Rate hikes stoked by online services, labour expenses

Ashley Fitzpatrick
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NL Power’s noted costs go beyond fuel or return on equity

Newfoundland Power line technician, Melissa King scales a pole to assist co-workers in carrying out system upgrades. — File photo by Joe Gibbons/The Telegram

In the coming year, Newfoundland Power will have to explain to the Public Utilities Board (PUB) why it should be allowed to hike the power rates for customers.

The proposed increase — running 7.2 per cent for the average homeowner — has already been criticized by Consumer Advocate Thomas Johnson.

That said, the hike is still far from reality.

Newfoundland Power must lay out for the PUB its anticipated costs through 2014 to justify the rate increases.

The Telegram dug into the utility’s application, to get a better sense of what has been put on the table.

Return on equity

Newfoundland Power is looking for a 10.4 per cent return on equity for shareholders in 2013 and 10.5 per cent in 2014.

In 2009, the PUB found nine per cent to be a fair return. The 2012 return is set at 8.8 per cent.

Determining a fair return is a complicated venture. “Return on equity, it’s an area of expertise that really none of us have,” Newfoundland Power spokesman Bob Pike said, adding all sides go to consultants for opinions on what is fair. That testimony informs the debate.

“(The requested return) may not be a number (Newfoundland Power) just throw(s) out, however they use the same sort of expert testimony case after case, which reaches for the sky and the moon,” Johnson has said.

Cost of service — Modernizing

Other costs are affecting the company’s rate request — a mix of minor and major concerns.

For one, the company states it is dealing with customers who want a different kind of service than was offered in the past.

“From 2007 to 2011, the number of customer initiated contacts with Newfoundland Power via email has increased by approximately 97 per cent,” the rate application states.

In 2007, the company responded to about 24,000 customer emails. In 2011, the number was up to 47,000.

“In 2011, customer (contacts) with Newfoundland Power through the company’s website exceeded (contacts) by telephone for the first time.”

Then there are eBills — the promoted electronic billing system.

In 2007, about 19,000 customers participated in the eBills program. In 2011, that number was more than 45,000.

While providing services electronically — eBills versus paper bills for example — can be cheaper per transaction, “provision of additional customer service alternatives tends to increase operational complexity and costs,” the company claims.

An example given is adapting the company’s website for iPhone, Android and Blackberry.

“The costs of modifications to the company’s website were approximately $130,000 and $123,000 in 2010 and 2011 respectively, and are forecast to be approximately $183,000 in 2012.”

Cost of service — Labour costs

The total number of Newfoundland Power employees has not changed significantly since the company’s 2010 rate application.

However, the company is dealing with a jump in retirements — facing a level not seen since an early retirement package was offered in 2005.

At that time, 76 employees left. Newfoundland Power is currently forecasting more than 70 retirements for 2011 through 2013, with 25 more forecast for 2014.

Within the current labour market, Pike told The Telegram, the utility has been unable to replace retirees by simply hiring off the street.

“We have to create our own qualified people, because you can’t hire them,” he said, explaining apprentices have been hired as they work towards journeyperson status.

Internal needs aside, the company has been absorbing some growing labour costs from contractors, Pike said.

“When we have contractors who do our pole setting and vegetation management and so on, because of the change in the labour market, these contractors are having to pay more for labour to compete with the larger megaprojects in the province. Then that gets reflected into the price to us for the work that they do,” he said.

Cost of Service — Capital spending

Newfoundland Power runs through a separate review with the PUB each year, to approve capital expenditures. These costs include, among other things, major maintenance and upgrades to substations.

Proposed work for 2013 includes replacement of a structure at Soldiers Pond, refurbishment of washrooms at the Kenmount Road offices, upgrades to group billing and the addition of a “virtual hold” customer call-back system.

A decision by the PUB covering the proposed spending, totalling just over $80 million, is pending.

Looking forward, “new investment must be made to serve customers who have moved to urban areas, as well as to maintain service in communities with declining populations,” states Kathleen McShane of Foster and Associates, an expert in financial matters relating to utilities who has filed an opinion on the rate hike for Newfoundland Power.

If the rate hike is approved, the new residential power rates will still be the lowest in Canada, Newfoundland Power president and CEO Earl Ludlow has stated.

The review of the rate application is just beginning and a public hearing is expected to be scheduled for early in the new year.

afitzpatrick@thetelegram.com

Organizations: Newfoundland Power, Public Utilities Board, Foster and Associates

Geographic location: Kenmount Road, Canada

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Recent comments

  • Muskrat Mullahs
    December 09, 2012 - 20:10

    Why should any company selling an essential public service with a state-protected monopoly be assured a return on equity of over 10% in an economy where interest rates are hovering around 1%?

  • EdB
    September 21, 2012 - 17:02

    I find it very interesting that most companies want us to go to e-billing and on line payments because it is more efficient and cheaper. NL Power wants to charge us more to implement these services "because they cost more". Something's wrong with this picture. They claim that their costs are going up because employees are retiring - most other companies encourage older employees to retire because new (younger) employees generally earn less money and so reduce costs. I spent 30 years in management and question most of their claims.

  • Virginia Waters
    September 21, 2012 - 13:15

    Well John, you're wrong on every point of your lame attempt to rebut the facts. (1) It doesn't matter whether NL Power contributes 12% or 50% of Fortis' profits. The very existence of Fortis and its diversification into real estate, etc., were all made possible by the profits from NL Power and from our monthly electrical bills. You have not refuted the fact that there exists cross-subsidization at the expense of ratepayers. (2) Of course you're a supporter of rate hikes otherwise you wouldn't be supporting the Muskrat fiasco that will make electricity in this province the most expensive in Canada - if not the world. You don't care if we get off oil (which has very little to do with the 7.2% rate increase demanded by Fortis). You only pushing Muskrat so that your corporate friends can get a free ride with electricty rates at 4 cents while the rest of us pay 24 cents. (3) As for the coming energy deficit - there is none, unless again you count what you're business friends are looking for on the cheap. (4) It is laughable to suggest that NL Power cuts its expense to the bone. They are officially on the 'cost-plus' model of earnings. The PUB rarely questions the need or the value obtained from NL Power expenditures. It acts merely as an audit department to confirm that the money was actually spent. Then it adjusts their return accordingly. No competition and therefore no need to cut anything to the bone. Give your head a shake. (5) Odd that you point out that NALCOR can spend and spend without accountability and then champion that organization as being capable of delivering a massive energy project withouit exceeding the budget by a country mile. Can't have it both ways John but of course your perpetual rants on these forums are really about something else - getting a deal for your buddies in big business. (6) As for your silly insistence that only Muskrat can save our rates from rising 70% over the next 10-15 years - who do you think you are kidding. Unless you flunked math, you'd realize that our rates will have to double within the first five years after the start-up of Muskrat just to pay out the loans.

    • John Smith
      September 21, 2012 - 23:07

      nope...you are the wrong one...LOL

  • Virginia Wates
    September 21, 2012 - 11:07

    John Smith is a big fan of NL Power - also known as Fortis. He finds nothing wrong with their demand for another 7.2% increase in rates despite the fact that inflation in this country is running around one percent. This is the same faceless, anonymous government spokesman John Smith who goes on forever in these forums about the high price of electricity - but only as a means of boosting Muskrat Falls. If Muskrat gets the go-ahead, NL Power's 7.2% rate hike will look like a joke. Expect rates to double or more in the first five years. Smith points out that NL Power supports charities. He overlooks the fact that their charity comes out of our pockets - not theirs. As for NL Power keeping on the lights, they experience regular outages just like any other utility - with or without a storm. What government and the PUB have lost sight of in the past few decades, since unregulated Fortis was set up to milk its regulated subsidiary NL Power, is that homeowners have been subsidizing the creation of a real estate empire for the benefit of Fortis shareholders. Fortis, of course, will argue otherwise. They will insist that the investment activities of Fortis have nothing to do with the distribution of power on the Avalon - that they are only redirecting monies that would otherwise be paid out as dividends to shareholders. The truth is less straightforward. There are a hundred different ways in which one arm of Fortis (NL Power) subsidizes the other arm of Fortis (hotels, office buildings, foreign utilities). In fact there is only one way to ensure that there is no cross subsidization (leading to higher electrical rates) and that is to mandate by law that for-profit regulated utilities operating in the province must be stand alone corporations such that all profits, cash flows, management costs, etc., can be accurately evaluated by the PUB when it comes time to review its rate increase applications. Better still, government needs to take a long hard look at the merits of continuing to divide the distribution of power in the province between NL Hydro and Fortis.

    • John Smith
      September 21, 2012 - 12:18

      Well Virginia, you are wrong on just about every point in your rant. For starters, I don't post on here nearly as much as others such as maurice adams, Daniel Williams, Eli, or Winston, but hey...why let the facts get in the way. NL Power does take donations for the gift of life program among others, but this doesn't come close to what they donate a year. Nl Power barely registers on the profits of Fortis, I think NL power contirbutes about 12% to the Fortis bottom line, as can be seen from the Fortis AGM notes. Oh, and let me assure you Virginia, I am not a supporter of rate hikes, However I know that if we stay tied to oil our rates will continue to go up. NL Power is just reacting to the increased cost of oil. I guess you and your cohorts don't care that our rates have increased by 70% since 1998...naaaa,,, forget about that...you don't care about our coming energy deficit...naaaa we'll just get everyone to put in better baseboard heaters...yeah..that will fix the problem. NL Power is cut to the bone my dear, they are responsible to their many shareholders, and are always trying to find efficiencies, unlike Nalcor, who are free to spend and spend. I support the muskrat development as an aswer to us getting off oil, and paying into our own resource, so that we don't see another 70% increase in our bills over the next 10-15 years. How about you?

    • Willy
      September 21, 2012 - 12:40

      The Hells Angels support Charities too, I guess for the same reason NL power does a little justification with a sprinkling of guilt!

  • WILLY
    September 21, 2012 - 10:23

    Just wondering why the Senior who does not even have a cell phone has to pay for all that junk. Maybe you should not offer things that will make rates go up. Well we have a Financial expert hired by NL Power. Word on the street is that experts are not right very often and Companies just use them to cover their ass. Just check this out from CBC Doc Zone. http://www.cbc.ca/doczone/episode/the-trouble-with-experts.html

  • JG
    September 21, 2012 - 10:09

    I don't know of many business organizations that get to demand to this extent an increase to what consumers pay for their services these days. In a competitive environment, businesses have to look at cost savings at every avenue to stay relevant. There has to be some form of consumer protection for monopoly providers, to challenge them to cut costs in line with almost every other business. While I can't say this authoritatively, I seem to recall an increase bordering on 5% each year for the last few years. I support the consumer advocate in his efforts to ensure NF Power is doing their part to contain/reduce costs, and I highly encourage the PUB to challenge NF Power to its fullest authority to seek information on NF Powers' buying process and spending practices, to ensure they are buying only what they need and are getting the best deal in every aspect of spending. I would ask for evidence of business optimization as well and what savings were obtained there as well, while they were at it. As a privately held company, I realize they have shareholders to satisfy, but lets make sure that a rate increase, no matter how large or small, is completely neccessary.

  • John Smith
    September 21, 2012 - 08:11

    I think NL Power does an excellent job under very harsh conditions, they keep the lights on in one of the most difficult climates in North America. They should be applauded for their work, including giving equipment to hospitals, and other community efforts. NL power is a company we should all be very proud of.

  • Eli
    September 21, 2012 - 08:04

    Didn't NL Power generate $31 million in profits last year? It's been said before; there are too many big paws in the cookie jar...Fortis, NL Power and Nalcor. Consumer rip-off!

  • Robere
    September 21, 2012 - 07:37

    “The costs of modifications to the company’s website were approximately $130,000 and $123,000 in 2010 and 2011 respectively, and are forecast to be approximately $183,000 in 2012.” For the love of God... what kind of website are they running? I must have missed the free massage they are apparently giving out to have costs that high for a website. Rediculous!!! This company runs a government backed monopoly and are not accountable to the people of the province for their spending. And to top it all off.... they want to GUARENTEE 10.5% return!!! Robery!!!!

    • jim bennett
      September 21, 2012 - 08:08

      FYI - Our rates are NOT even close to the lowest in Canada. BC, MB, QC, AB, and NB are all better... check this out http://www.hydro.mb.ca/regulatory_affairs/energy_rates/electricity/utility_rate_comp.shtml

  • DW
    September 21, 2012 - 07:25

    One money saving suggestion: Newfoundland Power should stop putting junk mail inserts in with their monthly bills.

  • Gerry Goodman
    September 21, 2012 - 07:15

    NL Hydro raised their power rate to Newfoundland Power 13% since 1 July 2012 yet this is not mentioned as the main reason for the rate increase to ratepayers.