New Clear Free Solutions Final Arguments For NB Power Rate Hike

  1. ROUSE: Good afternoon, Board. Before I begin I want to thank all the support people that have helped out with this hearing.  I want to thank all the intervenors, expert witnesses, members of the public, media, Board Staff, Public Intervenor and everyone at NB Power.

And although they haven’t been represented very well at these hearings, I also want to thank the First Nations people for agreeing to share this beautiful province with us through the Peace and Friendship Treaties.

Although I would have preferred to spend my vacation at the beach, this has been actually very enjoyable and a very memorable week.  And I met some really great smart, caring people.  I also want to thank all the Board Members and especially the Chair who has shown exceptional fairness and guidance to not only myself but to all participants within this hearing.  This has been evidence since my first appearance in front of the Board when he suggested that I was more than likely in the wrong hearing, at the cost allocation study, and strongly suggested I participate in these hearings instead.  For this I am thankful.

I am going to take some good advice I had this week and try and keep my final arguments fairly short and to the point.  I have four topics in my final argument and these are arguments are as follows, the rate increase, the new Electricity Act and my interpretation of it, the integrated resource plan and the financial risk management policies.

So the first one, the rate increase, as I had stated during my cross.  In general, it is my opinion that NB Power did a very good job at justifying a reasonable rate increase for this particular hearing.  In general, however, does not mean I completely agree.  I would argue the two best and compelling presentations all week came from the small industrial customers and small business at the public session Wednesday night.

The small industrial customers made a very compelling argument that the current rate design is outdated and needs to be reviewed to reflect the new reality.  As an interim solution to the problems identified by the small industrial customers, I would suggest to the Board a remedy that the across the board 2 percent rate increase proposed by NB Power not be applied to this customer class for this particular hearing by either having no rate increase or a rate increase below that of 2 percent.

The small business group also made a very compelling argument that they are already paying more than their fair share.  Although the cost allocation methodology is still ongoing, there does not seem to be any question that they are the customer class that is paying too much.  The cost allocation methodology is only going to determine the    exact amount.  My recommendation for small business rates is similar to that of small industrial customers.  And recommend the 2 percent rate increase not be applied to this customer class for this particular hearing by either having no rate increase or a rate increase below 2 percent.

I make these two recommendations based on section 103.8(b) of the Act where it says in approving or fixing just and reasonable rates, the Board may take into consideration matters of cost allocation and rate design.

The second topic that I wanted to cover was the interpretation of the new Electricity Act.  I generally agree with NB Power that the interpretation of the Act should be that setting rates should be forward looking and not necessarily just for the test year, although there is a portion of setting the rates that should be  based on the test year revenue requirement.  This test year revenue requirement should only be used to address the reasonableness of the specific items contained within it for that year.  And the 10 year plan in IRP should be used for the forward looking portion of it.

It is for this reason I made the suggestion for small business and small industrial customer rate increases.  There is ample time to adjust rates to obtain the    objective of section 68 of the Act without the two percent increase on these two customers.

My suggestion in going forward in the interpretation of the Act is that all of the shoulds, shalls and mays within the Act be examined.  There is a large amount of case law regarding the meaning of these three words.  Shalls are generally meant to be a requirement.  Shoulds are generally something that is not a definite requirement but rather guidance.  And may is generally thought to be an option that is strongly recommended.

Some of the considerations of these words are in section 68 and 100 of the Act, which are referenced as shall considerations for the Board in section 103.7 of the Act which states, in approving or fixing just and reasonable rates, the Board shall base its order or decision on the corporation’s revenue requirements, taking into consideration a) the policy of section of 68 and b) the most recent integrated resource plan approved or deemed to be approved by the executive council under section 100.  I am not going to — those were the two portions of section 103.7 that I am going to focus on.

Section 68 says, it is declared to be the policy of the Government of New Brunswick that a) that the rates charged by the corporation for the sales of electricity within the province i) should be established on the basis of annually forecasted costs for the supply transmission and distribution of electricity.  And ii) should provide sufficient revenue to the corporation to permit and earn a just and reasonable return in the context of the corporation’s objective to earn sufficient income to achieve a capital structure of 20 percent.

We would like to point that section 68 uses the word “should” in the context of annually forecasted costs which is the now portion of the ratemaking and the should is in regards to the longer term objective goal of the 20 percent.

In section 100 which was — a large part of my evidence was based on this part of the Act.  And it says, subject to — and this is in regards to the integrated resource plan.  It says, subject to any change request under subsection 7, the IRP shall be developed by the corp — the IRP shall be developed by the corporation in accordance with the principles of least cost service, economic and environmental sustainability and risk management.

A large amount of my evidence was based on these principles and I would urge the Board to give the shall in this part of the legislation due consideration. I don’t think it is reasonable to address all of the interpretations of the Act in the context of this particular hearing.  With that being said, one of the things that I think should be considered at possibly other hearings is this.  Although it has not really been identified as an issue yet, my thoughts are that the intention of the Act should be interpreted such that the long term PPAs should be approved by the Board.  I think it may be too late in the game to determine this at this hearing and suggest that it be handled maybe at the next rate hearing.

My opinion on this is on the fact that any new generation that is to be capitalized by NB Power does need to have Board approval and they have to take into account the approved IRP.  It is not reasonable to allow a contracted generation through a PPA to be able to be signed without Board approval as well, because both will affect the revenue requirement.  And it would be a loophole in the legislation if long-term contracts for generation identified in the IRP are allowed to be signed without Board approval.  I recommend that this be reviewed at the next hearing.

My third point that I wanted to discuss was the integrated resource plan.  As NB Power has pointed out during these hearings, this is the first of many IRPs and will be massaged over time.  Again, in general, I think the current IRP has a lot of potential, is actually quite progressive and has most of the elements needed to make a pretty good long-term plan into a very good long-term plan.

I had originally suggested to the Board order a new IRP be developed for next year’s rate hearing at the — and at the very least order NB Power to include more information in the next iteration.  I am going to withdraw my request for a new IRP to be developed for next year.  But strongly request that the Board order NB Power to engage in additional stakeholder consultations for the next iteration of the IRP, with the scope of the consultations based on the level of interest of the stakeholders.  And for my particular self, I hope that a lot of my concerns with the IRP would be developed.  But I think they should also offer this stakeholder consultation to whoever else is interested as well.

There has been some discussions about the renewable portfolios standard.  And I think that was handled between myself and NB Power during my cross-examination, so I am not going to discuss that any further.

However, I do want to point out that in my submission I had suggested a target of 100 percent renewable by 2100 in the long-term thinking.  Coincidentally, this coincides with commitments recently made by the Prime Minister of Canada at the G7 meeting.  So this should now be the long-term renewable portfolio standard goal for the next IRP.

My fourth point that I would like to address, which I am not near as prepared as I would like to be, and this isn’t going to be as good as the first three, is the financial risk management policies.  This I am going to get into a little bit more detail because I personally feel that this is my biggest issue with these hearings.

So as with my experience with being audited and auditing, it is my perspective that NB Power failed my own personal audit of their financial risk management policies.  My opinion is based on two senior managers of risk failed to provide an accurate description of operational risk.  In any recognized certified management system, this would have been a major non-conformance and more than likely would have resulted in decertification.

I would like to bring to the attention to the Board — and maybe the secretary can help me out with this.  The new document, the revised financial risk policy review that was just handed me this morning.  If you could maybe bring that up on the screen?  And then on page 7. I would like to bring everybody’s attention to governance 9 within this audit by an accredited third party.  There was a lot of discussion yesterday of what is included in the financial risk management policies.  And I was told that such things as earthquakes or external events are — weren’t to be included in these financial risk management policies.

With regards to this governance 9, which was based on a benchmark industry standard, I would like to bring the attention to the Board policy.  It says, yes, and it specifically references FRMP, which is the financial risk management framework policy.  And that the GAAPs identified in this audit was that there was no gaps identified.

So if we look at what the benchmark requirement, the shall statement I guess, is what we like to refer it to says, a documented risk management policy exists which includes a description of the categories of risk to be managed by each functional group.  And then in quotes it says “EG price risk, basis risk, liquidity risk, credit risk, model risk, market risk, operational risk, volatility risk, physical risk, optionality, legal, regulatory risk, contract risk, data risk, foreign exchange risk and interest rate risk”.

Yesterday when I asked the question about the definition of operational risk, NB Power could not give me an answer, what the external events was supposed to mean.  I would like to point out the physical risk within this definition of what is required according to this third party audit.

I looked up the definition of physical risk.  And it says a hazard, any biological, chemical, mechanical, environmental or physical agent that is reasonably likely to cause harm or damage to humans or other organisms or in the environment in the absence of its control.  Well this refers to damage to humans or organisms, or the environment.  In the context of this particular matter, it is in regards to financials.

I think it has been quite evident through this hearing — there was a study done based on climate change and how it may financially affect hydro flows and that seemed to be — nobody complained that that wasn’t part of this process.  So to exclude external events from financial risk management policy would be a very big mistake, in my thoughts.

A lot of my experience so far in the last five years has been with the Canadian Nuclear Safety Commission and that whole legislation, everything about that legislation

is about risk.  It’s a risk based legislation.  And although I am not qualified as an expert, I have a really, really good handle on risk and I know the things we should be looking at and the things that we shouldn’t be looking at.  And external events is something that can cause a lot of financial risk to NB Power.

So some of the other things that — according to this third party audit that didn’t identify any GAAPs there is some other things at risk that I would like to talk about, one of them is model risk.

I am going to put this into context of my intervention and I spent a lot of time arguing with NB Power about the reasonableness of the levelized cost of electricity for wind power.  Model risk is essentially, you know, are we doing the calculations right and stuff.  In the GLGH report, it suggested that for small wind scale farms that O&M is $86 per kilowatt per year.  Well for a large scale wind farm, the value is $62 per kilowatt per year.  I have submitted to the secretary a calculation.  I am not sure if she can put it up or not.

So anyway, I took the expert advice and used $62 per kilowatt per year.  And I converted that to megawatts per year.  I used the capacity factor .35 percent which was presented in NB Power’s IRP, and 24 hours per day, and 365

days per year gives us 3,666 megawatt hours per year.  And if we divide that all by the recommended from the experts of $62 per kilowatt, we get an O&M cost of $20.22 per megawatt hour.

CHAIRMAN:  Could I just get you to look at the night watt hours per year.  I am not sure that you gave the number that’s on the screen, and this document is not in evidence.  I think you said 3,666?

  1. ROUSE: Oh, 3,066.  3,066.

CHAIRMAN:  Just if somebody is reviewing the transcript and the numbers don’t work out.  I may have misheard it, but just in case.

  1. ROUSE: Okay.  Yeah, it’s 3,066.  In NB Power’s levelized cost of electricity that they presented in the IRP, they had an O&M cost of $42.31.  This is more than double what the experts recommended, and I would consider this a really significant modelling risk that didn’t get caught.  One of the other risks that the third party audit presented to us was contract risk.  As the previous intervenor mentioned, he focused a lot on political — political portion of it all, but there is also contract risk.  I think there is a fair amount of that going on as well in NB Power that is maybe not helping things a whole lot.  Contracts, especially longer term contracts with no exit clauses, such as the gypsum contract, can severely tie the hands of NB Power, and I really think that those contracts need to be reviewed.

The third party audit also discusses legal risk.  One of the topics that I brought forth in my evidence was in regards to the AECL contracts and the selection of the review of earthquake.  I understand that NB Power does not want to discuss this publicly, because it may be part of legal proceedings.  I would like the Board to, however, order NB Power to consult with me regarding the details of my concerns in the evidence I presented.  Financially, this information may prove to be very useful to NB Power.  It may help the bottom line.  I do not with NB Power divulge whether this or isn’t, or I don’t wish to know anything about their business.  I only want them to know what I know in regards to this contract.  And I think it’s very important that they understand, because I put a lot of research into this.

One of the other things that the third party audit talks about is regulatory risk.  Regulatory risk, there is two pieces to this.  Generally regulatory risk is thought of as new regulations coming in, which can financially affect a company or corporation and that is very much true.  In regards to risk and the things that can affect risk, there is essentially two things that it can be boiled to, which I discussed earlier in my cross, and that’s human error and external events.  Essentially, it can all be boiled down to those two things.  So as far as human error goes and regulatory risk, there is also a fairly significant regulatory risk involved in the regulator not being able to perform their duties, and I am not suggesting that this regulatory body in front of me is that way, but my own personal opinion, the Canadian Nuclear Safety Commission, there are some very serious issues with that, and I think that that could be posing a severe financial risk to Point Lepreau.

So those are some of the risks that I wanted to talk about.  And now for my ask, I guess, as far as financial risk goes, I requested the Board not approve the NB Power financial risk management policies until they are audited.  NB Power does not agree with me that some of these external events and stuff should be included in the financial risk portion of these policies.  They presented with me yesterday an additional risk policy that had nothing to do with the things I was talking about that they said that were included.  So until such time that external events is maybe audited again, I think we already have it here in Ernst & Young thing, but if they are not going to agree with me, maybe that can be part of the next audit process.  So I request that they not approve these financial risk management policies until they have been audited and the Board can see this audit.

There was also some confusion at the beginning of these hearings in regards to whether there should have been audit produced for this hearing, and I went through Motions Day to go through that, and it wasn’t real clear whether they were supposed to or not.  I would really like — urge the Board to be very clear on when they would like to see these audits and maybe not leave it so much up to interpretation, that we — that we, you know, kind of set some times.  And it looks as if NB Power may not have the audit completed in time for filing, but in discussions with them they seem to agree that it should be able to be available by the time the IR processes go through.

There was also some discussions in the financial risk management policy manual that came up, and whether NB Power was required to do two audits per year or an audit every two years.  The terminology, the words used in the manual was biannual, spelled b-i-a-n-n-u-a-l.  I have looked up the definition of biannual and all that I could find on the internet, and biannual means twice a year or semi-annual.  There is another term that’s used called the biennial, and it’s spelled b-i-e-n-n-i-a-l.  And if you look up the definition of this word, it means every two years.

If we look on page 154 of the IRP, if we could put it up for a minute, and page 154, okay, if we look at the operation, and maintenance and administrative costs, NB Power in the second bullet down, it says O&M costs for Point Lepreau were modelled to reflect a biennial outage. NB Power’s outages for Point Lepreau are supposed to be every two years, so this kind of confirms that.

I have a recommendation for NB Power that I think that they should take quite seriously, and I think the Board should take this quite seriously is well I am going to suggest that they become ISO 9001 quality management certified.  This will give the Board confidence that NB Power is being managed, and audited in a professional certified way, and is going to give the public confidence that it’s being managed properly across industry standards.

I would also maybe like to throw this out there that maybe these financial risk management policies and the acceptance of them might take up a little bit too much time of a general rate hearing, and we have already had one hearing in regards to them.  And possibly there might be separate set of hearings for this just so we don’t get all wrapped into all these things in the lieu of a rate hearing.

In closing, I have addressed my four main concerns.  I have spent all week staring at the computer screen in front of me, which has the NB crest with the words Spem Reduxit. or hope restored.  This process so far has restored my hope for New Brunswick.  I have one last suggestion to NB Power, and I suggest that they buy everyone in this room one drink at the hotel next door after the adjournment of these hearings, but there is not to be any talk of electricity or money.  Thank you very much.

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