Nova Scotia Power's proposed profit hike challenged at utility hearings

Nova Scotia Power's move to increase its profits was challenged Friday at regulatory hearings in Halifax.

The company is before the Nova Scotia Utility and Review Board (UARB) seeking an 11.6 per cent rate hike over the next two years.

It says it faces disproportionate risk this decade because of the huge cost of transitioning the province's electricity generating system away from burning coal as a fuel.

The company is required by the provincial government to close coal fired plants by 2030 and use power supplied from 80 per cent renewable sources. The company predicts that by 2029, ratepayers will be on the hook for $658 million in depreciation to write off its coal plants before their useful lives.

Nova Scotia Power argues it needs to improve profitability in order to attract investors and protect its credit rating as it transforms to a greener grid.

Pennsylvania State University finance professor J. Randall Woolridge, appearing on behalf of the consumer advocate representing Nova Scotia Power's residential customers, said that risk is not showing up as a red flag in credit reports.

Assessing risks

"The credit reports I read for utilities all talk about the transformation of their fleets and how that has to be financed. So it's not unique. That's what utilities have to do these days," Woolridge said.

University of Toronto finance professor Laurence Booth appeared on behalf of the UARB's counsel.

Booth said Canadian utilities face lower business risk thanks to protective Canadian regulators.

"How would you like to get nine per cent pretty much guaranteed in your RRSP or outside of your RRSP, the way that NSPI [Nova Scotia Power Inc.] is earning its allowed greater return for the last 10 years?" he testified.

Both Woolridge and Booth challenged evidence from a Nova Scotia Power expert witness, James Coyne, the senior vice-president of Concentric Energy Advisors.

Coyne says Nova Scotia Power's efforts to improve profitability are justified, calling it the "the lowest capitalized, vertically integrated stock in North America."

'Earning sharing mechanism'

In its rate application, the company is seeking to maintain its nine per cent return on equity (ROE) but expand the lower and upper earnings band to allow for a maximum of 9.5 rate of return.

It has also proposed an "earnings sharing mechanism" that would give it — for the first time — half of earnings above its rate of return. Right now excess earnings go back into the business to reduce costs for ratepayers.

Nova Scotia Power, a subsidiary of Halifax-based Emera, wants regulators to increase the proportion of shareholder money it can use to pay for capital projects from 37 to 45 per cent.

If approved, it would allow Nova Scotia Power to earn a nine per cent rate of return on 20 per cent more of the money it spends on capital projects. For ratepayers, it would mean paying a nine per cent rate of interest rather than the much lower rate when the company borrows the money from the bank.

Coyne testified that Nova Scotia Power deserves a higher rate of return than it is seeking when compared to returns earned by other utilities, especially U.S. utilities.

"My analysis shows that 10.1 per cent is a reasonable and market-based ROE for Nova Scotia Power," Coyne told the board on Thursday.

Hearings into the rate application will resume Tuesday and are expected to continue for the rest of the month.