PlanetNL26: Exposing Hydro’s Rural Deficit Account - Part 1
Very few Newfoundland Power (NP) customers know
they will overpay their true cost of electricity this year by 12%. Labrador Interconnected System (LIS) customers
will also overpay by 16%. Government has
legislated the utilities to over-collect from these two sets of customers to
subsidize high-cost rural and isolated regions. Hydro calls it the Rural Deficit account.
This
hefty involuntary subsidy grows annually as Government-imposed rate-setting
policies for the rural and isolated regions widen the cost gaps. NP customers especially, imminently
threatened by severe rate increases arising from Muskrat Falls, are being
counted upon by Government to pay a hefty price for Government policy goals. Government needs to be brought to task to overhaul
the mechanics of the Rural Deficit and the rate-setting policies in rural and
isolated areas before a penny of Muskrat costs is levied upon ratepayers.
Regulatory Framework
Behind the Rural Deficit
NL Hydro’s 2017 General Rate Application (GRA) reached its
conclusion earlier this month when the PUB signed off a rather anti-climactic Decision. There is little new to discuss on the GRA as
it simply addresses the final years of the pre-Muskrat era. The PUB’s Hearing into Rate Mitigation Options
and Impacts this year promises to be far more crucial and important to the
future of ratepayers throughout the Province and it is the ideal forum in which
the terms and the very existence of the Rural Deficit account should be
assessed.
Within
the GRA Decision, the PUB wrote a tidy summary of the legislative directives
imposed by Governments past and present to define the Rural Deficit. For clarity, the entire Decision section (5.3
Subsidization of Rural Rates) is copied here:
On July 5, 2007 Government issued
OC2007-304 which provided for the establishment of a policy resulting in the
implementation of an energy rebate to offset the costs of the monthly basic
customer charge and lifeline block (or equivalent) of energy consumption for
Hydro’s Labrador rural isolated diesel customers and residential electricity
customers in the Labrador Straits/L’Anse-au-Loup areas. This policy makes these
customers’ costs for the basic customer charge and the lifeline energy block
equivalent to Hydro’s residential Happy Valley-Goose Bay Labrador
Interconnected electricity customers’ costs.
Since 2006 Government issued a series
of directives which, together, deferred the approved rate increases for
non-government customers on isolated systems to July 1, 2019. Government funded the revenue requirement
impacts of these deferred rate increases until January 1, 2017 and directed
that Hydro absorb the costs since January 1, 2017.
The
first sentence of the first paragraph indicates “longstanding policy”: this
refers to legislation executed by the Wells Government in 1989 that saw rural
and isolated subsidy costs reallocated from Government to other
ratepayers. This was the first major
offense resulting in Government transferring the cost of social policy onto
ratepayers. The second sentence refers
to further refinement of the legislation made by the Williams Government in
2003.
The
second paragraph describes an additional layer of the Rural Deficit imposed by
the Williams Government in 2007 that saw Government contribute an additional
layer of subsidy for Labrador coastal customers. Rates in this area were nominally benchmarked
to the Newfoundland Power rate but the new legislation offered an extra
Government-paid subsidy to rebate these customers to effectively achieve the far
lower LIS rates offered in central and western Labrador.
The
third paragraph indicates that since 2017, the present Ball Government, has
seen appropriate to repeat the Wells strategy by transferring the post-2007 Government-funded
Labrador coast rebate into the ratepayer-paid Rural Deficit account. Ball’s Government executed a budget-cutting
effort by transferring their liabilities to ratepayers who again have no idea
they are paying the tab for rural policy initiatives.
Who Pays into the Rural Deficit
PlanetNL24 identified
the general areas of the province where the cost of service is high. One is the rural areas of the island
connected to the main hydro grid but not served by Newfoundland Power (NP). The other high cost areas include the L’Anse
au Loup interconnected area (connected to a small isolated Hydro-Quebec hydro
plant, not the main Labrador grid) in the Straits area of southern Labrador, the
isolated diesel-powered communities extending further up the Labrador coast,
and a half dozen similarly isolated diesel-dependent communities around the
Island.
NL
Hydro tracks the cost of service in these four zones and includes the data in
their GRA submissions to the PUB therefore assessment and reporting on the
subject is quite easy.
In
the recent GRA, Hydro anticipated wholesale revenue of $475M for the 5833.6 GWh
energy it will sell to Newfoundland Power (NP) in 2019. This amount would be the breakeven cost of
service to generate and transmit energy to NP (customer retail rates also
include NP’s own cost of service). On
top of this, however, Hydro shows it intends to collect an extra $70.3M to fund
Rural Deficit subsidies. Most ratepayers
then have no idea the actual cost of their service should result in a rate of
about 10.2 c/kWh (when including NP expenses).
The well-hidden Rural Deficit surcharge raises the retail rate by about
12%, setting the Island Interconnected domestic service rate at 11.391 c/kWh.
Customers
of the Labrador Interconnected System, the grid supplied by the Upper Churchill
serving Labrador West and Central with the lowest electricity rate in North
America, pay even more into the Rural Deficit on a percentage basis. Hydro indicates a $2.9M Rural Deficit surcharge
must be collected from LIS customers in 2019.
The true cost of service for their 656GWh total consumed energy is
amazingly only about 2.8 c/kWh. Hydro adds
an extra 16% for the Rural Deficit, resulting in the final LIS zone rate of
3.255 c/kWh.
On
average, households in both the NP service area and in the LIS both pay just
over $200 (before tax) annually into the Rural Deficit. This includes a great many cash-poor
customers for whom that $200 could have been much more usefully spent.
Who Benefits From the Rural
SubsidyThe
table below contains data found in the GRA documents to show how the $73.2M in surcharges
are delivered to the four NL Hydro rural and isolated service zones. Only the columns expressed in c/kWh were
calculated for this exercise.
Based
on total energy use, the subsidized customer zones represent 7% of the total in-province
energy market but they require 22% of the total revenue (this excludes
industrial customers who don’t pay into the Rural Deficit). The Rural Deficit is the great equalizer,
delivering subsidy levels of greater than 50% to 3 of the 4 high cost zones.
All Rural Customer Categories
|
Energy Sold (GWh)
|
Cost of Service ($M)
|
True Cost of Service (c/kWh)
|
Rural Deficit funding ($M)
|
Net Rate Subsidy Received (c/kWh)
|
Island Rural
|
413.4
|
77.8
|
18.8
|
24.2
|
5.9
|
L'Anse au Loup
|
25.1
|
7.7
|
30.8
|
4.5
|
17.9
|
Labrador Isolated
|
43.5
|
43.8
|
100.6
|
34.1
|
78.4
|
Island Isolated
|
7.1
|
12.1
|
170.4
|
10.4
|
145.8
|
totals/averages all zones
|
489.1
|
141.4
|
28.9
|
73.2
|
15.0
|
As
domestic household customers comprise most of the energy sold, it’s
illuminating to extract costs and subsidies for that sector alone in more
detail. The key data is also plainly
provided in Hydro’s GRA submission.
Domestic customers in the Labrador and Island Isolated zones, 100%
off-grid diesel-powered (excepting a small amount of wind-power at Ramea), are
found to be up to 90% subsidized by other ratepayers.
Domestic Customer Class Only
|
Energy Sold (GWh)
|
Cost of Service ($M)
|
True Cost of Service (c/kWh)
|
Rural Deficit funding ($M)
|
Net Subsidy Received (c/kWh)
|
Subsidy as % of Cost
|
Island Rural
|
247.0
|
52.4
|
21.2
|
19.1
|
7.7
|
36.5%
|
L'Anse au Loup Zone
|
15.8
|
5.2
|
33.1
|
3.2
|
20.2
|
61.2%
|
Labrador Isolated
|
23.7
|
23.5
|
99.3
|
20.2
|
85.2
|
85.9%
|
Island Isolated
|
5.5
|
9.3
|
170.2
|
8.4
|
154.6
|
90.8%
|
Existing Rates
The benchmark for all
zones is the Interconnected Island System (IIS) Rate set primarily for
Newfoundland Power customers. The
philosophy used to defend this is social equity: that it is fair and equitable to
provide electricity, an essential need, to all customers at the same rate
throughout the province. As a result, the
rate for Island Rural and the L’Anse au Loup areas is simply 11.391 c/kWh;
being primarily hydro-powered, there is no cap on energy use despite the
considerably higher cost of service in these areas.
The
Isolated diesel-powered zones with their very high fuel costs impose a three-block
rate design as shown below for residential customers. The first block quantity varies a bit by
season but is nominally sold at the same base rate as across the Newfoundland
Power system. The second block is almost
trivial: the quantity is very small and costs only 1.5 c/kWh extra. Although the third block, for all energy
above 1000 kWh per month, is priced over 50% higher than the base rate, it remains
more than 80% below the actual cost of service.
The third block is also probably less than half the bare cost of fuel
used to produce electricity.
Despite
appearances in the table above, the published first block price is not the
actual rate Labrador coast residential customers pay thanks to the legislation
enacted by the Williams Government in 2007.
Since then, all Labrador isolated diesel customers as well as
L’Anse-au-Loup/Labrador Straits customers have received a rebate that makes
their first block costs equivalent to just 3.255 c/kWh. The Williams Government interpreted social
equity as requiring rates on the Labrador coast to match the exceptionally
low-rate Labrador Interconnected System.
This
highly advantageous Labrador coast rebate, now over 8 c/kWh, was paid by
Government from 2007 to 2016 but since then, the Dwight Ball Government has
allowed the funding to shift to the Rural Deficit account. This is the pinnacle of absurdity as Newfoundland
Power ratepayers are subsidizing Labrador coast customers to receive
electricity rates 70% cheaper than their own.
By
administering the Labrador rebate policy, Government preserves the illusion
that coastal Labrador rates are based on Island (NP) rates when in fact the
policy target is the far cheaper Labrador Interconnected rate. Having Island ratepayers paying 11.391 c/kWh
to subsidize Labrador coast customers down to 3.255 c/kWh, is a perplexing and
astoundingly regressive piece of policy.
While
some of the customers in Labrador benefitting from the policy need financial
support, is it proper to have poor ratepayers elsewhere responsible to bear
that cost? Administering social policy
through electricity rates is regressive and twisted. Also consider that some of the poor paying
into the Rural Deficit are doing so to the benefit of many in the Labrador
coast zones who are quite well-off and banking their savings. This is the most regressive type of fiscal
policy imaginable, yet all of our Premiers of the last 30 years have seen fit
to either maintain it or make it even more ludicrous.
Part
2 shall examine whether other jurisdictions apply equally regressive subsidy
transfers on a similar scale between ratepayer groups and finds that NL Hydro
is unsurprisingly in a class of its own.
Part 2 also finds that some other relevant jurisdictions employ much
more rational and progressive economic policies – why not here?