growing uncontrollably. Premier Ball is among the group content to maintain the fiction that the Government has the problem in hand.

In an address to Rotary on Thursday, the Premier addressed the subject of dividends, suggesting that Nalcor might convert (perceived) equity in the project to debt — to which, as noted, Liberty Consulting also alludes. The return on equity now permitted under the PPA is 8.4%. Ball would have us believe that taking on more debt is a savings to ratepayers because it is cheaper. In fact what he suggests is mere smoke and mirrors. Nalcor is merely switching pockets when it chooses between dividends vs. power rates. There is no net savings there.

The Premier has also failed, to date, to address Emera's $600 million equity stake in the LIL on which 8.5% is paid. (The figure may be as high as $800 million when the full cost of allowance for funds used during construction (AFUDC) is considered.) This is a substantial sum, not applied to rate mitigation but to returns for the shareholders of Emera. In normal circumstances they would be entitled to the return, but that right is mired in insolvency. Similarly, the Premier needs to go to the Federal Government — now, not later. The Feds and Emera need to be told that Muskrat is a bankrupt project.

The Feds have to be willing to deal with their guarantee and agree on a new corporate structure for the project in which they, Emera and the Province will become equity participants — just not on the basis prescribed in the current PPA. That deal was foolish to begin with. Now the fools have to face the reality that Muskrat revenues won't cover the obligations to which Nalcor consented.

Soon a General Election will obscure the leadership Premier Ball never intends to bring to this issue. When he should be mad as hell that the Tories have put us in this boat, simultaneously he should be warning the enablers — Emera and the Feds — how they will be expected to help resolve the crisis. Instead, he is glibly proposing bogus solutions.

In addition, the Premier is giving no clear signal to ratepayers except the vague promise that neither they nor taxpayers will pay for the project which few, if anyone, believes. As a result, many people are making individual decisions, such as installing mini-splits, because they anticipate rates going through the roof, when that may not be the case — if the necessary political leadership is brought to bear.

Besides, for practical purposes, if the Premier persists in using the PUB to justify delaying the critical decisions needed to deal with the crisis of Muskrat Falls debt — from which the issue of rate mitigation is inseparable — he will let the federal government off the hook, too, in advance of a federal election this fall.   

The public shouldn't stand for any it.