Newfoundland Power is pressing the Public Utilities Board (PUB) for approval of its proposed power rate increase.
The company says the rate hike for customers is needed to both maintain a strong financial position and provide a fair return to its shareholders.
In opposition, the consumer advocate has been arguing the proposal is a show of corporate greed — for shareholder profit, rather than in the interest of fairness.
The PUB must decide if the 7.2 per cent hike for its customer base will go through.
“Newfoundland Power is very much like a normal business in so many ways,” said chief financial officer Jocelyn Perry, back before the board Tuesday for questions. She gave a statement on Jan. 10, the first day of hearings in St. John’s.
In the latest session, Perry reiterated Newfoundland Power has to manage day-to-day operations and keep up long-term maintenance programs for key assets, for the benefit of customers.
Yet, feeding part of the rate increase, the company is calling for a 10.4 per cent return on equity in 2013 and 2014.
Return in dollars
What does that percentage mean in actual dollars?
This year, under an 8.8 per cent regulated return on equity, the company expects to take in just over $36.5 million in earnings.
“But in 2013, (Newfoundland Power) wants this board to set rates high enough to let it earn $42.5 million. That’s just in 2013,” said consumer advocate, Thomas Johnson.
The company would take in $44 million in net profit in 2014, he said. All other things being equal, that amounts to a $7.5-million bump in two years.
The numbers are stated within Newfoundland Power’s rate application.
However, in considering what might be an appropriate return for the publicly traded company, it is worth noting Newfoundland Power’s proposed 10.4 per cent return on equity is not the highest number suggested to it by experts.
On Monday, Kathleen McShane, president of Foster Associates and an expert witness before the board on behalf of Newfoundland Power, said her recommendation for a fair return on equity is 10.5 per cent for both 2013 and 2014.
A recognized expert who testified in the 2009 rate hearings, McShane essentially said there is no set, clear way of coming up with the numbers determining what people pay on their power bills.
There are different approaches and opinions as to the best.
She said any set standard would likely include a look at utilities of comparable risk — business risk, regulatory risk, and financial risk.
That is difficult to do for Newfoundland Power since, if you are sticking to Canadian utilities, she said, there are only six companies in Canada with regulated operations that are also publicly traded.
“The U.S. public utility equity market is a much broader and deeper universe of companies from which one can select a sample of comparable risk companies,” she said.
There has been debate before the PUB over what, if any, companies might be compared to Newfoundland Power in an attempt to determine what is fair.
As for formulas? “In my view, no single test is strong or sufficient enough to ensure that the fair return standard is met. Different tests have different perspectives, different tests have different strengths and weaknesses, different tests have more or less reliability under different capital market and economic conditions,” McShane argued.
In fact, Newfoundland Power has called for the formula currently used in this province to be chucked, since it relies on certain financial market inputs — from markets not considered stable since 2008.
The formulated returns have been set aside in recent years, in recognition of the unstable markets and unfair results.
The Telegram will have more in its continued coverage on the power rate hearings at the PUB. The hearings are scheduled to continue through this week and next.