Tuesday, 14 June 2011

Politics and Power (The Electric Stuff)

There was some  news this week on one of  Islanders' favourite topics, electricity prices. The government announced who's on a new Energy Commission (lots of accountants), and  there was more out of Mondays meeting of the Southeastern United States and Canadian Provinces Alliance in Fredericton.

(I'd never heard of it either but here's the deal: "The Southeastern United States - Canadian Provinces Alliance (SEUS//CP) is a strategic trade and investment-focused partnership between six southeastern U.S. states (Georgia, South Carolina, North Carolina, Tennessee, Mississippi and Alabama) and seven Canadian provinces (Newfoundland and Labrador, Nova Scotia, Prince Edward Island, New Brunswick, Quebec, Ontario and Manitoba). The Alliance was established in Montreal in November 2007 to formally advance a common interest in enhancing economic ties between the two regions")

Anyway, PEI premier Robert Ghiz was asked about  the huge cost over-runs to refurbish the Point Lepreau nuclear plant. Maritime Electric is responsible for 5% of the costs of operating Point Lepreau, and gets 5% of the output. That translates into about 15% of PEI's energy requirements, and it's been by far the cheapest source of power, until this refurbishment adventure.

Ghiz expects feds to pay Lepreau costs
by adam huras Times & Transcript Staff •

FREDERICTON - Prince Edward Island Premier Robert Ghiz says he expects the federal government will pay for the complete cost overruns of the Point Lepreau refurbishment.

But the Island premier warns against court action in order to secure compensation from Ottawa.

Ghiz went on to say that if the Federal government wants to sell AECL to the private sector, then it needs this project to be successful, and its customers happy.  Right now the Lepreau fix-up is three years late, and about a billion dollars over budget. But, and I think it's a big but, there's another big chunk of money owing  that most don't even know about  that could have an even bigger impact on what Islanders pay for power once the dust settles. This is not a two minute story, so bear with me.

Islanders have traditionally paid the highest electricity rates in the country.  There was a brief stretch starting in 1998 when rates by law were fixed at 10% above those in New Brunswick, but as generation and power purchase costs started to rise, Maritime Electric and its parent company Fortis from Newfoundland begged off the 10% deal, and the provincial government (Binn's Conservatives) relented, putting electrity rates once more under the regulatory control of the Island Regulatory and Appeals Commission. As oil prices went on a roller coaster ride, Maritime Electric and IRAC decided to try to smooth out the peaks and valleys through a program called the Energy Cost Adjustment Mechanism or ECAM. It was one of these complicated regulatory processes that gave the media and the public a headache, so it wasn't widely reported on, but had a huge impact on rates.  (Laura Chapin of CBC radio got it) 

Every month the ECAM looked at the real cost of producing and purchasing power,  above or below the base rate Islanders were paying, and then spread that increase or decrease  over 12 months. The hope was the months when the rates went up would be counter-balanced by months when it went down. The problem was real rates did nothing but go up, and substantially. By 2008 Island ratepayers owed Maritime Electric close to 70 million dollars, money ME had already spent on power and was allowed to recover, but money Island ratepayers had been sheltered from paying because of the ECAM.  Finally it was decided this outstanding bill was only going to get bigger and had to be paid. IRAC agreed to the big jump in rates that everyone finally noticed, garnering a lot of media and political attention.  By  2010, Islanders were again paying rates well above other Canadians, but the ECAM balance was back to zero.  BUT (and here's what most people have missed) another bill that ratepayers will eventually have to pay  was quickly growing:  the replacement costs for power Maritime Electric has had to buy because of the Lepreau shutdown.  This outstanding bill reached 50 million dollars by the end of last March, when the government's new energy accord  brought another set of  calculations and complications into the mix. So to be clear, this growing liability is sitting on Maritime Electrics books,  there's no mechanism or plan in place right now to pay it off, and the new energy accord has just pushed the day of reckoning further  into the future.

The 5 year PEI Energy Accord will get a lot of attention between now and the provincial election in October,  and all of us will have to separate facts from the political hype that will come from all sides.  Rates did come down by 14% on April the First, and will be frozen for another  year, and then according to the plan, go up with inflation in years three to five. All of that is welcome to homeowners and businesses. What I would caution is that ticking debt bomb that's at 50 million dollars now, and will continue to grow until Lepreau comes back on line, whenever that is. The liability will grow more slowly (now at about 1.8 million dollars a month) because the Government is going to pay it, and it can borrow money cheaper than Maritime Electric, but it's still an outstanding bill that has to be paid, and if we look back at the kind of rate increase it took to get rid of  the ECAM bill back in 2008,  I can't see how we won't be faced with a similar kind of increase once the Energy Accord ends.

Here's what I'm wondering: how much of the 14% rate decrease would have occured anyway simply because the ECAM deficit was paid off, and Maritime Electric negotiated better purchase pricing agreements starting on April the first. And don't tell me Maritime Electric wasn't quite capable on it's own to pick up the phone and shop around with the regions utilities to look for better prices. (did it really need the help of the provincial government??) These cheaper power purchase agreements are the best news in all of this.

Beyond that, given that this 50 million dollar and growing liability is on the books, would it not have made more sense to get a 10% or 12% decrease now, and start paying off  this debt, so the impact isn't as great in 2016? (just nicely after the 2015 election)

And there are other costs Maritime Electric is allowed to recover including getting out of its participation agreement with NB Power in the Dalhousie heavy oil generator, and a third power cable when and if it's finally built.

The new commission that was finally announced this week has a difficult task ahead of it. Electricity is an essential service, right now there's only one company that delivers it, and by law Maritime Electric is allowed to recover all of its costs, and a healthy rate of return (9.75%) on its equity, and with oil prices continuing to rise, it's hard to see how there can be a soft landing for any of us. If anything we'll see rates in New Brunswick and Nova Scotia  go up substantially, and at least PEI businesses won't be at such a competitive disadvantage, or homeowners feel quite so fleeced. Until 2016 at least.

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