An external audit of fuel costs incurred by Nova Scotia Power over a two-year period from 2018-2019 has given the utility a passing grade. Fuel costs make up about 45% of the company’s expenses and their volatility used to result in hikes to power bills — until a separate account was established for Nova Scotia Power to deposit money when fuel costs came in below forecast and withdraw money when the costs exceeded the budget.
The report by auditor Bates White was the subject of an oral hearing involving the Consumer Advocate and lawyers representing businesses in front of the Nova Scotia Utility and Review Board (UARB) yesterday. Although there were no fireworks, the rigorous audit process offers a rare glimpse into the inner workings of a tight-lipped private corporation with $5 billion in assets and 1700 employees, on which 520,000 households and businesses rely for their electricity.
For example, the audit uncovered an error involving sulphur dioxide emissions from a coal-fired unit in Trenton that led to the purchase of more expensive coal and petroleum coke in 2019 to meet a five-year environmental target. Although the auditor redacted the original amount at the request of Nova Scotia Power, the lawyer for the UARB agreed with intervenors there was no reason why the $740,000 spent on more expensive/lower-emission fuel should be a secret.
Nancy Rubin, a lawyer for a group of manufacturing companies known as the Industrial Group, asked the auditors whether ratepayers should have to pay for an error by the power company.
“This was a lapse of quality control; so was it imprudent?,” asked Rubin.
Auditor Chris Musco said “there were other factors, including inventory constraints and operational constraints at Point Aconi and Trenton 5” that meant the auditors were unable to quantify how much of the blame for higher fuel costs could be tied to the initial error. Essentially, they couldn’t tie the mistake to the purchase of a particular cargo. Bates White made a recommendation (one of 40 in the 300+ page report) aimed at improving internal procedures.
Tuft’s Cove concerns
The audit also expressed concern over the reliability of power generating units at Tufts Cove (those iconic candy canes on the Dartmouth side of the Halifax Harbour) to switch between burning natural gas and heavy fuel oil (HFO). The audit noted eight instances when this capability was not available and explained why closer attention must be paid to avoid potentially higher fuel costs in the future.
“If in reality the Tufts Cove units’ ability to fuel switch is substantially less reliable than assumed by both NS Power’s gas traders and the Plexos [forecasting] model, NS Power’s exposure to high winter gas prices is actually much higher than NS Power expects,” states the audit report in section 9 dealing with power plants.
Bates White notes that Tufts Cove also has another issue with respect to Heavy Fuel Oil being able to flow properly when the weather turns cold and temperatures drop below a certain point. There were 51 days in the fall of 2018 when burning heavy fuel oil wasn’t an option at Tufts Cove and 15 days in November-December 2019 when it was too cold for heavy fuel oil to flow.
The auditor reported NS Power said the Heavy Fuel Oil system was “out for maintenance” in the fall of 2018. That was after an August 2 oil spill from a corroded pipe, which eventually saw 24,000 litres of heavy oil leak into the harbour. The auditor noted the company refused to disclose “the root cause” of the pipe break because it was considering taking legal action. (The regulator has since ordered NS Power to provide the regulator with the “root cause” of that spill and the company has committed to do that; almost 2.5 years after the incident.)
The audit has also recommended that NS Power begin tracking and reporting to the UARB every six months the fuel costs attached to reducing GHG emissions to meet Cap-and-Trade regulations. Those regulations arrived in 2019 and the power company has until the end of 2022 to reduce carbon or pay to purchase credits. NS Power has said it intends to meet that environmental target.
Lots and lots of overtime
Interestingly, the audit also contained a few paragraphs with respect to workforce costs. “Conclusion IX-24: Nova Scotia Power continues to rely upon a considerable amount of overtime labor as a percentage of its Fuel Adjustment Mechanism-recoverable labor costs.”
Bates White says it finds this approach “reasonable, although it remains a trend to watch.” The auditor found Nova Scotia Power appears to regularly overestimate its “regular labor, which is the scheduled hours of its internal employees, and underestimate the amount of overtime, term, and contract labor needed to make up the difference. In particular, for this 2-year Audit Period, NSPI’s regular labor hours were 11% below budget for the Audit Period, while overtime labor was 38% above budget and term labor was 78% above budget.”
The audit says the company assumes all its full-time or regular employees will be available and does not build into the budget allowances for disability, resignations, or parental leave.