27 January 2017

Feehan, electricity prices, and the bigger problem. #nlpoli

Jim Feehan's proposal to change the way we price electricity in the province got some media attention -over the past 24 hours.

Feehan believes that we should set the base price of electricity in this province on the best export price rather than the current proposal to have electricity from Muskrat Falls sold in this province for a price wildly more than that.  Under Feehan's scheme,  the money to pay for Muskrat Falls would come from a reduced profit for Nalcor and hence a reduced divided for the taxpayers. As well, there'd probably have to be an additional tax created to cover off the rest of the costs.

As we noted here in a recent post, Feehan's suggestion doesn't represent any change from what is actually going to happen anyway. He just wants to present it to consumers in a different way.  That's not a bad idea since it is inherently more transparent.  You can see what is what.  Unfortunately, Feehan's idea misses entirely the core problem, which is the electricity policy inherent in Muskrat Falls in the first place.

The province's electricity policy up to December 2012 was really simple.  The government created a system in which a combination of public and private companies made and delivered a basic necessity to consumers in the province at the lowest possible cost.  They gave the job of controlling the system to the public utilities board.  The price to consumers for the electricity reflected the cost of making the electricity,  transmitting it, and repairing and maintaining the plant and towers and so on.  The price to consumers also included a profit for the companies involved.

The Conservatives elected in 2003 promised to turn the government's Newfoundland and Labrador Hydro into a larger energy corporation.  In 2006, they thought they would have a deal on Hebron and announced at the opening of the House of Assembly that they would introduce an amendment to the Hydro corporation law to make that happen.

 The Hydro corporation was limited by provincial law to making and transmitting electricity for use in the province.  The public utilities board was legally supposed to set prices to keep Hydro solvent. As it turned out, they really hadn't given much thought to it, so they made a simple change to the Hydro Corporation Act. The Conservatives just lifted the restriction on what Hydro could do without changing the requirement that the PUB set electricity prices to keep the company profitable.

That created a problem since it fundamentally changed the nature of the electricity pricing scheme.  That wasn't what the Conservatives had planned to do, but their amendment the the Hydro Corporation Act was simply a lash-up caused by the way the administration worked (making-things-up-as-they-went).  In 2007, they fixed the problem they caused in 2006  by introducing two new pieces of legislation.  One created the new energy corporation and the other set up the Hydro Corporation again, essentially as a company to provide electricity within the province.

While the Hydro corporation could legally still wind up doing something other than make and transmit electricity,  the intention was to have it remain as the "regulated" part of the company.  The other business ventures, including the Lower Churchill would remain outside the public utilities board's control and would have nothing to do with the cost of domestic electricity.

This notion of domestic versus export is an important point to bear in mind. The Liberals had exempted the Lower Churchill project expressly from the public utilities board jurisdiction in the late 1990s even though it was, at the time, a project run by the Hydro corporation.  That's because it was intended solely for export and should not have come under consideration in setting domestic rates.

The Lower Churchill project, i.e. Gull Island, was always intended as a project to make electricity for export only. Funding was supposed to come from export sales that would pay for all the borrowing and profit.  Rather than being a cost burden on local taxpayers,  Gull Island was supposed to bring revenue into Newfoundland and Labrador.

In 2010,  the Lower Churchill project was effectively dead.  No one would buy electricity from Gull Island because it was too expense.  Officials at Nalcor and within the Williams administration needed a project to announce to cover Williams' exit from politics.  They invented Muskrat Falls and planned from the outset to force local taxpayers to cover the entire cost even though they would only use a fraction of the electricity.

Despite the fact that the Lower Churchill project was now being developed solely for domestic use, the Conservatives used the exemption granted to the Lower Churchill Project by the Liberals to keep the public utilities board from examining the project to ensure it met the existing lowest-cost-electricity policy. The Conservatives also changed the way the public utilities board would set electricity prices to ensure rates would cover Muskrat Falls.

The Conservatives also insisted that one of the reasons for building Muskrat Falls was the revenue stream the project would produce.Since the only revenue from the project would come from domestic ratepayers,  Muskrat Falls effectively transformed electricity pricing from the charge to provide an essential service to stealthy tax. What's more, the component of the development deal that involved the delivery of free electricity to Nova Scotia amounted to the use of domestic electricity prices to transfer wealth from Newfoundland and Labrador to Nova Scotians.  In the event Nalcor sold subsidised electricity to other export customers,  the discount served to transfer local wealth to others.

The scheme proposed by Nalcor to export electricity also demolished the distinction that had formerly been maintained between generation for domestic use and generation used primarily or exclusively for export. Nalcor plans to meet its export obligations by shipping electricity from facilities already paid for to provide domestic supply.  That also had the effect of transferring a significant benefit paid for by local consumers to people outside the province.

That fundamental transformation of domestic electricity policy is the major issue arising from Muskrat Falls that the provincial government needs to tackle. Professor Feehan's scheme simply doesn't address this.  If we step back and look a little wider,  the provincial government needs to reform the structure of the provincial energy corporation and its governance if the electricity industry portions of the corporation are to engage in electricity exports.

In Quebec,  this involved the creation of the so-called "heritage pool" of generation to maintain a source of stable,  low-cost electricity for domestic residential and business consumers.  Hydro-Quebec also re-organized into separate companies for generation, transmission, and distribution. The situation in Newfoundland and Labrador has some different aspects but the changes may not look radically different.

If the details of change aren't clear now, one thing is for certain:  the difficulties caused by half-baked, half-assed energy policy over the past decade go well beyond the pricing issue that Professor Feehan addresses.