All in the family: UARB to examine Nova Scotia Power’s dealings with Emera operations

Nova Scotia Power’s relationships with its parent company — Emera Inc. —and its nine sister affiliates, including Emera Energy, Emera Utility Services, Emera Caribbean, and Emera Maine, will get some rare scrutiny this week at a public hearing before the regulator.

As Emera has grown to become one of the top 20 energy companies on the continent, with $29 billion in assets and revenue of more than $4 billion a year, consumer advocates here have grown increasingly suspicious about whether there is sufficient separation between the business of the well-heeled parent company and the business of NS Power, the rate-payer funded utility which delivers electricity in Nova Scotia.

Consumer advocate John Merrick notes that the “policing role is particularly crucial now as the annual value of transactions between NS Power and its affiliates has increased 350% in the past 10 years — from $17 million in 2008 to $58 million in 2016.”

The shuffling of senior executives and commercially sensitive information between companies and the possibility NS Power may have been giving certain Emera-owned companies a break on the rent are just two topics before the Utility and Review Board (UARB) hearing starting Monday.

In Nova Scotia, the dealings between NS Power and its parent and sister companies are governed by rules set out in the 2015 Affiliate Code of Conduct. NS Power controls $4.6 billion in assets and employs 1,700 people. The purpose of the Code is to prevent ratepayers’ money from cross-subsidizing activities by other companies in the Emera stable, as well as maintaining competition when NS Power shops for goods and services.

For example, the Code requires the power company to get quotes from vendors outside its own group of companies for services ranging from the construction of sub-stations to storm cleanup. If no outside contractors can be found, NS Power must document and explain to the UARB why it had no other option but to hire one of its own affiliates.

To find out whether NS Power is keeping its nose clean and complying with the letter and the spirit of the Code, the UARB hired American firm NorthStar Consulting to audit NS Power’s transactions with its kissing cousins in the Emera family.

From Oct. 2015 to Dec. 2016, the audit found NS Power provided no direct financial assistance to any affiliates — a good thing. But it also found many instances of non-compliance where NS Power could have charged ratepayers for costs or services that rightfully belong to another Emera affiliate and its shareholders. The audit conducted more than 76 interviews with NS Power employees and looked at 53 protocols or rules governing business between affiliates.

NorthStar’s 114-page audit found the company complied with 29 rules and broke 24 others. The auditor also complained the power company refused to give up information NorthStar requested about “corporate governance.” Even without it, the auditor confirmed the management structure of NS Power and Emera are not separate but intertwined (as most Nova Scotians are well aware and despite the Code of Conduct stating they are to remain separate). Senior managers and senior executives often hold positions or “cross-appointments” in both NS Power and Emera, apparently indifferent to the language.

In 2016, Scott Balfour was the chair of the NS Power Board of directors and the Chief Operating Officer at Emera; Balfour will soon replace retiring Emera president Chris Huskilson. In 2016 the Chief Financial Officer at Emera was also the CFO for NS Power. Another executive was responsible for Human Resources at Emera and at NS Power.

Today, there is still a regular flow of senior managers (including lawyers and Public Relations people) transferring back and forth between affiliate companies. A pedway above Lower Water Street connects NS Power headquarters with office space purchased by Emera on Terminal Road. In its written response to the audit, NS Power argues inter-company transfers provide growth and leadership opportunities for its employees. The NorthStar audit takes a dimmer view.

“As a result of NS Power’s unencumbered temporary assignments and personnel transfers, cross-appointments of senior managers, and inter-affiliate organizational reporting relationships, it did not protect commercially sensitive information”, says the audit in Section 1, page 2.

NS Power disagrees strongly with that conclusion. The company says the auditor’s comments “demonstrate a misunderstanding” of the purpose of the Code of Conduct. In a written statement which NS Power president Karen Hutt plans to read before the UARB hearing today (Monday), Hutt says:

It is disheartening when NorthStar states in its Rebuttal Evidence: “NS Power wishes to maintain the current state of affiliate relationships and transactions unencumbered by regulatory oversight.”

 I want to assure this Board that this is simply not true. As a public utility with the privilege of providing an essential service through a monopoly franchise, we fully understand, appreciate, expect and endorse regulatory oversight. One of the key areas of disagreement relates to NS Power’s corporate governance structure and the role of our parent company, which, as outlined in our Reply Evidence, is consistent with the Affiliate Code and the practices in other utilities.

Safe to say they agree to disagree. Meanwhile, the audit makes 33 recommendations to change the Affiliate Code of Conduct, here are a handful that caught my eye:

• Separate the NS Power management team and utility organization from Emera Inc., obtain approval for the organizational deviations, or modify the Code.

• Perform a detailed prudence review of NS Power transactions with EUS [Emera Utility Services] to ensure that the failure to sufficiently evaluate and document economic and operational alternatives as well as reasonable management of NS Power resources has not resulted in cross-subsidization or additional costs to ratepayers.

• Discontinue the use of the Global Intercompany System (computer software program) and Journal entries for charging Affiliate transactions. Require monthly invoices for all affiliates with itemized services, dates and cost.

• Conduct fair market value analyses for all affiliate transactions including Management & Administrative Services or get UARB approval for alternative pricing methods.

• Obtain UARB approval for Emera Newfoundland (subsidiary responsible for the Maritime Link subsea cable) and Emera Energy (the company that buys and sells fuel for power plants) to be included in Emera’s lease at NS Power Headquarters. Charge Emera Inc. for back rent.

The audit has blacked out or redacted information that would show how much rent NS Power is charging the two affiliate companies. The report does indicate it’s the same amount the UARB had earlier approved for charging the parent company (Emera) to rent office space from NS Power. Still, NS Power is required to get UARB approval to make sure other Emera companies are paying fair market value and not getting a sweetheart deal.

As for the relationship between NS Power and Emera Utility Services, the audit found a glaring example of sharing commercial information between two subsidiaries that raised several compliance and competitiveness issues. The audit says NS Power issued a purchase order to an affiliate company called Emera Utility Services (EUS) for services needed to test the oil in 10,000 transformers. The audit claims the contract was not competitively bid or UARB-approved.

The audit quotes a chain of emails from a NS Power employee that showed he reached out to EUS one day after receiving a call from a potential supplier outside the Emera family of companies. The email shows the option of NS Power doing the testing itself was never adequately considered or documented before hiring EUS, the sister company, several weeks later. Wrote the unnamed employee:

 I put a cost comparison sheet together for NSP, EUS and (redacted name of company). You should be able to see that NSP is the best option from a cost perspective, but we will not be able to [provide?] the self-provisioning because our resources are loaded with work. I believe EUS is the way to go since it’s the second most cost effective option and resources can be available to complete the job.

NorthStar Consulting says this conversation shows “unrestricted communication between NS Power management and an affiliate exchanging commercially sensitive information.” Furthermore, the audit says, “this contract with EUS resulted in NS Power paying more than the purchase order agreed upon amount. The total amount paid to EUC exceeded NS Power’s in-house cost estimate and the all-inclusive estimate from the  (redacted name of the outside company).”

Bottom line for the ratepayer is that this cozy relationship between Emera-related companies cost us money. However, in another review involving the same affiliate, NS Power was credited with following procedure (analyzing whether it could do the work more effectively itself) before contracting EUS to provide power line technicians in 2014.

While the audit panned the power company for sharing sensitive commercial information with employees who work for other Emera subsidiaries, it found NS Power carefully follows the rules when it comes to safeguarding  information gathered from it customers.  It also carefully tracks and properly accounts for the time spent by employees seconded to work for affiliates.

And NorthStar auditor Douglas Bennett said it was “not surprising” to find examples of non-compliance because this is the very first look at how NS Power does business with its relatives. Given the potential for abuse and the tens of millions of dollars flowing back and forth between many affiliate companies, one might argue such an audit is long overdue and unlikely to be the last.

The regulator will hear arguments this week from NS Power and the consumer and small business advocates before deciding what action if any should be taken.