TIME TO END RATEPAYER SUBSIDY OF POWER TO ISOLATED TOWNS?

Guest Post by PlanetNL
PlanetNL27: End Ratepayer Funding of Hydro’s Rural Deficit Account

Part 1 of this 2-part post exposed NL Hydro’s Rural Deficit account and the trail of regressive Government policy that created it.  It was shown that the two lowest cost of service ratepayer groups in the province are heavily subsidizing rural and isolated customers.  This included a subsidy so deep on the coast of Labrador that it delivers power at 70% less than the rate paid by the Newfoundland Power ratepayers who backstop the vast majority of the subsidy funding!  

Part 2 explores what other jurisdictions with high-cost service areas are doing and attempts to identify best practices that need to be considered here.  The PUB hearing into Rate Mitigation Options and Impacts needs to be looking at all of these potential actions and Government needs to relent in legislating out the regressive subsidies and instead promote fair policies based on economic efficiency. 

Rural Rate Impact in Other Jurisdictions
Finding the exact cost of service and rate impact in other utilities is very difficult as rural distribution and cost of service is typically not as well-defined elsewhere.  In this regard, NL Hydro has superior data gathering and intelligence on its rural and isolated costs.  What can be found is that generally all provinces mandate the principle of applying one consistent base rate for all customer areas as widely as possible.  The provincial utilities having isolated diesel service areas generally use a multi-tier rate structure with first block power set equal to their on-grid customer rate.

Scanning recent financial documents and GRAs of the four other provincial utilities with significant isolated diesel-service areas indicates their on-grid interconnected ratepayers are contributing subsidy revenue, however the rate impact is almost negligible compared to NL.  In BC and Manitoba, on-grid ratepayers are likely impacted by by 0.5- 1% while in Ontario and Quebec, it is likely 0.1% or less.  Those are levels most on-grid ratepayers probably won’t be getting into much of an argument over.  The NL on-grid customers’ 12-16% subsidy impacts, compounded by a future of drastic rate increases soon to come from the Muskrat Falls project, put this province entirely in a league of its own.    

As for rate structure in the isolated diesel areas, Manitoba charges no premium at all to diesel residential customers but the remaining three provinces subscribe to the multi-tier system where the base block rate matches the main on-grid rate but the higher rate blocks recover a little more of the costs.  In Ontario and BC the upper rate is about 19 c/kWh, just a little higher than in NL.  In the case of NL’s nearest neighbour, Quebec, the upper rate is much higher at 41.43 c/kWh: despite Hydro Quebec having billions in earnings at their disposal they are the least generous province in subsidizing isolated customers.  It is apparent that Quebec subscribes to the theory of marginal price economics as they have set the upper rate at what appears to be the marginal cost of diesel fuel.

The rate practice in the high arctic from Nunavut to Alaska is even more relevant than the provinces.  Other than in Northwest Territories, the norm is for utilities to establish individual community rates based on the entire cost of service of the local diesel plant.  Over in Nunavut, the Government completed a review just last year deciding it’s best to stick with the community-based pricing system.  As a result, the largest community of Iqaluit, which with the most efficient plant, has a rate of 56.69 c/kWh while the highest rate, in much smaller Kugaaruk, is 112.34 c/kWh.  The Nunavut Government subsidizes all communities on first block energy only so that all pay half the Iqaluit rate or 28.35 c/kWh but customers are charged full local plant rates on any additional energy consumed.

In NWT, with a population comparable to NL’s rural and isolated service areas (Nunavut’s population is a little less), there are 4 rate zones.  A single averaged rate structure exists for diesel-service communities known as the thermal zone where first block power is subsidized by the NWT Government (not other ratepayers) down to 30.1 c/kWh while energy above the base amount is billed at 68.37 c/kWh.

It’s no surprise that in all these Northern areas where actual cost of service rate-setting exists, average household electricity consumption is significantly lower than in the highly subsidized NL diesel communities.

Time for Progressive Policy, Not Regressive
The problem with NL Hydro’s current rural and isolated predicament is twofold.  Firstly, on-grid ratepayers should not be forced to subsidize other ratepayers because Government chooses to shirk the responsibility of paying for its policy actions.  If Government wants to get inventive on social policy, the cost of that policy belongs within the Government revenue system. 

The second issue is that customers using high cost electricity are so heavily subsidized they have very little incentive to mitigate cost and instead use more electricity.  This causes a high rate of growth in the Rural Deficit account and the contributions of on-grid ratepayers must rise.  It appears Government would prefer that on-grid ratepayers remain oblivious.

Many of the ratepayers paying into the Rural Deficit struggle enough to pay their own bills and should not be forced to pay other people’s bills.  If the problem remained on the scale as in other provinces at 0.1% to 1% it would still be wrong but the severity of the impact relatively low.  Having already surpassed 12% though, this problem demands immediate reform and absolutely needs to be part of the ongoing PUB review.

While some beneficiaries of the Rural Deficit may be equally poor to many of those who pay into it, many surely are not.  There is nothing in the administration of the policy that allocates more benefit to poor people than well-off people.  As all customers in each zone receive the same rate subsidy, in practice the well-off who can afford to be bigger users of electricity will benefit the most.  Poor people are paying dearly for the comfort of many who do not need the help is a classic example of a regressive Government fiscal policy.

The matter of subsidizing high-cost service areas should never have been passed on to ratepayers in the first place and the practice must be stopped.  Subsidy for the high cost rural zones is a matter of social policy that is the sole responsibility of Government.  Ratepayers should not be held accountable for doing what Government is afraid of which is recognizing the challenges of rural and remote areas and dealing with it head-on.

The sustaining of this bad policy, another in a long list of utility management errors, has surely taken in excess of a billion dollars from on-grid ratepayers.  If not for Muskrat Falls, the money should be refunded.  Given the inevitable rate hikes due to come from Muskrat – when the politician-led mitigation myths of export profits and other energy sales are proven a fiction – the elimination of the Rural Deficit will become a primary and absolutely pressing requirement.   

New Zones and Rates for NL Rural and Isolated
Besides transferring responsibility for the subsidies back to Government, reform to rate-setting formulas for the rural and isolated areas must be developed that are more reflective of best practice elsewhere.  The existing level of subsidy is both indiscriminate to the economic need of individual consumers and it provides little or no rate signal to stem cost growth. 

A revised system must promote economic efficiency by setting rates based on the true cost of service to a much greater degree to change consumer behaviours.  The policies across the arctic region reflect the available options.  Doing so will allow Conservation and Demand Management (CDM) efforts to maximize the productive use of electrical energy and assets in all parts of the province.  The uptake of renewables in diesel communities will also take off much faster as presently renewables cannot compete with the excessively subsidized rates in force at the retail level.

As part of the reform, segmentation of rate zones should be considered a key opportunity.  If high cost zones are covered up through broad blending strategies as they are today, the more difficult it will be to make the utility system more efficient.   As Hydro already tracks four cost zones, implementing revised ratemaking strategies for these four areas would be easy to do.  Going to the community-based level as in Nunavut and Alaska could have further benefits.  Given the small populations in those other jurisdictions, there can be no argument it is an administrative burden either.

Rate increases in rural and isolated communities would not be well received despite the fact the overall cost of service is certain to decline.  To ease the transition, Government could continue subsidizing base energy to match the Newfoundland Power rate while phasing in additional cost of service increases over many years.  Promoting region-specific CDM and supporting renewable energy alternatives may also diminish potential rate escalation.  Detailed study may show a pathway not as bad as some may assume while additional environmental benefits from reducing diesel usage and new economic opportunities from renewable developments should not be ignored.

Those in rural and isolated zones, including the Labrador coast, should also not forget that the existing legislated system will automatically trigger substantial rate increases because the base rate in those zones is pegged to the Newfoundland Power rate.  When the rate mitigation bubble bursts and the post-Muskrat rate reaches the 17 c/kWh or 23 c/kWh levels that have been reported or possibly higher, then the rural and isolated rates shall be going up across the board as well.  New realities will be unkind to all.