My name is René Gallant and my role is to represent Nova Scotia Power in all regulatory matters with the Nova Scotia Utility and Review Board (UARB), including changes to electricity rates. Over time, but starting today, I’ll use this blog to update readers about matters pertaining to NS Power and the UARB, just as Robin McAdam has been doing with other important topics.

This morning, NS Power filed a General Rate Application with the UARB. We are requesting approval of a Rate Stabilization Plan that would add about $3.50 a month to an average household’s power bill beginning January 1, 2013, and again in 2014. The actual amount would vary, depending on an individual household’s electricity use. It represents a 3% overall increase in both years.

We know any rate increase is difficult for families and businesses. That’s why I want to take this opportunity to lay out the factors that led to today’s application and to talk about what NS Power has done to address the rising cost of providing electricity, the choices we’ve made, and why we believe we’re on the right path for the future.

NS Power is seeking a rate increase because, simply put, the costs involved in providing electricity for Nova Scotians continue to rise. These costs come amid many changes in the way we generate and consume electricity – most notably large reductions in electricity use by the province’s pulp and paper industry, and the switch from coal to natural gas and renewable energy like wind and biomass.

Troubles in the pulp and paper industry have greatly reduced payments by NewPage and Bowater to the fixed costs of the Nova Scotia’s electricity system. (Robin McAdam has recently posted here regarding Pacific West Commercial Corporation’s application to the UARB for a special electricity rate, which was developed through extensive negotiations with Nova Scotia Power, and designed to allow the former NewPage mill to return to production.)

Over time, NS Power has built an electricity system – power plants, sub-stations, poles, wires and more – that meets our responsibility to provide service to anyone who requests it, anywhere in Nova Scotia. The cost of this infrastructure was designed to be paid off over time and to be shared among all customers. As we’ve indicated in our filing today, this can be equated to roommates sharing the cost of an apartment. If one roommate leaves, the cost of rent doesn’t go down.

Similarly, the Bowater mill is contributing much less than what it used to toward the costs of the electricity system. The former NewPage mill currently contributes nothing to system costs, because it is shut down. If it reopens, as we hope it will, through the Pacific West deal, it will only pay a fraction of what it used to toward fixed costs. It’s a difficult situation, but for other our customers, it’s better to have the mills making even a small contribution than no contribution at all.

With respect to renewable energy, we’re convinced that changing how we make electricity will lead us to a more economically and environmentally stable future. The transition isn’t always easy. It’s big, complicated, and happening quickly.

For many decades, Nova Scotia has relied mostly on coal for electricity. It’s dirty, it’s expensive, its price is volatile, and buying it drains money from Nova Scotia and sends it to foreign coal companies. However, we’ve made substantial progress in changing our generation mix to the point where only 57% of electricity came from coal in 2011 – down from 80% in just five years. Soon, coal will account for less than half of generation.

This change comes as we’ve made more use of natural gas and added renewable sources like wind and biomass. This transition to renewables creates upfront costs – incorporating renewable energy into our mix is will add 1-2 %, on average, to electricity costs each year – but will provide future savings and stability in electricity prices as we become progressively less reliant on foreign coal. The wind, for instance, isn’t subject to world market prices.

These are the two main drivers increasing costs to customers in 2013 and 2014. NS Power has applied for a Rate Stabilization Plan that attempts to ease the burden of these costs on customers by setting rates for two years, instead of the traditional single-year application. This is an unusual step – traditionally, rates are set based on a single year of forecast costs and revenue. The traditional approach can create problems for anyone needing to make long term decisions such as business investments, or even household improvements like a new heating system. If approved by our regulator, the Rate Stabilization Plan will give customers and NS Power time to adapt to our changing circumstances and protect customers from rate spikes.

To limit overall increases to 3% for both 2013 and 2014, the Rate Stabilization seeks to defer about $120 million in costs – mainly system costs formerly paid by the paper mills – until 2015, so we can include them in our rates in a way that should require little or no increase in the amount customers pay. That’s because we’ll finish paying off an old tax bill through rates in 2015, so if we make the new payments equal to the old tax ones, it won’t cost customers more than they’re already paying. This is something like making a down payment on car and then budgeting to pay it off over several years, rather than paying for it all at once out of pocket.

We hope customer representatives and the UARB will agree that the Rate Stabilization Plan is the best solution to dealing with the difficult issues facing electricity prices. If the Rate Stabilization Plan is rejected, the Board could set rates in the traditional way, but it would result in much higher rate increases. We have included all the necessary information for a traditional rate application, but we believe the Rate Stabilization Plan is a better option for customers.

Again, we know news of an increase isn’t what customers want to hear. But we are confident we’re on the right path and I’m looking forward to an open and transparent regulatory process. Of course, we’ll be providing updates as we go forward, and have opened the comments section below for your thoughts. For those interested, our application to the Utility and Review Board can be read at www.nspower.ca/2013gra. There is also a summary document and an FAQ section.

Regards,
René Gallant
Vice President, Regulatory Affairs

On April 27, Pacific West Commercial Corporation (PWCC), the Vancouver-based company selected as successful bidder for the former NewPage Port Hawkesbury mill, and Nova Scotia Power applied to the Utility and Review Board (UARB) for approval of a new electricity supply agreement.

It’s a complex arrangement, which I will try to describe below. But first I want to briefly discuss Nova Scotia Power’s guiding principle in the months of negotiations we undertook with PWCC.

Our goal has been to secure an agreement that will enable the mill to resume production, while ensuring that all other customers are not just protected against any additional costs but benefit from the mill returning to production. We achieved our objective for customers. In no circumstance does this deal lead to other customers subsidizing the mill.

Instead, it provides an opportunity for the Port Hawkesbury mill to return to operation, benefitting the workers who will be directly employed there, as well as forestry workers in northern Nova Scotia, and the overall economy of the Strait region. At the same time, Nova Scotia Power customers overall will benefit, because the mill will contribute to paying the fixed costs of the electricity system, albeit at a lower level than it did previously.

The power supply arrangement will help make the mill competitive while ensuring the rest of our ratepayers are not only protected from additional costs, but they also get a benefit from the proposed agreement. Here are the basics of the deal:

• Nova Scotia Power will “assign” the energy from certain renewable energy assets – the Nuttby and Digby Neck wind farms and most of our hydro assets (except the Mersey System) – to the mill. This does not entail a transfer of ownership; rather, it means that those generation facilities will be deemed to be producing the energy the mill needs, so the mill will essentially be self-generating electricity. This does not mean that the power from these facilities goes directly to the mill. These facilities will continue to operate so as to most efficiently service all Nova Scotia customer.
• Rather than being billed for electricity, the mill will provide NS Power with dividends on preferred shares assigned to NSPI in exchange for dedicating the use of the specified generating assets. The dollar value of the dividends won’t be tied to the specific generation costs of the “assigned” facilities, but, rather, the “incremental cost” of the electricity it uses. That means the dividends will be calculated as the additional cost of generating electricity for the mill, after NS Power has served all other customer demand with the lowest cost generation available. A complex system of forecasting will provide the mill with hour-by-hour costing a day in advance, so mill managers can determine when it will be most cost-effective to operate.
• For each megawatt-hour of electricity it uses, the mill will contribute $2 towards the fixed costs of the electricity system. Fixed costs are costs that don’t reduce with lower customer demand on the system, such as the cost of generation facilities and transmission towers and wires.
• As well, there is a second avenue by which the mill, if it becomes profitable, could contribute to fixed costs. Under the agreement, NS Power will hold 30% of the mill’s common shares. I want to stress that this does not mean we will be taking an equity position in the mill. What it does mean, however, is that if the mill is profitable and PWCC declares common dividends, those dividends will flow directly to system fixed costs, benefitting all NS Power customers. These dividends would be in addition to those provided in compensation for the incremental cost of providing the mill with electricity.
• To make this all happen, NS Power will become a limited partner and part shareholder with Pacific West, so that our customers can receive dividend payments. These arrangements together will enable tax savings that will help make the mill profitable. The tax structure of this arrangement has been submitted to the Canada Revenue Agency for approval, in parallel with the Pacific West’s application to the UARB.

To be clear, common share dividends won’t go to NS Power or its shareholders. In fact, this deal is specifically structured in a way that provides no profit or loss to NS Power or its shareholders.

There are still hurdles and more work ahead in the coming months, but April 27 was a significant milestone, and I am very proud of the work Nova Scotia Power has done to assist the economy of our province by getting the Port Hawkesbury mill running again. Our detailed evidence submitted to the UARB is available through http://www.nsuarb.ca.

While we’re on the topic of Port Hawkesbury, I should also give you a brief update on our biomass plant currently under construction at the mill property. The project remains on budget and is expected to be complete and supplying power in early 2013. In fact, the Mitsubishi steam turbine and generator recently arrived from Japan and is now on site.

NS Power has assumed responsibility for construction and operation of the plant. The plant is an important part of achieving provincial renewable energy standards and is expected to contribute about 3% of Nova Scotia’s electricity. If you’re interested in reading more information on how the plant will operate, view some of my previous posts here.

Thanks for reading,
Robin