Government’s Muskrat Falls reference to the Public Utilities Board is a de facto acknowledgement that the province’s ratepayers cannot bear all the costs associated with the Muskrat Falls project.
In 2012, the provincial government decided that Newfoundland ratepayers would pay the entire cost of the project no matter what the cost ended up being.
To facilitate the financing of the project, the government in 2013 issued Orders-in-Council facilitating financing of the project and implementing its 2012 decision to have rate payers pay the entire cost. Absent changes in current legal and contractual arrangements, compliance with the 2013 Orders-in-Council will require Newfoundland ratepayers to pay more than 23 cents per kilowatt-hour (plus HST) beginning in 2021.
Muskrat Falls’ proponents conducted no elasticity studies to determine what price the local electricity market could bear. However, on July 30, 2018 economist Dr. Jim Feehan filed an elasticity report with the Public Utilities Board. Feehan’s report demonstrates that as electricity rates rise to even 17 cents per kilowatt-hour, up to 50 per cent of electric space and water-heating customers may leave the system and adopt other forms of heat-generating energy. His report shows it would be more economical for consumers to move to an efficient oil furnace, propane system, mini-split heat pump, or other options, all of which would be less expensive. In effect, the 2013 Orders-in-Council, which were enacted to facilitate financing of the Muskrat Falls project based on the assumption local ratepayers would pay for it, will be frustrated.
Electric heating customers leaving the system in droves would be catastrophic because a significant loss of this customer base would financially cripple public utilities and ultimately the province. Something has to be done.
The Public Utilities Board reference is timely. It offers stakeholders, consumers and interested parties an opportunity to contribute to finding ways of retaining affordable electricity, thereby dissuading electricity users from leaving the system. Rate design experts and economists will be asked to investigate ways of remedying our current situation. Solutions require research and innovation.
There are potential starting points within the current system based on duplication. One example, in 2017, Newfoundland and Labrador Hydro and Newfoundland Power between them spent $167,000,000 in operating costs. These and other systemic expenses need to be examined to curb unnecessary overlap.
Furthermore, the 8.5 per cent rates of return currently enjoyed by the utilities are no longer possible. Moving to incentive- or performance-based regulatory mechanisms for the transmission and distribution of electricity should be less costly, ensuring services at the lowest possible cost while maintaining acceptable levels of customer service.
While business and industry expansion may be the best use for the additional energy which will be coming onto the island, ratepayers also need market priced power for stable rates. This will encourage users of other forms of heat energy to convert to electricity.
Everyone recognizes that the cost of Muskrat Falls will ultimately have to be paid. However, we now know having ratepayers bear the entire cost of Muskrat Falls will not work. Re-engaging the Public Utilities Board is a positive first step to help to determine what will work.
After that, we will know what changes will be required to the current legal and contractual arrangements.