Nova Scotia Power’s decision to boost profits was challenged Friday at regulatory hearings in Halifax.
The company is before the Nova Scotia Utility and Review Board (UARB), which is asking for an 11.6% rate increase over the next two years.
He says he faces a disproportionate risk this decade due to the enormous cost of transitioning the province’s electricity generation system away from burning coal as fuel.
The company is required by the provincial government to shut down its coal-fired plants by 2030 and use electricity that is 80% from renewable sources. The company projects that by 2029, taxpayers will have to pay $658 million in depreciation to write off its coal-fired power plants before their useful life.
Nova Scotia Power says it needs to improve profitability to attract investors and protect its credit rating as it transitions to a greener system.
J. Randall Woolridge, professor of finance at Pennsylvania State University, appearing on behalf of the consumer advocate representing Nova Scotia Power’s residential customers, said risk doesn’t show up as a red flag on credit reports.
“The credit reports I’ve read for utilities all talk about transforming their fleets and how that needs to be funded. So it’s not unique. That’s what utilities need to do. these days,” Woolridge said.
Laurence Booth, professor of finance at the University of Toronto, appeared on behalf of counsel for the UARB.
Booth said Canadian utilities face less business risk thanks to protective Canadian regulators.
“How would you like to get 9% virtually guaranteed in your RRSP or outside of your RRSP like NSPI does? [Nova Scotia Power Inc.] earning its best authorized return in the last 10 years? he testified.
Both Woolridge and Booth challenged the evidence of a Nova Scotia Power expert witness, James Coyne, senior vice president of Concentric Energy Advisors.
Coyne says Nova Scotia Power’s efforts to improve profitability are warranted, calling it “the least capitalized and vertically integrated stock in North America.”
“Revenue Sharing Mechanism”
In its rate application, the company seeks to maintain its return on equity (ROE) of 9%, but expand the lower and upper earnings bracket to allow for a maximum rate of return of 9.5.
He also proposed a “revenue-sharing mechanism” that would give him – for the first time – half of the revenue above his rate of return. Currently, excess revenue is funneled back into the business to reduce costs to taxpayers.
Nova Scotia Power, a Halifax-based subsidiary of Emera, wants regulators to increase the proportion of shareholder money it can use to pay for capital projects from 37% to 45%.
If approved, it would allow Nova Scotia Power to earn a 9% rate of return on an additional 20% of the money it spends on capital projects. For taxpayers, that would mean paying an interest rate of 9% rather than the much lower rate when the company borrows money from the bank.
Coyne testified that Nova Scotia Power deserves a higher rate of return than it seeks compared to returns earned by other utilities, particularly US utilities.
“My analysis shows that 10.1% is a reasonable, market-based ROE for Nova Scotia Power,” Coyne told the board Thursday.
Hearings on the tariff application will resume on Tuesday and are expected to continue through the rest of the month.