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Public Utilities Board says $200M per year from feds won't be enough
The final report on rate mitigation options for Newfoundland and Labrador says it’s going to take more help from Ottawa than previously believed.
The Board of Commissioners of Public Utilities (PUB) released its final report late on Friday, detailing what the provincial government needs to do to prevent a 75 per cent increase in electricity rates in the province.
As of the most recent update, Nalcor Energy maintains the Muskrat Falls hydroelectric project will cost $12.7 billion. Assuming that number doesn’t further increase, the PUB predicts a sharp increase in rates.
“Based on the most recent project update released by Nalcor in June 2017 the average domestic rate for customers on the Island is forecast to increase to 22.89 cents/kWh in 2021 when the Muskrat Falls project is commissioned and project costs are required to be included in customer rates,” reads the report.
“This is a 75% increase from the current average domestic rate of 13.06 cents/kWh.”
“The broad and steep impact of these projected rate increases is unprecedented in the history of electrical power regulation before the board, and indeed appear to be unprecedented in recent North American experience."
In April 2019, the Liberals announced their plan to keep electricity rates at 13.5 cents per kilowatt hour. In order to keep electricity rates from hitting almost 23 cents per kilowatt hour, the PUB says hundreds of millions of dollars annually will have to be spent to subsidize electricity rates — $620 million will be needed in 2021 alone to keep rates at 13.5 cents per kilowatt hour, the first year Muskrat Falls is scheduled to be completed.
The report says industrial customers — which include Corner Brook Pulp and Paper, North Atlantic Refining Ltd., Teck Cominco Ltd. and Vale Inco Newfoundland and Labrador Ltd. — have expressed deep concern with the problem facing the province.
“The broad and steep impact of these projected rate increases is unprecedented in the history of electrical power regulation before the board, and indeed appear to be unprecedented in recent North American experience,” reads the report.
How much money is needed
The PUB report outlines the escalating cost to be passed down to ratepayers as a result of the Muskrat Falls project.
The total annual cost of the Muskrat Falls project is enormous, according to the report.
“The forecast revenue requirement for the Muskrat Falls project to be included in the rates charged to customers is approximately $726 million in 2021,” reads the report.
“(Newfoundland and Labrador) Hydro’s total Island Interconnected revenue requirement, including the Muskrat Falls project, is forecast to be $1.1 billion in 2021, without export sales and assuming the decommissioning of the Holyrood plant. This is an increase of more than 70% from the 2020 requirement. The revenue requirement for the Muskrat Falls project will increase to $1.2 billion in 2039.”
In order to offset the increases in electricity rates, the government needs to redirect revenues, cut costs at Nalcor Energy and Newfoundland and Labrador Hydro, and use more electricity, the report states.
Where the money comes from
The PUB says the largest sources of funds for rate mitigation are returns and dividends from Muskrat fall, Churchill Falls, and Newfoundland and Labrador Hydro, Nalcor export sales and water power rentals. Those sources could provide from $171 million in 2021 to $526 million in 2030. But the PUB cautions not to redirect too much of that money to keeping electricity rates down.
Operational savings at Newfoundland and Labrador Hydro and Nalcor Energy could contribute another $22 million in 2021 to $48 million in 2030. One way is to merge Newfoundland and Labrador Hydro and Nalcor’s power supply division. The PUB says those savings are small, but could become significant in the long term and lead to a better overall utility.
The provincial government has already signalled its intention to get government properties — such as schools and hospitals — away from oil heating and onto electric heating. While the report says it’s too early to make specific recommendations on electrification, it suggests between $40 million and $70 million in revenues could come from the move by 2025.
The board says it did not answer whether directing oil and gas revenues toward rate mitigation was part of the answer, as it was not within the terms of the board’s review.
More help from Ottawa needed
But even with all the money identified in the report, the PUB says there is still a significant gap to fill if the government wants to keep electricity rates at 13.5 cents per kilowatt hour.
“During the course of the review government announced its intention to keep domestic rates on the Island Interconnected system at or below 13.5 cents/kWh in 2021,” reads the report.
“While it is not clear whether this target rate will be maintained in subsequent years it is clear that, even with the application of the potential mitigation identified, domestic rates in 2021 would be well above the target rate.”
Should the government put all the mitigation sources identified in the report in place, there’s still a lot of ground to make up.
"... even with the application of the potential mitigation identified, domestic rates in 2021 would be well above the target rate.”
In April 2019, the Liberals announced their rate mitigation plan, which included $200 million from the federal government annually to keep rates at 13.5 cents.
The PUB's report say that’s not enough.
“It is estimated that, in the absence of additional rate mitigation, the average domestic customer rate on the Island Interconnected system would be over 19 cents/kWh,” reads the report.
“If additional mitigation becomes available in 2021 as a result of the province’s engagement with the Government of Canada, this would further reduce this rate. For example, additional mitigation of $200 million would reduce the average domestic rate to between 16 cents/kwh and 17 cents/kWh, close to the average of the other Atlantic provinces, but still higher than the target rate of 13.5 cents/kWh.”
Premier Dwight Ball is expected to give an update on rate mitigation discussions with the federal government in the coming week.