Fair return for N.L. Power under debate

Ashley Fitzpatrick
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NL Power

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.


Organizations: Newfoundland Power, Public Utilities Board, Foster Associates

Geographic location: Canada, U.S.

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Recent comments

  • Carl
    January 18, 2013 - 11:17

    Corporate greed. NF Power buying power from Nfld Hydro, owned by Fortis all the same group of greedy individuals. No consideration for the general public, just rake it in............. Bank of Canada interest rate is low. Any time you can get 5 percent on investment is good. Many small business, in NL are operating on far less than 10 percent and its because of greed by such corporations as NL power.

    • a business man
      January 28, 2013 - 09:14

      Just to put it into perspective, I too run my businesses without consideration for the general public. My sole objective is to rake it in. In case you missed the memo, business is about profits, The objective is making as much as possible while spending as little as possible. That is why it makes sense to sell power to subsidiary companies and accept the tax benefit, and that is why it makes sense to eliminate employees even though profits are increasing. Just rake it in - those are words I live by

  • Johnny
    January 17, 2013 - 19:29

    If NL Power was able to borrow money during the recession and during the financial meltdown, then how could any increase in return be justified?

  • ChurchMouse
    January 17, 2013 - 12:41

    As an employee of Newfoundland Power I can confirm what others have said about the company, and not much positive. I am continually pushed to give more and take less while other employess below me take 75 paid sick days a year, yes that is seventy five. Waste everywhere, politics are rampant, but no need to change anything, senior people get their large salaries and bonuses for getting others to sacrifice, and we can pull 35 to 40 million down for Fortis. The PUB and Johnson are just actors in this theatre.

  • W McLean
    January 17, 2013 - 10:09

    What is this "NL Power" or "Nfld and Labrador Power" people refer to? An imaginary company, like that football player's girlfriend? It's Newfoundland Power.

  • Kay
    January 16, 2013 - 20:38

    To Jay, I worked there too and got out. I wouldn't agree that they are understaffed. I would say that most people leading the company didn't know how to manage what they had, money was wasted in one place while another suffered, and the politics around the place was out of control. And there are too many people doing nothing, and no one doing anything about it. Terrible place to work. Hope they get what they deserve.

  • Winston Adams
    January 16, 2013 - 12:04

    Nfld Power is hoping to get a quarter of the 7.9 percent domestic rate increase, to boost profits. So that is 2 percent of the the total, and they likely get little of that. Now the government power company is asuring us a 30-50 percent increase to cover Muskrat falls. And few have opposed that. AS A WHOLE MOST WANT IT. And most will tend to blame Nfld Power. who are actually restricted from bringing on any competitive power source. They now buy 93 percent of all power grom the government. And Nfld Power do the grunt work , and we love the Light and Power Boys when extreme weather puts us at risk. Where we are screwed by all the power companies is in Efficiency/ Conservation plans that can help customers save on power bills. If we save , they lose on revenue and profit. In other jurisdictions this is not allowed to be controlled by the power companies. Too bad we don't learn from others.

  • Jerome
    January 16, 2013 - 10:08

    Only the truly idiotic would suggest that eliminating NL Power would result in lower rates....that is just stupid. NL Power has to face it's shareholders, they do a lot with very little, every expenditure is scrutinized to the nth degree, every dollar, and every employee is utilized to the extream. Unlike Hydro, who have access to an unlimited bank account. Can you imagine what would happen if there was no NL Power? Then you would see rates skyrocket to unbelievable heights. @ Jay...I can assure you that NL Power is not overstaffed, or overpaid...hydro perhaps, but not NL Power, who are cut to the bone in all departments.

  • Paul
    January 16, 2013 - 09:34

    I think it is time for one of two things to happen. Either competition be allowed into the retail electrical market in NL or NL Power be taken over by Nalcor. I am thinking there must be quite a bit of duplication of services that could be eliminated if it were one company. Since there will be no competition in the wholesale production of electricity for the next 50 years due to Muskrat falls we will need to keep it as low as possible for the next 50 years and that cannot be done by having several regulated entities providing all wanting 10-15 percent return for its investors. Also what NL Power has said is that if they do not get it services will suffer which I take to mean that they will take their return on equity anyway and just cut back on other things.

  • Winston Adams
    January 16, 2013 - 09:13

    And while seeking 7.9 percent more form the domestic, the small to medium business sector is on average getting a bit over 1 percent proposed REDUCTION. And the big buiness, well they get a much reduced power rate compared compared to residential, some of which may be justified as they argue that the distribution cost to get them for that power is less. But then they are given an extra 28 percent discount to use MORE energy. Sound like a good conservation plan? Use more energy in winter, more oil for Holyrood, backload this on the residential consumer. Great plan! And conservation plans for the domestic customer? Among the worse in North America. Of course litte conservation helps keep the power demand up. And we need that to justify Muskrat Falls. Nfld power get 93 percent of their power from Nfld Hydro, and are now prevented from developing their own source. It is getting near economic for Nfld Power to bring on their own wind for example, that that is now against the law--- with the approval of our citizens that voted for MF and the other changes to the PUB etc. And remember it is our government power companies, Nfld Hydro and Nalcor who pushed for the high cost MF, Nfld Power wouuldn't touch that as a economic thing to do. Critize nfld Power where appropriate, but is a well run company is many, but not all respects. They could do much more to help keep costs down for the customers, but shareholders want more profit. It is a conflict of interest that is handled differently by other jurisdictions. And Johnson makes a little noise but is really with the shareholders, in my opinion. He certainly voted for MF and all the misery of continued higer rates that will bring.

  • Winston Adams
    January 16, 2013 - 08:26

    The domestic rate hike proposed is 7.9 perccent for energy, not 7.2. And 7.2 is the average domestic increase when not considering the basic charge, we refer to that as the meter charge, which is unchanged. For the average electric heated house I calculate the increase as about 165 dollars per year. If it was 7.2 percent it would be about 150. But 165 is the applicable figure, and a difference of about 15 dollars per household. For all domestic, the difference between 7.2 and 7.9 is almost 4 million dollars extra from the domestic sector. Maybe someone could check my figures. Certainy 7.9 is the energy ratehike proposed, lets get that clear. What you and other media say is the spin intended by the company method of presenting data. And the cost for these hearing, and experts are all paid from the customer bills is about 1.25 million. Just put it on our tab, just like the 18 percent profit increase they seek.

  • Blair
    January 16, 2013 - 08:07

    Newfoundland Power in my opinion is the essence of corporate greed There is scarcely a time when they are not in front of the PUB looking for approval to take money out of the pockets of the rate payers. This company thrived for years and years when Newfoundland was a "have not" province dealing with with high unemployment and a struggling economy, but not NL Power. They have above average management wages and pension schemes. They are also good at wasting money. They recently spent over approximately $150,000 to improve the doorway at the headquarters building on Kenmount Road including a virtually useless set of elaborate steps that leads to nowhere. The steps go down to Kenmout Road, (their parking lot is on the side of the building) NL Power are continually suggesting that our power rates are "still one of the lowest in Canada". I suggest that this is more of a complaint on their part, and they are doing everything to correct that. This greedy company should be paid off and sent packing. The province has Newfoundland Hydro which already supplies power to much of the province, why not all of it. Why this unnecessary NL Power? If this were to happen the only people at NL Power who would not be needed are the top executive managers and the board of directors, all others would be absorbed by Hydro. Unfortunately this will never happen but you can be assured that NL Power will never stop looking for money. I would be surprised if they have not already started their nest rate increase application before this round of hearings are over.

  • solomon
    January 16, 2013 - 07:52

    The 7.2% is nothing more than a smokescreen. What they really hope to get is around 4% which will be 2% more than they need. By asking for 7.2% they will get at least 4% with the support of the consumer advocate. Everyone will be happy, except the consumer.

  • wtf
    January 16, 2013 - 07:48

    10% for a company that faces almost no risk on it's investments - that's BS.

  • Jack
    January 16, 2013 - 07:42

    The fair return for Newfoundland Power is no guaranteed return on investment (ROI). If they want a ROI, they have to earn it like everyone else, not handed to them on a taxpayer's silver platter. We don't want to end up like Nova Scotia where Emera and Nova Scotia Power have legal rights to a 9% ROI, do we?

  • Jack
    January 16, 2013 - 07:41

    Maybe if Newfoundland and Labrador's electrical system is administered under one company, and not two of them, Newfoundland Power for power delivery and maintenance and Nalcor for power generation, this province will not be in a rate increase mess. Perhaps merging all electrical companies into one in Newfoundland and Labrador should be a pre-budget consultation idea. Fortis can still sell power and maintain electrical facilities, but not in this province. In addition, when utilities propose rate hikes, it should be done for multiple years and not on a yearly basis to reduce PUB hearing cost. This will take a page out of Nova Scotia where utility providers must propose rate hikes over multiple years before their Utility and Review Board.

  • Jay
    January 16, 2013 - 07:09

    N&L Power has behaved like a fat cat for years. It can, because it operates in a monopolistic environment with a guaranteed market. The existing situation allows it to be overstaffed, overpaid, and over equipped. Over the years the PUB has allowed this to happen. I don't care what the wealthy shareholders get, and the PUB should not be an agent for these shareholders. It's time for the PUB to start looking out for the consumers. If N&L Power wants to ensure a healthy return for its shareholders, it should start cutting costs and learn how to run an efficient operation.

    • Jay
      January 16, 2013 - 12:10

      NF Power is definitely understaffed and they are definitely underpaid. I used to work for Fortis, got out of there 4 years ago and it was the smartest decision I ever made.