With inflation running at close to 5% these days, Nova Scotia Power might be forgiven for seeking a 3.3% increase in each of the next three years. That cost works out to an extra $5 a month. (Caveat: the 5% inflation rate is based on month-to-month comparison from a deflated pandemic economy last year and is not an annual inflation rate; the economic landscape and long-term inflation rate may change.)
What seems unforgiveable is a proposed change in how the company would finance capital projects — whether it is running power lines into a new subdivision or building a wind farm — that would shift millions of dollars in costs to consumers while significantly increasing revenue for Nova Scotia Power shareholders. This seems egregious because it could have very negative consequences for ratepayers.
Keep in mind the company will be required to make investments in the hundreds of millions of dollars over the next decade to “green the grid” in order to meet legal requirements to get to 80% renewable energy by 2030.
How Nova Scotia Power finances new projects to get us off coal could cost ratepayers big time if the Utility and Review Board goes along with a proposed change to the way financing costs are calculated.
Suppose, for the purpose of this example, Nova Scotia Power plans to spend $100 million building a large wind farm. Under what’s known as its “debt to equity ratio,” Nova Scotia Power currently borrows 62.5% of the cost of the wind farm from the bank and pays interest on that “debt” at 3-4%.
The remainder 37.5% of the wind farm’s cost is financed by shareholders with a guaranteed rate of return from Nova Scotian ratepayers — that’s the “equity” part.
What I didn’t realize is that Nova Scotia Power earns a guaranteed annual rate of return (profit) averaging 9% on that portion of the project financed by shareholders.
The change Nova Scotia Power wants would allow the company to apply that 9% profit to a larger slice of the pie, in this case the project’s cost.
Instead of earning 9% on 37.5% of our hypothetical wind farm’s cost, Nova Scotia Power would earn 9% on 45% of the cost. That works out to an extra $675,000 for the power company in the first year which would continue over the 25-30 year life of the wind farm declining by 3-4% each year.
As the percentage the utility can recover from ratepayers goes up, the percentage of the cost Nova Scotia Power has to borrow and pay interest on goes down, from 62.5 to 55%. A good deal for shareholders; not such a sweet deal for ratepayers. On our $100 million wind farm, the proposed change would wind up costing consumers in the ballpark of $8 million over the 25-30 year life of the project.
That’s if the Utility and Review Board approves not only the requested change to the cost of financing but also a slight increase in what Nova Scotia Power is allowed to claim as profit. Currently, that earnings range is 8.25-9.25% but the utility wants a .25 percentage point increase to max out at 9.5%.
Here’s the math to support the conclusion that proposed changes to the cost of financing ( from 37.5 to 45%) and the profit margin (from 9.25 to 9.5% ) could see Nova Scotia Power ‘s revenue increase by 23% for each $1 it spends on capital projects:
Current: $1 x 37.5% x 9.25% = $0.035
Proposed: $1 x 45% x 9.5% = $0.043
Profit Ratio: $0.043 / $0.035 – 1 = 23%
Although a wind farm was used in this show-and-tell example, the cost of any capital project (including the estimated $5 billion dollar Atlantic Loop currently being discussed among Ottawa, Quebec, New Brunswick, and Nova Scotia) would be captured by a change to the debt-to-equity ratio. The extra cost to consumers for a project the size of the Atlantic Loop could be in the range of $400 million.
Included in its 3,100-page application for a general rate increase, is this explanation by Nova Scotia Power for why it wants to change how capital projects are financed, essentially to maintain its credit rating:
The increase in the common equity ratio is particularly important to maintaining Nova Scotia Power’s current credit ratings given the significant capital investments that will be required to facilitate the clean energy transition… significant capital projects result in a deterioration in credit metrics during construction, as debt increases to fund the debt component of the capital structure, with no corresponding increase in cash flow until the project is placed in service. Therefore, the increase in the common equity ratio is imperative to ensure Nova Scotia Power maintains its current credit ratings such that it has the financial integrity to attract the capital necessary to fund these transformational capital investments.
The power company is asking that the financing change be phased in by the end of 2024. A public hearing will take place before the UARB in September.
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This is unconscionable. Thank you Jennifer for uncovering this grab by NS Power.