It was Nova Scotia Power on the hot seat yesterday as Bruce Outhouse, the lawyer for the Utility and Review Board, quizzed Nova Scotia Power president Karen Hutt about the potential risks to ratepayers of self-dealing among the growing stable of Emera companies.
In 2016, NS Power did $66 million dollars worth of business with other Emera-owned firms. Emera, headquartered in Halifax, now has $28 billion worth of assets and 7,400 employees in ten affiliate companies; NS Power and Tampa Electric Company are the largest.
While most eyes were focused on NS Power’s Karen Hutt in the witness box at the front of the room, a plain-clothes Halifax policeman was quietly seated at the back keeping an eye on the door. A gun was clearly visible in the holster at his hip, a highly unusual presence at a stuffy UARB hearing, even when it involves a company many Nova Scotians love to hate.
Paul Allen, the executive director of the UARB, says HRM police were called as a security measure after he was told someone planned to disrupt the hearing. Nothing happened and Allen declined to name the target. He could recall only two other instances (an assessment and a planning appeal) where security was summoned. Most people in the room were unaware of the officer’s presence.
The purpose of the proceeding is for the UARB to determine if NS Power is complying with the Affiliate Code of Conduct. Its rules are designed to avoid cross-subsidization: to keep the business activities and the governance of NS Power separate and apart from the activities of its parent company (Emera) and Emera-owned sister companies.
An audit carried out by NorthStar Consulting between October 2015 and December 2016 found what it described as “management indifference” to rules that require NS Power to be the only provider of electricity services and for its management team to come from within the company.
Those rules were broken. NS Power argues they are a matter of interpretation at odds with a well-established practice at Emera and its subsidiaries to cross-appoint executives to hold key positions in more than one company.
That interpretation extends to leadership as well — the current chair of the NS Power Board is Scott Balfour, who is also the Chief Operating Officer of Emera Inc. During the audit period, Balfour also chaired the Board of Directors of several Emera affiliates, including Emera Brunswick Pipeline (a natural gas transmission company in New Brunswick), Emera Utility Services, and Emera Maine.
UARB lawyer Bruce Outhouse suggested to NS Power president Karen Hutt that the current organizational structure of NS Power and Emera is “rife with ongoing conflict of interest situations” that offer little comfort to the public.
As an example, Outhouse pointed to the fact NS Power is opposing a request from Emera Brunswick Pipeline, an Emera affiliate, to offer Irving Oil a discount on natural gas shipped through Emera’s pipeline. The Emera Brunswick pipeline is a competitor with the Maritimes Northeast pipeline where Irving Oil is today a big customer.
NS Power has told the National Energy Board that if Irving Oil shifts its business to the pipeline owned by Emera, ratepayers in Nova Scotia could see their electricity costs go up by millions of dollars. Outhouse noted that the problem the UARB has with the co-mingling of Emera and NS Power activities is that in this particular example, if the Emera Brunswick Pipeline wins the Irving business the parent company (Emera) makes a profit while its subsidiary NS Power gets to recover the extra fuel costs by charging ratepayers in this province more for electricity. (Nice work if you can get it!)
NS Power president Karen Hutt replied that ratepayers should draw comfort (however small) from the fact NS Power is willing to protect its interests even when they are opposed to the interests of the larger Emera parent. Hutt testified that decision was made by NS Power management and never went to its Board of Directors for approval. That may be because Scott Balfour, the chair of NS Power, is also the chair of Emera Brunswick Pipeline, and would have had to stand down or recuse himself.
Hutt testified even if that decision had gone to the Board, both NS Power and Emera are bound by law and internal codes of conduct that prevent company officers from finding themselves in conflict-of-interest or sharing confidential commercial information. Outhouse appeared skeptical.
One of the recommendations in the audit report which NS Power opposes is for the UARB to separate the organizational structure of NS Power from Emera.
NS Power’s position is that doing business with affiliated companies such Emera Utility Services — which supplies linemen, construction, and support services — saves ratepayers money. But there’s also the potential to inflate costs if instead of doing the work itself the power company hires a sister company that charges 55 per cent overhead (the going rate as we learned yesterday) or fails to obtain at least two quotes from firms outside the family fold.
NS Power does not add a profit margin when it does work for an affiliate. However, the Affiliate Code of Conduct does require the monopoly to document the process it uses every time it deals with a sister company so ratepayers can know they are getting best value.
The NorthStar audit found four cases totalling $11 million in value involving NS Power and Emera Utility Services where the rules around hiring an affiliate weren’t respected.
“We made the right decisions but the documentation fell short and we recognize the need to do better,” said Paul Casey, NS Power Distribution manager. Casey’s position is that ratepayers suffered no harm.
However, the UARB now has the option to accept or reject a recommendation from the auditor to take a second look at those transactions involving Emera Utility Services. That process is called a “prudence review” and sometimes results in customers getting money back although the review itself wouldn’t come cheap. This is not a recommendation NS Power supports, although it does accept 23 of 33 recommendations.
The auditor was also critical of NS Power relying largely on “institutional knowledge” to price its services rather than applying market-based comparisons. In response, NS Power’s president has promised to act on an audit recommendation to develop a Cost Allocation Manual that will become the standard for all transactions among NS Power and Emera affiliates.
The hearing is expected to wrap up today.
Thanks for this report, Jennifer. NSP/Emera’s position as a monopoly with a guaranteed rate of return should require a greater degree of scrutiny. Until we find a way to re-nationalize (expensive) or make it irrelevant for power generation, NSP/Emera need to be reminded just how golden is their access to the market while keeping close tabs on their operations. In my dreams, we go the nationalization route and send the bill to the Progressive Conservative party for their malfeasance.