The Nova Scotia Legislature

The House resumed on:
September 21, 2017.

 

 

 

HANSARD

 

NOVA SCOTIA HOUSE OF ASSEMBLY

 

 

COMMITTEE

 

ON

 

PUBLIC ACCOUNTS

 

 

Wednesday, May 2, 2012

 

LEGISLATIVE CHAMBER

 

 

 

 

Nova Scotia Utility and Review Board

Energy Issues and Power Rates

 

 

 

 

 

 

 

 

 

Printed and Published by Nova Scotia Hansard Reporting Services

 

 

Public Accounts Committee

 

Hon. Keith Colwell, Chairman

Mr. Howard Epstein, Vice-Chairman

Mr. Clarrie MacKinnon

Mr. Gary Ramey

Mr. Mat Whynott

Mr. Brian Skabar

Hon. Manning MacDonald

Mr. Chuck Porter

Mr. Allan MacMaster

 

[Mr. Andrew Younger replaced Hon. Manning MacDonald]

[Hon. Christopher d’Entremont replaced Mr. Chuck Porter]

 

In Attendance:

 

Mrs. Darlene Henry

Legislative Committee Clerk

 

Mr. Terry Spicer

Assistant Auditor General

 

Mr. Gordon Hebb

Chief Legislative Counsel Office

 

WITNESSES

 

Utility and Review Board

 

Mr. Peter Gurnham, Chairman

Mr. Paul Allen, Executive Director

Mr. Steve Pronko, Senior Advisor


 

 

 

 

 

 

 

HALIFAX, WEDNESDAY, MAY 2, 2012

 

STANDING COMMITTEE ON PUBLIC ACCOUNTS

 

9:00 A.M.

 

CHAIRMAN

Hon. Keith Colwell

 

VICE-CHAIRMAN

Mr. Howard Epstein

 

 

MR. CHAIRMAN: Good morning. I'd like to call the meeting to order. We'll start with introductions and I’d start with the NDP caucus.

 

[The committee members and witnesses introduced themselves.]

 

I'd like to welcome our guests here this morning. I believe it is probably the first time you have ever been here, so this will be an interesting experience for you, I'm sure. We would ask you to start with any kind of presentation you'd like to make and then, after that, we'll go to questioning.

 

MR. PETER GURNHAM: I indicated to the clerk that I did not have an opening statement. What I did do was file, ahead of time, a memorandum which hopefully you have received, which explains how the electric system operates, how rates are made. I thought by doing that perhaps all of the members, who might not be as familiar with our proceedings as others might be, would have a base of information to work from. So I hope that was helpful.

 

Paul is here to answer questions with respect to finances, as this is the Public Accounts Committee, so if you have questions about the board's finances, Paul can answer those. Steve is our senior advisor on electrical matters, so if we get to an engineering question you're going to lose me very quickly and Steve will take over and fill in on that.

 

 

1


 

One preliminary matter, I guess - I observed that the matters you have asked me to come and talk about this morning are energy matters and our mandate is funded, not by provincial taxpayers as it relates to energy, so none of the energy mandates that we discharge are discharged supported by taxpayer dollars. Having said that, I'm happy to try to answer - we are happy to try to answer - any questions you have about what the board does. I hope in the next two hours we can help explain what the board does and give you a better understanding of what we do on a day-to-day basis.

 

MR. CHAIRMAN: Thank you very much. Our first questioner will be Mr. Younger - and you have 20 minutes.

 

MR. ANDREW YOUNGER: Thank you, Mr. Chairman, and I appreciate you coming before the committee today. I guess it's a bit different being on the opposite side of things from the usual.

 

MR. GURNHAM: There are lawyers who would pay big dollars to be where you are today.

 

MR. YOUNGER: I've had the privilege to attend a number of the hearings, as you know. I'd like to start by asking you - I think you're probably aware that there's a perception of the board, particularly as it relates to Nova Scotia Power and energy matters, that it is as much a rubber stamp for requests of Nova Scotia Power as anything else. Obviously, members of the public aren't all sitting in the hearing room; however there is certainly a feeling among the public that if Nova Scotia Power announced they are going to ask for 10 per cent, then they'll come to the board and it will get whittled down and it will be around 8 per cent.

 

Sometimes, especially in the past few years, it seems to have come down to there will be some settlement conferences and then the board will come back and say, well these interveners have agreed to the settlement deal - in the past maybe it is Bowater, NewPage, or the Avon Group obviously is one of the big conglomerates, and I wonder if you could discuss how you see your role in terms of protecting the public interest, especially when some of the bigger players and bigger users on the energy market reach an agreement with Nova Scotia Power and then you're looking at a potential settlement deal that of course members of the public, I mean I know the consumer advocate is involved, of course, but often the average Joe on the street really doesn't understand and wasn't involved.

 

MR. CHAIRMAN: Mr. Gurnham.

 

MR. GURNHAM: Let me start with the first part of the question and that is the oversight of Nova Scotia Power, in particular in a hearing process. I think I'd start by saying that Nova Scotia Power is probably one of the most examined companies in Nova Scotia. When the company determines that it requires an increase in power rates, it will file an application. As part of the application we have put before them standard filing requirements which basically provides, to us and to the interveners, all of the information we think we need, at least going in to adjudicate on the issue as to whether they can justify an increase in costs. The hearing is then publicly advertised and parties are able to participate in our process and, as you know, many do.

 

As you point out, the large industrial customers have for years been before the board advancing the interests of the large industrial customers, and the municipal utilities are regular tenders before the board.

 

I became concerned shortly after I became chairman of the board that two pieces of that puzzle were missing. A number of years ago we appointed a consumer advocate who speaks for domestic customers, because I was concerned that domestic customers who, in fact, are the largest customer class, were not adequately represented both in the hearings and in what was becoming a trend, and that is settlement agreements - and I will talk about settlement agreements in a minute. Then, following what I would call the success of the consumer advocate process, I observed, along with government actually, that several of the smaller commercial classes were also not represented in the hearings, and so for the last couple of years we appointed a small business advocate. I think we have a more balanced slate of parties before the board in a proceeding.

 

Once the application is filed, we go through what’s called an interrogatory process and literally hundreds of questions are asked by parties who are skilled at doing this, and by board members, to inquire into the application by Nova Scotia Power and to see whether they have justified the increase they’re asking for. In most major rate hearings we go through two sets IR requests, so that by the time we get to the hearing most of the case is laid out on the table. In addition to that, any intervener who chooses to do so can hire an expert or provide evidence on his own and participate in the hearing process. Then we get to the hearing.

 

I think you’ve observed that some of the very best lawyers in Nova Scotia are involved in these processes. The Rob Grants, the George Coopers, the David MacDougalls, John Merrick, and so on - these are guys who are good advocates for their client’s position and who put – and Bruce Outhouse for us - Nova Scotia Power’s feet to the fire. So I think we have a thorough adversary process which tests the cases that Nova Scotia Power puts to us.

 

I understand that an increase in power rates is not popular; it will never be popular. But our obligation is to look at the sum total of the evidence, having been tested quite vigorously - and for those of you who have been in our hearing room you’ve seen how vigorously it is tested - and at the end of the day come up with an amount that will allow Nova Scotia Power to incur its prudent costs, including its cost to capital.

 

In recent years, increases in raw energy prices have caused those costs to go up. I can speak about that in answer to another question - but as to the process, I think you’ll find it’s a fairly vigorous process and it’s a process that’s very similar to one you’d find at the National Energy Board, at the Ontario Energy Board or those sorts of agencies.

I’m not sure if that answers the first part of your question - I read that you guys do supplementals, so if you’d like a supplemental now before I get to settlements that’s fine, but I can go on to settlements.

 

MR. YOUNGER: No, you can go on to settlements.

 

MR. GURNHAM: My background - I came from 27 years of practising law, much of it in the administrative and litigation field. I was with a firm that’s now called Cox & Palmer, so I had some experience in how settlements work.

 

The board’s rules facilitate settlement discussions because, in my view, assuming the parties are properly represented - in other words, there’s equal representation amongst the parties - if you can come up with an arrangement where the parties themselves are satisfied with the result, as opposed to imposing a result that the board might impose which may not satisfy some of the parties, then I think that the board not automatically approve, but the board should give great weight to a settlement agreement that enjoys the support of a number of parties.

 

Probably 15 years ago it was very unusual to see a settlement agreement in our proceedings. I would say in the last five years we’ve had a number of settlement agreements on major matters. Two things have facilitated that: One is that with the appointment of the consumer advocate, and the small business advocate, the board has a greater level of satisfaction that those customer groups are represented and therefore there is fair negotiation at the table; and, secondly, spending three or four weeks in front of us paying lawyers is an expensive exercise, and if the parties can more efficiently resolve their matters in a settlement process that’s satisfactory to them, then there is a cost saving to them and they have a known quantity, as opposed to a decision that we might impose on them.

Having said that, we do call evidence on the settlement agreement - board members and board council are able to ask questions on the settlement agreement. At least two settlement agreements I can think of have been turned down, but my personal view is that if in a circumstance where parties are well represented they come up with a settlement agreement that appears to make sense to the board, then the board should defer to that.

 

MR. YOUNGER: When it comes to those settlement agreements, certainly one of the concerns that I have is – and you’re absolutely right, there’s a very capable consumer advocate, a very capable small business advocate, I don’t disagree with that, but the practical reality seems to me that they get into a room behind closed doors so people don’t see what’s going on. For example, in the last one we had the Avon Group and then we had NewPage and Bowater, and they often used the same lawyer because they had similar issues at the time, so that makes sense. They are huge customers - between the Avon Group and Bowater and NewPage, they were enormous users. Then HRM would usually sit in there, and they’re obviously a big user. HRM’s issue might be the rate that’s going to be on there for traffic lights, as a fixed rate, or for streetlights or the conversion rate for LED lights.

 

A lot of those issues, it seems to me, can get sorted out, and Nova Scotia Power has an interest to deal with those bigger customers because they are bigger loads on the system. The consumer advocate is one person and the small business advocate is one person, even though they are representing far more total customers - perhaps at a lower percentage of the load, but far more customers.

 

My concern is that because those settlements conferences generally happen behind closed doors - despite the fact that you then ask questions about it later, we don’t get to see that give and take. It does feel that there is a - well, as you said, it’s much like an adversor in the legal profession, in civil litigation, where everybody sort of knows in the back of their head what they really want out of the negotiation. Some of those parties come out and obviously they’d be happier with something else, and that’s what I’m concerned about, that at the end of the day the consumer feels left out.

 

MR. GURNHAM: It’s a legitimate concern, and I understand your concern. Let me respond to it. For example, I think that if settlement discussion had to take place in our hearing room where everybody, including the media, could watch, we’d never settle anything. There has to be a certain give and take in a settlement discussion. How settlement discussions normally come forward is one of the parties will assess the case that the other party has and he will say, well, there may be some common ground here. It may be worthwhile having a chat to see whether there is common ground here. If it appears to be the common ground, then they will talk to two or three other parties and then a settlement conference will be convened.

 

There has been a flaw in the settlement process as it has come forward in the past, at least in two recent settlements, in that all parties were brought to the settlement agreement process too late in the process. As part of our strategic plan that is currently underway, we’re looking at how to fix that. I think to have a situation where we’re forced to have an open settlement discussion means we wouldn’t have any settlements - might as well have the hearing.

 

MR. YOUNGER: I can’t remember whether it was you specifically, but the board at times has criticized Nova Scotia Power over the amount of confidential information. I realize that . . .

 

MR. GURNHAM: That’s me.

 

MR. YOUNGER: And I congratulate you for that. I think there are a lot of people who agree with you. I think it’s important to recognize that any intervener can sign a confidentiality agreement and get access to the confidential documents as well, but do you think Nova Scotia Power has significantly improved its public disclosure?

 

MR. GURNHAM: If you take out the word “significant,” I would say yes. There are some legitimate matters that need to be kept confidential; for example, Nova Scotia Power has to acquire hundreds of millions of dollars worth of fuel, essentially on the open market as it relates to coal and as it relates to natural gas, and if they have to disclose to us what their bids are going to be and those bids are made public, then it really destroys their ability to get the best deal for the ratepayers.

 

Having said that, I don’t know if you participated in the last rate hearing, but there was a circumstance - and I was chairman of the panel and this is all a matter of public record, there is no secret on this - where Nova Scotia Power filed pension information that was significantly redacted. Of course, I get a chance to see what isn’t redacted and I just said to myself, wait a minute, what has to be protected here? There is nothing that has to be protected here that I could see, so I met with the panel who was chairing it and we asked Nova Scotia Power to justify why all of this was filed in confidence and, at the end of the day, none of it ended up being filed in confidence.

 

It’s a constant struggle, and part of our job is to police it. To say that I’m frustrated that too much information is filed in confidence, the answer to that is yes. Am I vigilant to see that doesn’t happen, and are my board members vigilant? The answer to that is yes, too. So it’s a bit of a struggle at times.

 

MR. YOUNGER: I do appreciate you calling them out on that. I remember the pension information debate in the last hearing. I attended hearings periodically before this role, in my previous role as chairman of the Energy Committee for the city, but I attend a lot more of them now. One of the things that I tended to notice and heard from some of the other interveners is there are a lot of hearings now - you have a DSM hearing, the fuel costing hearing, the hearing for the AA, then we have the fuel adjustment hearing, sometimes a general rate hearing, and then there’s a capital plan hearing. Are you concerned that there is hearing fatigue when it comes to Nova Scotia Power?

 

MR. GURNHAM: Yes, I am, and if you’ve had the chance to look at the strategic planning document that we currently have underway, one of the questions we’re asking stakeholders is is there a way we can consolidate some of these hearings.

 

It’s sort of funny the way this developed. Mr. Epstein would remember that in the old days there would be maybe four, five, or six major hearings a year and that would be it, and in those circumstances things like capital work orders and other things didn’t go to a public hearing. In recent years, interested parties have expressed an interest in opening up, for example, the work order approval process - these are the capital approvals that Nova Scotia Power has - so they want to be notified and want the ability to participate in that process, which is absolutely legitimate. The consequence of that is you’ve got a lot more hearings because of the interest people have.

 

So what we’re trying to do, in talking with various stakeholders, is to see whether there are, firstly, more cost-effective ways to conduct the hearings we conduct - I think we’ve gone a long way in that regard with our electronic case management system and so on and so forth - and also whether we can consolidate certain kinds of hearings so they’re not happening all the time.

 

The biggest offender seems to be the capital work order hearings. We have what’s called a capital justification base plan process underway and what we’re trying to do is see if we can’t group large portions of those capital projects into one proceeding. Those who want to comment can comment, but I agree there is an element of hearing fatigue. I’m aware of it. The problem is we’ve got a lot to do and decisions need to be made - and you don’t want to preclude anybody’s ability to participate. By the same token, it’s absolutely crucial to the board that people do participate and bring their point of view. I don’t want the board or the system to suffer from hearing fatigue, but it’s a tough question.

 

MR. YOUNGER: I’m glad you’re looking into it because one of the concerns I have is that - it’s funny, when the combined power rate increase was reported by various media for January 1st, almost every media outlet had a different number. And part of that was that - it’s almost like death by a thousand cuts because we get 1 per cent here and 2 per cent here and, well, this capital was approved here and there’s a DSM charge and we adjusted this for the fuel - and that's where I think the problem is. There are two issues there: one, nobody really knows what the total is in any rate class, but also it certainly feeds into that public perception, which I think lately has been quite correct, that every time they turn around they are reading in the paper that, oh, there's another increase, oh, there's 2 per cent here and 4 per cent here.

 

MR. GURNHAM: I take your point, and it's a point I'm aware of and concerned about.

 

MR. YOUNGER: I appreciate you looking into that. I have just a couple of minutes left in this round. I'm wondering, just to be clear, my understanding is that the decisions that you can make related to power rate increases and what is actually included in a rate are really governed by provincial legislation. You can't go outside what is - your role is dictated by what is in the Electricity Act, is that correct?

 

MR. GURNHAM: Well the Public Utilities Act, yes. The Electricity Act really is a policy doctrine; the Public Utilities Act is the Act that gives us the authority to regulate Nova Scotia Power. I tried to explain how that worked in that memo that I handed out. If you had a specific example it would be easier for me but, yes, the only powers we have with respect to the regulation of Nova Scotia Power are those that in the Public Utilities Act.

 

MR. YOUNGER: Well I guess, for example, bonuses have come up many times, but at the moment the Public Utilities Act doesn't preclude the inclusion of bonuses for executives in rates.

 

MR. GURNHAM: No, although I have to say as a result of the . . . .

MR. YOUNGER: It was in the settlement.

 

MR. GURNHAM: . . . last rate case, the bonuses for senior executives are being paid by shareholders and not ratepayers. There's nothing in the Public Utilities Act to preclude the board from allowing bonuses for other employees of Nova Scotia Power in the same manner that the Government of Nova Scotia pays bonuses to ECP employees - pays a bonus to me. It's a fairly common thing and we are permitted to do it, not required to do it. There's nothing in the Act that precludes us from giving bonuses, if that's your question.

 

MR. YOUNGER: That's my point, so if the Public Utilities Act said, for example, that executive bonuses cannot be included in the rate base - that has to be a shareholder . . .

 

MR. GURNHAM: Then we wouldn't be allowed to do that.

 

MR. YOUNGER: Exactly, and that would be the same for, I assume, any other - obviously you're allowed to include fuel because the rate base would pay for fuel, but it lays out what you can consider or what they can come to and ask for the ratepayers to pay for and what they can't.

 

MR. GURNHAM: Sure. I guess I'd caution - I'm not going to get into policy issues - the bonus issue as it relates to people further down the line in Nova Scotia Power is as it is in the Province of Nova Scotia, a fairly normal . . .

 

MR. CHAIRMAN: Order, please. Unfortunately, Mr. Younger's time has expired. I'm sure someone will come back to that.

 

Mr. MacMaster.

 

MR. ALLAN MACMASTER: Thank you, Mr. Chairman. My first question, on Page 2 of the 2011 Nova Scotia Utility and Review Board Strategic Plan Summary, under Goals, 2.2 . . .

 

MR. GURNHAM: Just let me dig that out.

 

MR. MACMASTER: Oh, sure, sure. It’s Section 2.2 on Page 2 of the Nova Scotia Utility and Review Board Strategic Plan Summary.

MR. GURNHAM: Got it.

 

MR. MACMASTER: You got it, okay. As part of the plan for the URB, 2.2 talks about “inform public policy.” My question: What role does the URB play in informing public policy for electricity rates, and can you give some examples?

 

MR. GURNHAM: Sure. The words informing public policy are very carefully used, so the board does not make public policy - public policy is made here and the board completely understands that. However we have, I'd like to think, some expertise in electricity and other matters, planning matters, and the other things we do.

 

If, for example, government were planning a piece of legislation that affected our mandate - and this has happened - I think it would be appropriate for government to ask us whether anything in the legislation might, for example, cause an inadvertent issue that they didn't intend to cause. So I think it's perfectly appropriate, on a confidential basis, for them to show us legislation and say, look, do you see any problems here that we aren't seeing? That's quite a different issue than lobbying for the piece of legislation, which I think is absolutely inappropriate.

 

There were certain changes, for example, that the province was considering to the assessment mandate in the province - this doesn’t relate to energy but it’s a recent consultation - that is, property assessment, and that’s something we have a fair bit of information and experience with. So, the Department of Community Services asked if they could come over and ask two of our board members, who have particular expertise in that area, some questions about some ideas they had with respect to reforming the appeal process. Again, if we’re asked by government, I think that’s a resource - we’re there, we know stuff about it - I think that’s a resource that should be used.

 

What we should not do is go to government and try to lobby for changes to the assessment process. I think that’s inappropriate and I think if we did that that would impinge on our independence, which is very important.

 

MR. MACMASTER: Has the URB reviewed public policy in other jurisdictions and made recommendations to government?

 

MR. GURNHAM: Certainly when government was discussing with me the consumer advocate and the small business advocate, I spoke to some of my colleagues in other provinces and learned what was done in other provinces. I haven’t initiated, on my own, a public policy idea and taken it to government, but when asked to advise government, as I was on that issue, I did find out what was going on in the rest of the country by talking to my colleagues in other boards.

 

I’m not sure that’s answering your question.

 

MR. MACMASTER: It’s an example of looking at other jurisdictions.

 

In getting back to the goal of informing public policy, how do you evaluate that strategic goal? You do do it from time to time, as you’ve just given that example - how do you evaluate the success of that kind of activity?

 

MR. GURNHAM: I guess it’s successful if we have a point of view that government or one of the Opposition Parties wanted to ask us; in other words, we have an idea, would that cause any problem with your mandate? And if we properly answered that question, then I think we would have discharged it.

 

This is not a proactive thing. In other words, I’m not out banging on the door of Province House trying to inform public policy; that’s absolutely inappropriate. When I first became chairman of the board there was a view among the senior public service that it was not appropriate to consult the board because that somehow impinged our independence. I was concerned about that because I felt that at the end of the day better legislation and better public policy would result if we made ourselves available, within proper terms of reference, to advise, if asked, on matters of public policy.

 

I have to tell you that some of my colleagues across the country think that’s the wrong thing to do; they think they should live in an ivory tower. But, at the end of the day, we’re all serving the public and if the board can have some value-added with respect to a piece of legislation, then I think we should be asked and take that opportunity. I’m not offended if my ideas aren’t accepted, because I’m just one of many people being asked.

 

MR. MACMASTER: What role, if any, did the URB play in informing public policy around the NDP’s electricity plan?

 

MR. GURNHAM: None.

 

MR. MACMASTER: None. Okay.

 

MR. GURNHAM: I should say that when it came time to draft some of the renewable regulations, certainly those provisions were shown to us, but the plan itself, I had no advance knowledge of it.

 

MR. MACMASTER: Okay. Is one of the goals of the URB to ensure that the energy supply is stable and affordable in the province?

 

MR. GURNHAM: Yes, I mean what we are trying to do is arrange for the delivery of power and energy at the lowest long-term cost.

 

MR. MACMASTER: How does the electricity plan of the current government impact decisions that were made at the URB?

 

MR. GURNHAM: Well, as you know, renewable targets have been imposed under the Electricity Act - again, a matter of public policy that it’s appropriate for government or the Legislature to decide. That having been done, there are changes that have to be made to the electricity system, some of which we control, in order to ensure those targets are met.

 

There are significantly more renewable resources being put on the system in order to meet those targets, and the combination of that and some loss of load as a result of what we all know why, will cause some of the older coal units to be shut down in advance of their useful life.

 

MR. MACMASTER: In Ontario, the premium for renewable energy projects is estimated to result in a 23 per cent increase in power bills over the span of five years - what is the rate attributable to the change in policy to Nova Scotians and their power bills?

 

MR. GURNHAM: Well, to date, the Department of Energy has issued an estimate of something in the order of 1 to 2 per cent a year on power bills. Not long ago, in a discussion with Nova Scotia Power, I confirmed that that was their view. I don't have a different number than the province.

 

I have to say that we are proceeding in Nova Scotia in a much different way than they proceeded in Ontario. I don't make those decisions, but perhaps that's as a result of the Ontario experience. I'd better be careful what I say about Ontario.

 

MR. MACMASTER: What is the most affordable input source for generating electricity in Nova Scotia?

 

MR. GURNHAM: The most affordable? Low-price coal - sorry, no, hydro. I was thinking of sources you burn. The cheapest source of energy in Nova Scotia is hydro. The problem is we just don't have enough, but hydro costs little, if anything.

 

MR. MACMASTER: Can you be more specific when you say hydro? For instance, a lot of people would think of the Muskrat Falls project, but we don't actually know the numbers.

 

MR. GURNHAM: No, I wasn't thinking of Muskrat Falls. About 11 per cent of Nova Scotia Power's generation capacity comes from hydro. The largest piece of that is the Wreck Cove hydroelectric plant in Cape Breton, which is about 200 megawatts. The next piece would be the Mersey system, which is about 47 megawatts, and then there are a number of smaller hydro plants around the province, some of which are run-of-river and some of which are stored hydro.

 

What Nova Scotia Power does is try to use that hydro to the best advantage. I have to say that the Wreck Cove plant is quite an advantage to the ratepayers. You can essentially store 200 megawatts of energy and turn it on and off with the flip of a switch, so it's a very valuable tool in managing Nova Scotia Power's load. Unlike Quebec, we don't have vast amounts of hydro. If we did, I probably wouldn't be here today.

 

MR. MACMASTER: You had mentioned coal - can you expand a little bit on that, where that fits into the mix as far as in terms of affordability?

 

MR. GURNHAM: At the moment the price of coal and natural gas is roughly equal. That's a bit of an anomaly because the price of natural gas has gone from about 13 cents to about 3.5 cents over the course of the last four or five years as a result of events that I don't think could have been predicted 10 years ago - and that's the shale gas and the other elements of supply. But traditionally in the system, coal has been the least expensive means of generation.

 

It's becoming more expensive as we have to meet environmental constraints, because the system can't burn very much high-sulphur coal and it can't burn very much petroleum coke, although petroleum coke is getting more difficult to access. So the cost of coal is certainly higher than it used to be, but relative to certain other sources it is still fairly low-cost and has been the baseload of the system for years, although that is changing.

 

I think in this year 20 per cent of the baseload generation is coming from natural gas, which is a good thing.

 

MR. MACMASTER: I know that in the case of wind power, a lot of times it comes - the wind is with us at times of the day when we have the least amount of energy demand, at night, for instance. I know that it's not a very efficient means of meeting the demands when the demands come to us and, as a result, power plants and power companies around the country have to ramp up the use of fossil fuels to make up for the inefficiencies of those systems.

 

My question is: By using more wind, are we really reducing the need for fossil- fuel-fired plants?

 

MR. GURNHAM: I think it can over time, but you've got to have sufficient diversity in order to allow that to happen. I think it's important that the wind resource be located in different parts of the province because you're more likely to have diversity with respect to when the wind is blowing.

 

I think it does make a whole lot of sense to follow wind with coal-fired plants, which we were forced to do in the early days - or what Nova Scotia Power was forced to do, because it didn’t have natural gas resources. In order to follow wind with coal you’ve got to keep the turbine spinning because it takes hours to ramp it up. So that’s not very efficient, but you can flip an oil plant on very quickly. We now have 700 megawatts of natural gas capability on the system, so it’s much easier to follow.

 

I also think, and perhaps I’m traipsing into a policy area, but to the extent there can be a regional operation of these wind plants - in other words New Brunswick, Prince Edward Island, ourselves, and maybe even beyond, to create even more diversity - I think you can get a more effective use of wind. But there is no question, wind is only - depending on where it is in the province - it is only reliable somewhere between 31 and 40 per cent of the time, and you can’t very well store electricity. There is a limited amount of wind Nova Scotia, itself, can accept - it’s in the area of 500 megawatts. You can’t go beyond that because it becomes unreliable; it makes the system unstable.

 

I guess I’m beyond your question, but yes there are issues related to wind because it’s only reliable between 31 and 40 per cent of the time.

 

MR. MACMASTER: There are COMFIT rates in the province and I know there are volunteer groups around the province. We’re starting to see the benefit of starting up wind farms for instance. They got a nice 20-year contract. It’s a new, unexpected revenue source for them, which is great. How much will those rates that we’re paying affect the cost of power bills for Nova Scotians?

 

MR. GURNHAM: The COMFIT rates were set by the board and they are higher than the rates you would get if you are competing for that power. There is no question the ratepayers are paying a premium for the COMFIT rates. It’s expected that because of restrictions on the distribution and transmission system that Nova Scotia has that we really can’t accommodate more than 100 megawatts of COMFIT power. Some of that power may be located where it is of advantage, from a diversity standpoint, but the COMFIT rates are higher than the other rates that are being paid in the province.

 

MR. MACMASTER: Can you give us, in terms of dollars and cents or in a percentage term, how those rates could affect overall power rates or is it an insignificant cost?

 

MR. GURNHAM: It’s not terribly significant. The total load of the system is about 2,400 megawatts and I suppose - I’d be surprised if we had more than 30 or 40 megawatts on a system in the next year or so.

 

MR. MACMASTER: Is there any cap on the amount of energy that we procured through those . . .

 

MR. GURNHAM: Hundred megawatts.

 

MR. MACMASTER: How would you suggest curbing future rate increases and make power rates more affordable?

 

MR. GURNHAM: Boy, if I had the answer to that question, I could write the book and wouldn’t have to be here.

 

I think there are a couple of things. I think as we are less dependent on coal we are going to see less volatility in power rates and I think we’re reached a point where, while coal is still significant, it’s becoming less significant.

 

The price of renewables, while high going in, is predicable; in other words once those contracts are in place we’re not going to have the variations in prices that we’ve seen in the last number of years. I know that there are complaints about the demand-side energy charge that people see on their power bills - having said that, I am a firm believer that an answer to lowering people’s individual power bills is to take the maximum advantage of the DSM opportunities that are available to them. I do that myself, personally. I’ve seen my power bill go down - I can tell you how if you want.

 

I think there are things customers can do by way of DSM opportunities for energy savings. I also foresee a day, I hope in the reasonably near future, that we’re able to stabilize these increases in power rates because of the change in the system fleet by relying less and less on coal, more on gas, which seems very stable and seems like it will be very stable for a long time, and on these renewables which, although they are a little more costly going in, do not escalate because their wind is free.

 

MR. MACMASTER: My next question is kind of related to that. Certainly reducing our energy use is probably the best thing we can do, but you mentioned that more renewable sources and leaving fossil fuels is going to make things more predictable - but is it going to make them predictably higher? In other words, if there’s somebody out there - and I know that through the demand-side management, people who are low income or fixed income can go and get grants to fix up their homes, which is great, however, they still have to pay their power bill and if you compared it to a tank of gas, most people would prefer buying a $50 tank of gas than $150 or $200 tank of gas. Is it going to be predictable, but just predictably higher?

 

MR. GURNHAM: By “predictable” I meant levelized. In other words, I don’t see, once we reach a point where we’re less dependent on coal and have more stable producers on the system, I don’t see the changes - i.e., increases - that we’ve experienced in the last 10 years, at least I hope we won’t. But I think I’d be misleading you if I were to suggest to you that I see any dramatic drop in power rates in the future - I don’t.

 

MR. MACMASTER: When you say more predictable, is this based on an assumption that the price of fossil fuels will continue to rise?

 

MR. GURNHAM: Well, the price of fossil fuels is volatile and it has continued to rise and coal is a commodity that’s very much in demand in Asia and elsewhere. I don’t see the price of coal - I mean there will be blips in the price of coal - I’m not an expert in coal, if you want some real advice that’s worth something, talk to somebody else, but I don’t see a downward trend in that.

 

What I mean is once we get generation supplies on the system that aren’t subject to those volatile changes, then rates will stabilize and, I’m hoping, not rise very much. But as I say, I’d be misleading you if I thought there was going to be a dramatic drop in power rates - I don’t think there is.

 

MR. MACMASTER: Very volatile - and if you look at something like natural gas which was trading at $14 not so long ago and now it’s just above $2. It’s an example of volatility.

 

MR. GURNHAM: But I think that’s a once-in-a-lifetime circumstance that has caused that, whereas the changes in the price of coal are more subject to the market, more demand for coal - and I wouldn’t say shortages of coal, but shortages of certain types of coal. There was a real sea change in the whole natural gas industry over the last five years. That was an unusual circumstance.

 

MR. MACMASTER: What kind of regulatory oversight does the board have over Emera versus Nova Scotia Power?

 

MR. GURNHAM: We have no oversight over Emera. Emera owns most of the shares of Nova Scotia Power.

 

MR. CHAIRMAN: Order, please. Unfortunately, Mr. MacMaster’s time has expired. I’m sure you’ll come back to that as well.

 

Mr. Epstein.

 

MR. HOWARD EPSTEIN: Thank you, and, Mr. Gurnham, thank you very much for agreeing to come to meet with the committee today. I wonder if we could start by looking a little bit at the board and its staff and its own internal functionings before we get back to some of the energy issues.

 

You pointed out that you perform a variety of functions in addition to your energy oversight, and among those I guess would be oversight over common carriers and some water utilities and over some land use matters. Given this diversity, I’m wondering, can you tell us about the expertise of the staff that the board has, and what categories of expertise do you have when do you hire consultants? I wonder if you could tell us a bit about that.

 

MR. GURNHAM: Sure. I can give you our complement of people to start, so you’ll understand who we have on staff. Then there’s an approach that the board has adopted with respect to how we will staff our hearings, which I’m happy to explain to you and then we’ll see where we are from there.

 

MR. EPSTEIN: I’m sorry, could I just - by staff, do you mean the board members who will attend the hearings? Are you still talking about staff as in . . .

 

MR. GURNHAM: People like Steve.

 

MR. EPSTEIN: Yes, thank you.

 

MR. GURNHAM: We have on our advisory group, which is made up of engineers and accountants, a complement of six; we have in our administration group, which would include four clerks of the board who are highly skilled and the people who run our hearings and so on, 17; to service our insurance mandate, we have three people, one of whom is an actuary and the other of whom has actuarial training; to service our petroleum pricing mandate, we have two people who are skilled in fuels management; and we have three board clerks, as I mentioned, and eight board members - so a complement of 40. We have a core group of advisors who can assist us with the day-to-day operations of the board.

 

So, for example, if we have a typical work order from Nova Scotia Power, we’re able to process that with the assistance of our staff and come to a conclusion; tomorrow we’re going to be setting petroleum prices for this week, we have staff who are able to help us do that.

 

There are two models in Canada with respect to how you staff boards like ours. If you go to the Ontario Energy Board, you’ll find they have about 300 or 350 employees. What they have tried to do is capture in-house all of the expertise they need in order to discharge their mandates, including having two sets of staff - one set of staff to advise board members and one set of staff to appear in hearings as witnesses, with Chinese walls between them.

 

In my view, the cost of our doing that in a small province where we don’t regulate Enbridge, and we don’t regulate Union and some of these big companies, would be prohibitive. So we haven’t followed that path. What we do for extraordinary matters, i.e., supporting major hearings and other things we do, is have a stable of external consultants whom we can bring in to act as board counsel witness or to advise the board as needed.

 

For example, on fuel matters we’ve been using the Liberty Group out of Pennsylvania for years, and in my view they have provided the ratepayers of Nova Scotia very good service; we have a regular arrangement with the Tellus Institute in Washington - you would recall Dr. John Stutz, who appears in many of our hearings; we have an arrangement with a regulatory accounting firm that provides us with accounting advice; and then we have a engineering firm called Synapse that gives us extraordinary advice with respect to infrastructure that’s being built. So, for example, if the power plant were to be built, we would have them on board.

 

We do not use our own staff as witnesses, so our own staff, like Steve, are available to advise Bruce Outhouse with his board counsel and are available to advise the board members if they have a technical problem and available to assist with the functioning of the hearing. So we use these external consultants to be the expert witnesses for our board counsel if there is a hearing or to provide opinions or advice to us on matters that - I wouldn’t say are beyond the competence of our staff, but we simply don’t staff the board in order to be able to do those assignments.

 

MR. EPSTEIN: Yes, and I guess that was part of the point of my question. As I followed your outline of what staff did and what the consultants did, it seemed to be the case that when it came to electricity matters, most of the expertise at the board was the expertise of the board members themselves.

 

MR. GURNHAM: No, I wouldn’t say that. Steve is an electrical engineer. We have two or three other electrical engineers. I’m a lawyer, but after 30-odd years of working around in this, I know what a transformer is and I know what it looks like, but I couldn’t tell you whether it needed to be rewound. I rely on somebody like Steve to tell me. No, what I meant to convey was that I don’t think any of the board members have engineering expertise - well, two of them do, they’re engineers - but we do rely on our engineering staff for what I will call the day-to-day routine decisions that are made, and also to coordinate the use of experts on major matters.

 

MR. EPSTEIN: But you also have some accounting staff, did I hear you say?

 

MR. GURNHAM: Yes, because regulatory accounting is a big issue.

 

MR. EPSTEIN: And so would they perform a function when it comes to reviewing some of the plans of Nova Scotia Power?

 

MR. GURNHAM: Oh, absolutely, yes. As I say, we have an actuary who fortunately came to us as part of the insurance mandate, and we now use him as part of the team on Nova Scotia Power - because I have a particular interest in their pensions - to look at pension issues for us.

 

MR. EPSTEIN: Yes, so although Liberty and Tellus take an obvious high-profile role in the hearings about Nova Scotia Power, you also rely on some of your own staff to do some of the number crunching internally - is that fair to say?

 

MR. GURNHAM: Absolutely, and if there’s a difficult engineering question that we’re facing, often I will go to Steve or one of his colleagues before the hearing starts and get them to explain to me, a lawyer, how this piece of equipment works and what the risks are associated with it; that’s part of their role.

 

MR. EPSTEIN: Yes, although many of the questions associated with Nova Scotia Power aren’t so much on the technical side about how the transformers work, are they? They’re more on the policy and . . .

 

MR. GURNHAM: Well, no, you’d be surprised. I mean, we have to approve every capital expenditure over $250,000 - and I just signed a $7 million one this morning for the Tidewater plant in St. Margarets Bay, so somebody had to look at that. Now, the board member assigned to it was Kulvinder Dhillon, who is an engineer, so he would have some understanding of it. No, they’re not insignificant, some of these projects, at least in terms of dollars.

 

MR. EPSTEIN: Okay, good point. I should say that I don’t think anyone has any problems with the administrative choices you’ve made about when to have staff and when to hire consultants.

 

Could I just follow up on one extension of this, which is the choice of legal counsel that the board makes on a regular basis. We see Mr. Outhouse coming and representing the board which is, of course, a very fine choice and he has huge expertise now, but he’s a lawyer in private practice and so I suppose to some extent he’s a consultant to the board. So I’m wondering, has the board thought about having its own legal counsel on staff or does it continue to make sense for the board to retain outside expertise?

 

MR. GURNHAM: Well, I don’t want to get into Mr. Outhouse’s personal situation, but in my view - and I think if you spoke to any of the stakeholders who participate in our process - as long as Mr. Outhouse is willing and able to be board counsel, we would like him to be board counsel.

 

MR. EPSTEIN: Me, too. I’ve known him since we were first-year undergraduates together in 1965.

 

MR. GURNHAM: But you and I and Mr. Outhouse are getting a little older than we used to be, Mr. Epstein.

 

MR. EPSTEIN: My point exactly.

 

MR. GURNHAM: I have a concern as to what will happen after that. Bruce and I have talked about that, but he doesn’t intend to retire anytime soon, but my personal view is as long as he’s able to help us, I want him there and so do all of the parties. He’s a superb lawyer.

 

MR. EPSTEIN: Yes, I think that’s widely agreed, thank you. Can I move now perhaps to some aspects of the rate setting, which of course is perhaps one of the major reasons that we’re here today. You mentioned earlier that two of the settlement agreements that had been worked out by some of the parties were turned down by the board. I’m wondering if you could explain why the board turned them down.

 

MR. GURNHAM: Yes. The first one - and I have to say that there was a period that I came to the board, that you’ll recall, where I was precluded from being involved in Nova Scotia Power matters because of the work I had done in my law firm, and this was during that period. That board panel was chaired by Margaret Shears and they were concerned about the impact on domestic customers - as to whether the deal was fair to domestic customers. In that settlement discussion, we had not yet appointed a consumer advocate. I can’t speak for the panel because I wasn’t in the panel room, but I read the decision and I think the decision was turned down, as I read it, because they were dissatisfied that the interests of the domestic customers had been protected - in fact it was that decision that led to the whole consumer advocate process.

 

You’re going to ask me about the second one - and I can’t remember it. I’m sorry.

 

MR. EPSTEIN: That’s fine, we can leave that.

 

I wondered, as well, about one of your comments in response to questions from my colleagues in which you drew a distinction between the way the Ontario Government was approaching renewables and the way Nova Scotia was approaching renewables, but you didn’t amplify that. I’m just wondering if you could explain a bit of the differences.

 

MR. GURNHAM: I don’t want to create a difficulty between Ontario and Nova Scotia, but Ontario proceeded very rapidly, let me put it this way, on a program to acquire renewables - and it wasn’t the board that did this - without having any real understanding as to whether these renewables could be accommodated on the energy system, and without having any public debate as to what the prices should be; in Nova Scotia we had a public hearing to set out COMFIT rates. It was just an edict by the Minister of Energy in Ontario and for example, one example, they set solar rates at a price that caused everybody in Ontario to run out and buy a solar panel because it was a no-brainer - you could generate electricity and get 80 cents a kilowatt hour.

 

They realized that was a problem so they halved it, to make it 40 cents a kilowatt hour. I mean . . .

 

MR. EPSTEIN: You are referring to a feed-in tariff, then?

 

MR. GURHAM: And the feed-in tariffs were - I think if more time had been taken to understand the consequences of the feed-in tariff.

 

The other thing which happened in Ontario, which I think was unfortunate, was the Ontario Energy Board and the stakeholders in Ontario were in the midst of an integrated resource plan process. Those plans, as you know, form the basis for a lot of these decisions - what kind of generation you need, how much DSN you need.

 

The government, in their haste to get on with a renewable regime, called a halt to that process and simply made decisions, I guess inside government, as to how this was going to happen without the stakeholders, who really knew what the consequences were, being consulted. That hasn't happened here.

 

MR. EPSTEIN: Well thank you for that amplification.

 

I'm wondering if you could help us, and I think perhaps the public especially, understand some of the very basics of how it is that electricity rates are set. The starting point is that the essentially monopoly company, Nova Scotia Power, as a regulated entity, is entitled to recover through its rates its reasonable costs of doing business. I'm wondering if you could explain a bit what is involved in that and any additional elements that come into play.

 

MR. GURNHAM: Sure. I tried to do that in my memo.

 

What happens is that the utility - not just Nova Scotia Power, every utility in the province - will produce a budget of what they think their expenses are going to be for next year and they will compare that to what they are currently achieving in rates, and if there's a shortfall - in other words, if there's going to be a loss - they will apply to us for an increase in rates.

 

What they will usually adopt is what's called a test year. It is usually a 12-month period, but it doesn't have to be - some of the water utilities, for example, use a 24-month test year. They will put before the board their estimated costs and their rates, under the currently approved rates, which show the shortfall and then the rates they are asking for, which will show why they need the rate increase.

 

Included in what they will ask for are, as you indicated, the prudently incurred costs, so their O&M costs, their fuel costs, their cost of carrying capital, both debt and equity - and part of the cost of equity is a reasonable return. The board will be called upon, at least for a public company, to judge what a reasonable return it is - for Nova Scotia Power it is between 9.2 per cent and 9.5 per cent.

 

Once the rate ask is put together, including a rate of return, we then have to determine how that will be recovered from customers, and that is done pursuant to what is called a cost of service study. What we're trying to do is ensure that the customers pay the costs they are imposing on the system. So for example - and this is an example I gave in my memo - the large companies like Bowater and Michelin and some of the other big companies don't use the distribution system - the distribution system being the wires that are running up and down Hollis Street - they only use the transmission system which are the steel towers you'll see around the province. So what the cost of service study does is isolate various categories of costs and then assigns them to those customers who use them.

 

MR. EPSTEIN: Mr. Gurnham, before we get into much more detail about how the rates are apportioned amongst the customers, can we go back and look at the expense side first? You used the term “O&M” - this is operations and maintenance, is it?

 

MR. GURNHAM: Yes.

 

MR. EPSTEIN: That's correct? Fine. And then you listed fuel as one cost. Part of the fuel is what’s known as FAM - that’s the fuel adjustment mechanism?

 

MR. GURNHAM: Right.

 

MR. EPSTEIN: And then you talked about capital costs. So, briefly, can we just look at the fuel costs for a moment, especially the fuel adjustment mechanism - can you explain what that is please?

 

MR. GURNHAM: Absolutely. About five years ago the board approved a fuel adjustment mechanism at the request of Nova Scotia Power. They had asked for it a couple times before and it was turned down and they were sent back to the drawing board, largely on issues of transparency because the board wasn’t satisfied that all of the parties would be getting the information they needed to have a fuel adjustment mechanism we can rely on.

 

But essentially what happens is that the fuel costs in the rates change automatically, based on the costs that are prudently incurred by Nova Scotia Power. We didn’t have this situation where you have to guess your fuel costs in a test year and then they may turn out to be wrong, the utility may win or the customers may win - what the fuel adjustment mechanism does is insure that the customers only pay the prudently incurred costs that are imposed on the system.

 

How the mechanism works is that every two years, either in a rate case or in a separate proceeding, the board will have a hearing that sets the base cost of fuel and so the rates will be calculated with that base cost of fuel in them. Then each year, at the end of the year, the rates will we trued up and so there will a change in everybody’s bill in January, either up or down, depending on what the experience was based on the base cost of fuel. There have been years when it’s gone down; there have been more years when it’s gone up.

 

MR. EPSTEIN: The FAM is meant to respond to volatility in the price of fuel in the general marketplace.

 

MR. GURNHAM: It’s meant to respond to volatility, but it’s also meant to take away any attempt - and I don’t say this critically - to gain the system. So utilities like to put a little padding in to make sure that with volatile costs there’s going to be enough for them to recover - there is no incentive to do that because they’re only going to get what the actual costs are.

 

MR. EPSTEIN: Seems to me the board has been critical of Nova Scotia Power from time to time in terms of their ability to purchase intelligently in the marketplace - can you just explain how that comes in to this point?

 

MR. GURNHAM: Sure, every two years as part of the fuel adjustment mechanism process we do a fuel audit - it’s not just a financial audit, it’s a performance audit, and all of the contracts Nova Scotia Power enters into are open to . . .

 

MR. CHAIRMAN: Order, please. Unfortunately I have to interrupt you again, Mr. Epstein’s time has expired.

 

Mr. Younger.

 

MR. GURNHAM: This is an important question if someone else would - I think the FAM is one of the things that is least understood, and if someone else would like to ask me that question I’d be happy to finish the answer, because I really think . . .

 

MR. CHAIRMAN: That may happen.

Mr. Younger, you have 16 minutes.

 

MR. YOUNGER: And we may get to that in the 16 minutes, because I think you’re right, I think that is one of the things that confuses people enormously, especially when they suddenly, like a couple years ago, got that very small rate decrease from the FAM and then suddenly there seems to be a realization that maybe they’d given too much of a decrease - it just went and back and forth all over the place. We’ll talk about that in a moment.

 

We had Efficiency Nova Scotia in recently, I’m not sure if it was last meeting or two meetings ago, but recently, and you are right, there’s concern and in fact according to Efficiency Nova Scotia they actually field a heck of a lot of concerns from the public, and complaints - and I don’t think it’s about conservation programs. We’ve been very clear that our issue is who pays for the operation of Efficiency Nova Scotia, not that actual conservation program or anything else. My understanding, and please correct me if I’m wrong, is that you don’t get to make that decision, the legislation says that it will be a fee on power bills, therefore it’s up to you just to set what that fee will be - is that correct?

 

MR. GURNHAM: No, not quite. I’m not sure I understand you question. I think the question is who pays the operating costs of Efficiency Nova Scotia?

 

MR. YOUNGER: The operating costs and the programs. It’s obviously covered by a charge on every Nova Scotia Power bill.

 

MR. GURNHAM: The program costs, as they relate to electricity, in other words a program that is devoted to reducing electricity use and Efficiency Nova Scotia’s internal costs of administering that program are approved by us. We approve those amounts and those amounts find their way on to your power bill.

 

As I understand it, the government has given Efficiency Nova Scotia a broader mandate to deal with efficiency other than electricity. That caused some significant concern to the board and we directed Efficiency Nova Scotia to provide us a protocol for approval by us to ensure those costs were segregated; in other words, that the electricity ratepayers were not, and are not, paying any costs associated with programs that don’t relate to electricity. That protocol is being put in place.

 

MR. YOUNGER: Yes, that’s an important clarification. I was thinking about the electrical programs and not necessarily the other ones. I think what I just wanted to clarify is that the discussion around who pays for the electrical stuff could have been on - I guess there are a million options - to be ridiculous, you could have put a tax on soda pop or something, or you could have put a fee or a charge on ratepayers’ electrical bills, or you could have charged shareholders or whatever, but you are bound by the legislation.

 

MR. GURNHAM: That’s right. Under the Act, Efficiency Nova Scotia is entitled to recover from ratepayers the cost of the programs we approved. Sorry, if that is that your question, I missed it.

 

MR. YOUNGER: Yes, I just wanted to clarify that’s the case. Sometimes it’s been suggested that the board has made that decision to do that.

 

MR. GURNHAM: No, like Nova Scotia Power, they are entitled to recover their prudent costs for the electrical programs that we approve.

 

MR. YOUNGER: Do you have any concern - and I know having participated in some of these hearings - around the auditing of these issues? In fairness, I asked the same question to Efficiency Nova Scotia. There are obviously things that you and I, and others here and elsewhere, are going to do just because they are cost effective to do - NewPage for example, when it was still NewPage, had done fairly extensive upgrades on electrical stuff because it made financial sense. Are you concerned about the ability to audit between the difference of what companies or individuals would do by themselves and then what is directly related to the $40 million, or give or take . . .

 

MR. GURNHAM: Yes, you’re talking about what’s called “free ridership.”

 

MR. YOUNGER: Yes, exactly.

 

MR. GURNHAM: It is part of the report that Efficiency Nova Scotia has to make to us - and these documents are public, you’re welcome to look at them. They have to give us an estimate of the effect of free ridership on the programs that they undertake.

 

Free ridership is a huge issue as it relates to DSM activities. I just read an article in the Public Utilities Fortnightly last week about a significant debate that’s taking place in California. It’s an ongoing concern as to whether there is too much free ridership in program design, and what they try to do is try to eliminate the effect of free ridership in program design. It’s not always successful, but it’s something that is difficult to eliminate because if something is a good idea, when it becomes known as a good idea, people don’t need to be incented to accept it, which is the point you’re making. So that’s a constant dilemma in the overseeing of DSM activities. I don’t have a magic answer to it.

 

MR. YOUNGER: I think it’s important that we talk about - there are lots of issues we could talk about and I think you’re right, it’s important we talk about the fuel adjustment mechanism. In another life I was involved in some of the negotiations and how that was set up and the back and forth and it didn’t necessarily go the way - nothing ever goes completely the way that you would have done it and it’s a negotiation, like everything else.

 

One of the concerns strikes me that there’s such an overlap, by the time we do the catch-up on the fuel adjustment mechanism we can be looking at catching up on the fuel costs for a couple of years back, which can result in a fairly significant hit to ratepayers. Then we end up with what we had last year, which is that the hit was going to be so bad that in the settlement, and I think the board maybe even suggested this, that it be deferred over a few years to catch it up - and then you end up with interest charges. But you are trying to mitigate the rate.

 

Then what happens is a year and a half or two years ago you approved rate increases for the next two or three years to catch up on a fuel adjustment mechanism, but then they may also come in with a general rate application in the meantime, which is in this case what happened, then a capital plan and everything else, and these start to compound. Is there concern around how far out that fuel adjustment mechanism is spread?

 

MR. GURNHAM: Yes, it will shorten the life of the Fuel Adjustment Mechanism and I would like to give it a little while longer to see how it works. I understand and appreciate the confusion you’re talking about but as somebody who looks at it from the inside, I think it is giving us more accurate fuel numbers than we used to have. I’m hesitant - do you have access to the quarterly reports?

 

MR. YOUNGER: Yes.

 

MR. GURNHAM: So you see what’s happening this year, fuel costs are significantly lower than budgeted. I guess what goes around comes around. I would like to see the life of the FAM go on a little further to see how this works, particularly when I believe we’re coming to a time of more stable prices. So if you’re asking me, am I considering changing the FAM, I’m open to any suggestions and any hearing, and there will be a hearing in the Fall on prudence under the FAM, and if people want to talk about changes, I’m happy to do that. I would like to see the current model run a little longer, and maybe with some more favourable external conditions like we’re seeing this year, before I make a final judgment but I don’t want to say definitively, Mr. Younger, because I may sit on the panel and you may argue that you want a change and I may agree with you at the end of the day. So I’ve got to be careful what I say.

 

MR. YOUNGER: Thank you for that. I’m not sure, I mean obviously there’s a risk, you could change it and make it worse too, you could end up with rate increases every three or four months.

 

MR. GURNHAM: Sure, and there’s a tendency when the numbers are going the wrong way, i.e. up, people blame the FAM and I think you’ve got to distinguish between the conditions the FAM is dealing with and the FAM itself. We spent a lot of time with stakeholder input, using some very able experts, designing this FAM model. If, at the end of the day I could be satisfied it isn’t working, then I will be the first person to say we’ve got to change it but I really think, particularly given some favourable, at least early year fuel results, that I would like to see another cycle before we do much.

 

MR. YOUNGER: All right, and that’s fair. One of the things that I think is - I mean there is obviously, when this was all negotiated, one of the benefits is obviously Nova Scotia Power not making a profit on their fuel costs . . .

 

MR. GURNHAM: That’s right.

 

MR. YOUNGER: . . . and that being a flow-through expense to ratepayers, so that obviously is a benefit and I agree. I mean largely because these unconventional gas plays have driven the price of natural gas down, Nova Scotia Power is able to burn significantly more gas at Tufts Cove, which is the only one that has changed over at this point, but the problem is going to be that if natural gas were to stay low, which it may in the near term anyway with the growth of the unconventional gas, I think what you’re going to see is you may get hit on the other side with the capital costs where they may want to be looking at, for example, the Burnside facility and operating it more often and converting from diesel to natural gas. I know they’re already talking about Tupper and Trenton as possible conversions if they can get a gas line. So you may get hit on the capital side?

 

MR. GURNHAM: Yes, and I don’t want to prejudge anything but we’ve got an excess of capacity on the system so we would have to be very careful about rushing to build any more power plants.

 

MR. YOUNGER: Well, I agree and that’s actually why I wanted to ask something else. You had talked about, it’s your mandate to, in a nutshell, if I understand it correctly, to prove the lowest cost . . .

 

MR. GURNHAM: Lowest long-term cost.

 

MR. YOUNGER: Lowest long-term cost, within the realm of the legislation, obviously you can’t approve something - you couldn’t go all coal, for example, because the legislation wouldn’t allow that. One of the options Nova Scotia Power has is to import electricity. They do that on a spot market but they don’t seem to have been pushed in any of the Liberty audits or anything to explore the idea of contracts with Hydro-Québec or so forth. Is that something that you are interested in having them look at?

 

MR. GURNHAM: Absolutely. The problem is the transmission constraint between New Brunswick and Nova Scotia and, as you know, that’s being worked on. At the moment there’s only 345 megawatts of capacity for exchange and that’s largely there for security reasons, not trading reasons, but if it is reinforced to the 800 megawatts that is being talked about, that solves one problem. There is - and I don’t want to get into the details - there is an additional transmission constraint around the City of Moncton that also has to be resolved in order to have a fairly robust flow of energy to Nova Scotia. If those transmission infrastructure problems could be solved, then whenever they run their simulated models, that amount of imported energy would be available there and then the only thing would be price.

 

MR. YOUNGER: That’s where I’m wondering - the Premier committed a year and a half ago that those line issues were going to be dealt with. He said it repeatedly, that with the coming of the Churchill Falls project that is also going to be done; Nova Scotia Power says it’s going to be done. Most of the contracts in meetings I’ve attended recently in the States with some of the U.S. states that are negotiating with Hydro-Québec, they’re negotiating for delivery start dates out three and four and five years, which is within the time horizon that the Premier committed that tie would be dealt with. So would it make sense to have Nova Scotia Power looking at those contracts and options now?

 

MR. GURNHAM: Well, I can’t speak for Nova Scotia Power but I believe the reinforcement of that transmission is something that is being looked at from two standpoints: one is to solve the problem you talked about; and also - and I don’t know a lot about Muskrat Falls, but if it goes ahead, that capacity will be needed to get the power and energy through Nova Scotia to any buyers outside Nova Scotia.

 

MR. YOUNGER: Well, not only does it have to get outside Nova Scotia, I believe they are required by the National Energy Board to keep that grid operating on an even basis, in both directions, which would mean they would have to import electricity.

 

My concern is if they start negotiating these contracts five years from now or three years from now, we may be into the same thing that the member for Halifax Chebucto raised when the board criticized him on fuel contracts and coal contracts. Hydro-Québec is in the market and eager now.

 

MR. GURNHAM: I would encourage you to talk to Nova Scotia Power because I think you’ll find that those discussions are underway and I really don’t think I should be talking for them.

 

MR. YOUNGER: And that’s fair. When it comes to Muskrat Falls, and I guess the application is not before you but we assume that it will be before you at some point if now, according to Emera, you can reach an agreement, which seems to be overdue at this point, has the board done any pre-emptive looking at the possibilities of how this is going to roll out yet?

 

MR. GURNHAM: Let me say if we’re going to have an application before us, it would have to be brought by a utility we regulate. So if, for example, Nova Scotia is to build that line, then they would, under Section 35 of the Public Utilities Act, apply to us to get approval. If it’s to be built by somebody else, if they’re not a public utility in Nova Scotia, then we would not have the jurisdiction to look at it.

 

I’m assuming the context of your question is that Nova Scotia Power or a Nova Scotia utility is going to build the line?

 

MR. YOUNGER: This is actually my issue, that it has been said that this will go to the board but Emera has said they’re building it and then will likely sell the energy to Nova Scotia Power, so basically they’ll just be a fuel supplier. So at the end of the day, in that scenario, the board actually won’t make the decisions, other than on the Nova Scotia Power one to decide fuel cost.

 

MR. GURNHAM: We will only have a Section 35 application for pre-approval under the Public Utilities Act as currently drafted - now the Act could be amended - if a utility that we regulate applies to build. So let’s proceed on the question on the assumption Nova Scotia Power is going to build and then I’ll tell you what we would do.

 

We would look at it from - and we’ve already started some of this work - we would look at it from two . . .

 

MR. CHAIRMAN: Order, please. I have to interrupt you again, unfortunately.

 

MR. GURNHAM: It’s always when I get to the good part.

 

MR. CHAIRMAN: Mr. d’Entremont.

 

HON. CHRISTOPHER D’ENTREMONT: I think it’s an interesting road we’re going down so I’ll allow Mr. Gurnham to finish off his thoughts.

 

MR. GURNHAM: If Nova Scotia Power comes forward with an application under the Public Utilities Act to put in its rate base the link between Newfoundland and Labrador and Nova Scotia, they would need our approval for that. What we would do is take a look at it from two standpoints. I’m told that this can be done technically but we would look at the technical feasibility of it; in other words, how reliable is one of these lines going to be, buried under the ocean? We would engage experts who could assist us in that regard, as can anybody else who wants to participate in the hearing.

 

Of course, the other aspect of it will be the economic aspect and it goes back to the question you asked me at the beginning of the hearing: is this the best long-term option for serving the ratepayers of Nova Scotia? It would be a different set of experts, but those would be the two critical questions that we would look at.

 

We would also want some assurance that Muskrat Falls itself will work. So in other words, it will be power and energy that can go into that system, although we have no jurisdiction on that point. But the hearing we would undertake, assuming Nova Scotia Power is the applicant, would be the technical feasibility to do this and the economics, and yes, in anticipation of this coming to us, board counsel and Steve have been in significant discussions with consultants who might be able to assist us.

 

MR. D’ENTREMONT: Thank you, and I’m sure Mr. Younger wants to thank you as well. Which brings me to the issue - I do want to spend a little more time on Muskrat Falls itself. I know the Premier has talked a lot of times - we’ve asked for a more in-depth study to be done on Muskrat Falls. He has fallen to the issue - well, the URB will be doing that study. So my question to you - I know you talked about Section 35 - but when will the URB be doing a study of Muskrat Falls?

 

MR. GURNHAM: When and if we get an application.

 

MR. D’ENTREMONT: All right, and that application itself really needs to come from Nova Scotia Power, if I understand how you’re going. Can the government ask you to do that? The Premier seems to be going down the road that the government is going to be asking you to do that work. What would that work look like?

 

MR. GURNHAM: I think you would have to ask the government. I mean, this House can enable us to do almost anything through legislation. I’m not inviting that. If it’s Nova Scotia Power that’s applying, I don’t think there needs to be any legislation. I think we have the power to oversee this project.

 

MR. D’ENTREMONT: Okay, if you do get the application from Nova Scotia Power, not Emera, how would the board set itself up to determine the affordability of the project itself, because that seems to be where the Premier says, well, the URB can go out and do this, so how . . .

 

MR. GURNHAM: Yes, well, as I say, we do it from two aspects: the technical aspect, could this be done, and then we would measure the likely cost of this power and energy against alternate sources - not just at a point in time, but to see whether over the long term this project was the best option for ratepayers.

 

MR. D’ENTREMONT: And it goes to my next question, what other clean energy sources would the board look at? Is it projects across Canada, across the world? Is it different . . .

 

MR. GURNHAM: Well, only ones that can supply energy to us. There’s a finite group of projects that could supply energy to us.

 

MR. D’ENTREMONT: All right, and would it be projects that would look at hydro versus tidal, or would it be other mixes of energy that you could qualify if Muskrat Falls is the best deal or not?

 

MR. GURNHAM: I don’t want to prejudge it, but I would say that any realistic power and energy supply that could deliver an equivalent amount of power to Muskrat Falls should be compared to.

 

MR. D’ENTREMONT: If the board deems the project is not the lowest-cost option but public momentum has already been established, will the board side with the affordability or will it be public opinion? You know how these things can end up, right?

 

MR. GURNHAM: I’m sorry, I’m not sure I understood you.

MR. D’ENTREMONT: Well, as you move into a true hearing on this one, so you’re going to be doing your work to see if it’s an affordable issue, we feel public opinion itself has been wrapped up by the government that Muskrat Falls is a good option for Nova Scotia. If your findings are that it is not the best option, which way will you side? Will you side with the findings or with public opinion?

 

MR. GURNHAM: With the findings. Our job under the Public Utilities Act is to determine whether this project is in the best interest of the ratepayers of Nova Scotia.

 

MR. D’ENTREMONT: We’ve continued to - and I’ve been concerned along the way that the province appears to have that one-track mind about Muskrat Falls. How will the public be able to have confidence that all reasonable alternatives have been looked at as we go down this study road, hopefully as somebody asks for that study to be done?

 

MR. GURNHAM: Well, it will be a public process. Our hearings now are broadcast. You can tune in on the Internet and listen in. They will know the stable of experts that we and others have retained. The process itself will be very similar to a hearing process. It will be longer and more complicated, but parties who are interested can join as interveners and provide evidence - including if somebody felt they had a cheaper source of energy they could apply and become a party.

 

I said this is going to be a complicated hearing and I don't want to predict how it's going to proceed because I expect I'm going to end up chairing the panel. So I don't want to go too far into it but I'm happy to try to explain the legal test, which I think I've done.

 

MR. D'ENTREMONT: Thank you very much. I think, just as a final word on that - we're all optimistic that something will come of this, but it still looks like, as it rolls around, it simply means that there will be a higher rate of power if this does happen over a longer term, and what that capital cost will be as it starts to build, and I think what you've provided to us today is maybe more of the complexity of the transmission system versus whether it's Emera or whether it's Nova Scotia Power that makes those applications or does the build-out, so I think it makes it just that much more confusing for Nova Scotians as it rolls around.

 

MR. GURNHAM: Everything the board does with respect to this project, or any other, looks at the lowest long-term cost for ratepayers. If this project or any other project fits into that matrix, then it's worthy of approval.

 

MR. D'ENTREMONT: Okay, I thank you on that. I'm changing gears just a little bit and this is because I don't necessarily pay a lot of time to the URB, to see the actual hearings that are going on. I know that normally our member for Hants West does participate in some of the process that has been going along - I'm sitting in on his behalf, and I'm just wondering, as we look at rate hearings themselves, what socio-economic research does the board do to determine the threshold that Nova Scotia families and small businesses can afford to pay for electricity? I know it's more of a general question for you, but just more for my explanation.

 

MR. GURNHAM: Well we certainly gets lots of evidence on the issues that ratepayers are facing in trying to manage high power rates and other costs, so that evidence is clearly before us. I think you need to understand that the regime under which we work is to examine the costs of the utility that we regulate and determine whether those costs are prudently incurred and necessary. If those costs are prudently incurred and necessary, then our obligation under the Public Utilities Act is to give them the opportunity to recover those costs.

 

MR. D'ENTREMONT: With the input from that socio-economic look - because I know what happens in our communities when people show up to our constituencies with bills that are far beyond anything I can help with - do we look at the availability or the capability of certain parts of our society to be able to pay for power rates? How does that impact in the decision making of the board?

 

MR. GURNHAM: Well, in fact, that was the subject of a case that I sat on that went to the Supreme Court of Canada. The issue involved there was whether the Public Utilities Act allowed the board to impose what were called “lifeline rates”; in other words rates based on ability to pay. The decision that the board panel I chaired made was that the Public Utilities Act did not permit lifeline rates.

 

That was challenged under the Constitution. That case was heard, again, by a panel that I chaired and, following that, went to the Court of Appeal and the Supreme Court of Canada which agreed that under the Public Utilities Act we don't have that jurisdiction.

 

MR. D'ENTREMONT: I think that would be an interesting public policy influence to see how we could make that work. I know from a standpoint from my area, a lot of times these people are on income assistance. By the time they show up to our constituencies their bills are probably in the $2,000 range and we have to work with Nova Scotia Power one way or another.

 

We continually hope that there is some kind of program there. I'm just wondering, is there a way that it could be influenced by the URB?

 

MR. GURNHAM: I think the result of the decision of the Supreme Court of Canada is if there's to be a program it's to be a government-funded program.

 

MR. D'ENTREMONT: So something that maybe Community Services or other programming could come up with in order to make that happen.

 

MR. GURNHAM: Having said that, I'm not unsympathetic to the issue. I mean I've had witnesses come to our hearing room, particularly in that constitutional case and others, people living under the poverty line who are telling me that they are making the choice between buying drugs and heating their home. Those are hard stories to hear, but I think the Supreme Court of Canada has made it clear - that’s a social issue to be dealt with by government, not by the ratepayers.

 

MR. D’ENTREMONT: No, the challenge I think we have, even as government- because I’ve had the opportunity to be on both sides of the issue – it is the fact that sometimes the bills are just too large. It continues to compound and there’s no mechanism, I think - maybe it’s a criticism of Nova Scotia Power, I’m not too sure - they’ve just let things go far too long before anyone really finds out about them, so all of a sudden it’s a $3,000 bill instead of a $400 bill or you’re a couple of months in arrears and you can sort of fix it up.

 

MR. GURNHAM: The board has a fairly sophisticated complaints process that customers can take advantage of to try to solve those problems. Those are problems that can be solved.

 

The other concern I have is that on some of these demand-side management initiatives - I have to be careful how I say this - but people in poverty are in most need of assistance but have the least ability to respond to the initiatives that are out there. Certainly Efficiency Nova Scotia is working on that, but I’m convinced there are a lot of energy savings that can be achieved by people in those situations if we could enable them to do them. That’s not something the board can solve on its own. It’s a problem that needs to be solved because I think there are opportunities that will work.

 

MR. D’ENTREMONT: I’m changing gears. I know I’m running out of time quickly here.

 

When it comes to the issue - I mean the challenge we’ve always had with Nova Scotia Power is now the parent company of Emera, where we talk a little bit about the profits that Emera makes - what authority does the URB have over how much profit Emera stakeholders make . . .

 

MR. GURNHAM: None.

 

MR. D’ENTREMONT: . . . because it’s sort of that line, that delineation between the two companies?

 

MR. GURNHAM: None. All we control is the rate of return on common equity that Nova Scotia Power has, which at the moment is in the range between 9.2 and 9.5 per cent. It’s a rate that’s put in place having regard to expert evidence we receive, looking at what similar utilities are making across the province. I see Standard & Poor’s are recently concerned that it may not be high enough. But that’s the only piece of the puzzle we control. In return for investing 100 per cent of the common shares in Nova Scotia Power, Emera gets that return. What they do with that return after they get it is beyond our control. The return they get from the other industries they’re involved in, such as the Brunswick Pipeline or these Caribbean utilities and so on, we clearly have no control over.

 

MR. D’ENTREMONT: Looking at the 9 per cent, at the actual rate of return, most of us would love to have that kind of rate of return in our investments. How is that 9 per cent decided upon or how has it come to fruition - is it a requested directly from them or is it something the URB actually lines up?

 

MR. GURNHAM: No, they requested a higher rate of return. I tried to explain in the memo I put out because it’s a difficult question to understand - I have a whole section there on how a rate of return is calculated. What essentially you do is you look at a risk-free investment, which is long Canada bonds, and then you try to determine an equity risk premium above long Canada bonds that is a proxy for the risk that the utility faces in undertaking its business. How you get to the risk factor is you compare it to earnings that are being achieved by other industries, most of whom are non-regulated industries.

 

It’s a fairly sophisticated science as to how it’s done. There are two or three different tests you use. That one was called the equity risk premium test, which is one that’s widely relied on; there’s also a discounted cash flow test, and if you read some of our rate cases you can read - and don’t fall asleep - pages and pages on these tests. It’s a fairly sophisticated science. Experts are brought in by all parties to try to determine what a reasonable rate of return is. I think if you were to look at the return Nova Scotia Power has, compared to fully integrated utilities across North America, you’ll see it’s either at the lower end of the range or within the range.

 

Now I agree with you. I can’t go to the Royal Bank . . .

 

MR. CHAIRMAN: Order, please. Unfortunately, we’ve run out of time again. That’s very interesting, though.

 

MR. GURNHAM: At another good point.

 

MR. CHAIRMAN: Mr. Epstein.

 

MR. EPSTEIN: I think we might end up at the same point, so don’t forget what you were talking about. But we’ll get there by going back to where you and I left off.

 

When we chatted before we were having a little look at the basic elements that go into generating the rates that are ultimately set for the different customer classes, but we were talking really about the costs that Nova Scotia Power encounters, and you were pointing out to us that there is operations and maintenance, which I think is fairly straightforward - I guess that’s staff costs and keeping the transmission and distribution system up to snuff and meeting environmental standards and so on - then there are the fuel costs, and we were having a bit of a chat about control of fuel costs.

 

Then you pointed us to the cost of capital, and that’s where I wonder if we could focus our attention for a moment. I would invite you to explain the cost - what the idea of the costs of capital means for Nova Scotia Power.

 

MR. GURNHAM: Nova Scotia Power has a capital structure, which we hope is an efficient capital structure that the board has put in place. What you’re trying to do is find a capital structure in terms of debt, preferred shares, and equity that is in the best interest of the ratepayers. Obviously the shareholders of the utility would like to have the largest common equity component possible, because that is the most expensive piece of debt. By the same token, you have to have a certain amount of common equity in order to make the shares marketable . . .

 

MR. EPSTEIN: Excuse me, Mr. Gurnham. I want to make this as simple as possible for myself and for anyone at home who might be listening to this. Could I try and offer you what I think is a very simple explanation of this?

 

MR. GURNHAM: Sure. I was trying to do that.

 

MR. EPSTEIN: If Nova Scotia Power needs money to build their new office building or to keep up their system, I assume they can either go and borrow that money, which would normally mean going to the bond market, or they can get money from shareholders - is that essentially the big picture?

 

MR. GURNHAM: Sure, but we control how much of that they do in the sense that Nova Scotia Power’s maximum common equity component is 40 per cent and their debt component is essentially 60 per cent. So as they finance all of their infrastructure they must finance it using 40 per cent common equity and 60 per cent debt, and debt is cheaper.

 

MR. EPSTEIN: Yes. Debt essentially means going to the bond market and borrowing the money, and you say that equity is more expensive than debt.

 

MR. GURNHAM: Traditionally it is.

 

MR. EPSTEIN: Yes, and equity means essentially having shareholders. And why is it that equity is more expensive than debt - can you just explain what that concept generally means?

 

MR. GURNHAM: Because shareholders, who are taking a risk with respect to their investment, command a higher return. If you look at any company - if you look at Canadian Pacific, if you look at High Liner Foods, you’ll see that their return on common equity is higher than the return on debt because the debt is secured.

 

MR. EPSTEIN: Maybe we’re using the term in a slightly different way, but debt, presumably, if you’re lucky, you can retire at some point and pay it off.

 

MR. GURNHAM: And you do.

 

MR. EPSTEIN: Whereas equity kind of never goes away - isn’t that part of the problem, that shareholders are there forever unless you buy back shares?

 

MR. GURNHAM: No. The way the debt is handled is through sinking funds. So in other words a debt issue - if you floated a debt issue today, 30 days out, as part of the payment of that, you set aside sinking funds so that you’re in a position to pay that debt at the end of the day. But don’t forget that the debt holders have in priority to the shareholders a charge on the two billion assets of Nova Scotia Power that exist, so they don’t command as high a premium as the common equity shareholders who, on a windup of Nova Scotia Power, would probably receive nothing.

 

MR. EPSTEIN: Well here’s something that I hear people . . .

 

MR. GURNHAM: I thought we were going to simplify it here, Mr. Epstein.

 

MR. EPSTEIN: Well, we’re trying, and I’m trying.

 

I hear people say the following thing - what you’ve been outlining for us are really expenses that are incurred in the normal course of business and therefore, since they’re outlays by the company, the customer should ultimately have to pay for these - I think you called them “prudent and necessary costs.” Nova Scotia Power was privatized in 1992 by the Progressive Conservative Government of the day, and therefore it was intended to be a privately held company and therefore a profit-making company. So where does the profit come in?

 

MR. GURNHAM: The profit of Nova Scotia Power?

 

MR. EPSTEIN: Yeah.

 

MR. GURNHAM: The profit of Nova Scotia Power is their return on rate base.

 

MR. EPSTEIN: Okay, so that, I think, is the focus. So what leads to the calculation of the return on rate base?

 

MR. GURNHAM: It’s really a number that falls out of the cost of debt and the cost of capital. The return on rate base is about 9 per cent? (Interruption) About 8.5 per cent - it’s a combination of the weighted cost to capital, which is 9 per cent for common shares and around 8 per cent for debt.

 

MR. EPSTEIN: You also used the term “return on equity.”

 

MR. GURNHAM: The Public Utilities Act doesn’t use the words return on equity and so, really, that’s what the markets are concerned about. What we do and what everybody else in the country does is put a price on the cost of debt and the cost of equity and we translate that into a return on rate base and that is, in fact, what we regulate Nova Scotia Power on.

 

MR. EPSTEIN: Okay, I have heard people say the following thing - they have said well, look, Nova Scotia Power is essentially a monopoly business for almost 1 million people, for all their households, for their businesses, for their industry. There’s a captive market, it’s an essential item, everyone buys electricity, and there isn’t a lot of risk here. They look at it and they say why should the risk factor be much different than that that is involved in government bonds or municipal bonds or blue chip company bonds? Why should there be such a significant difference between the rate paid to bondholders for secure bonds and the rate of return for a monopoly regulated utility that’s selling an essential service?

 

MR. GURNHAM: Sure, because that’s the way the market prices common shares.

 

MR. EPSTEIN: This is, again, what people have said to me - they have said they’ve gone and listened to your experts at the hearing and what the experts tend to say is I’m going to compare Nova Scotia Power with a group of other utilities elsewhere. What people have said to me is why aren’t they comparing it with government bonds, why aren’t they essentially saying not treat this as a profit-making company that’s similar to other profit-making companies in maybe a different line of work? Why doesn’t it look more like something that’s a very secure kind of investment?

 

MR. GURNHAM: Because it is a profit-making company.

 

MR. EPSTEIN: Oh, yes, it certainly is intended to be a profit-making company. The question is, I think, the margin.

 

MR. GURNHAM: You would have no shareholders if you weren’t prepared to pay them a competitive rate. The decision that was made when Nova Scotia Power was privatized was to make it a public company. Being a public company it can only finance itself in accordance with what the market requires and that’s why you have a - we can talk about this for a long time, but both these decisions are beyond your and my control. In order to finance Nova Scotia Power and to preserve its bond rating, which we need to do, it needs to be able to attract capital, including common equity capital and it can attract it at 5 per cent.

 

MR. EPSTEIN: Is the company still issuing shares?

 

MR. GURNHAM: From time to time, yes. I think it issued over $150 million in the last six months.

 

MR. EPSTEIN: So this factor essentially flows from the privatization?

 

MR. GURNHAM: Well it is a private company in the same way the bank across the street is; it’s a company designed to make a profit.

 

MR. EPSTEIN: Yes. No, no, I think that’s clear enough. Okay, I think my colleague to my left has questions.

 

MR. GURNHAM: And I’m not defending that, I’m just saying that’s what it is.

 

MR. CHAIRMAN: Mr. MacKinnon.

 

MR. CLARRIE MACKINNON: Mr. Chairman, a couple of quick questions if I could. You indicated - and we’ll bounce back to wind power - that we were talking a maximum of 500 megawatts for the system and 100 megawatts is geared to COMFIT, if I’m recapping correctly . . .

 

MR. GURNHAM: Yes, although the COMFIT projects are not all wind.

 

MR. MACKINNON: Okay. What percentage of them would be, because you indicated that we were looking at moving COMFIT to about 40 megawatts?

 

MR. GURNHAM: It’s too early to tell. The COMFIT process is just barely underway and, in fact, it’s a question better asked of the Department of Energy because they are, in fact, administering that program. There are COMFIT biomass opportunities; there are COMFIT tidal opportunities in addition to wind. I can’t tell you sitting here what portion of the COMFIT projects are wind because that’s not something we administer.

 

The question I was asked, and I think I’m right on, is that in total the Nova Scotia Power system can accommodate something in excess of 500 megawatts of wind and something less than 600 megawatts of wind, because we can’t follow more wind based on what we know now and that information comes from a study by a company called Hatch, which was undertaken by the Department of Energy.

 

MR. MACKINNON: The Glen Dhu project is in my constituency and Shear Wind has had a very, very positive impact on our rural economy. They’re looking at a Phase II and a Phase III, which I am supportive of. I’m trying to zero in on what of the 500 megawatts is remaining that companies throughout the province could have the possibility of capturing.

 

MR. GURNHAM: Sure. Well, under the Electricity Act the province has appointed a renewable electricity administrator who is responsible for acquiring new renewable projects. He’s an appointee of the Department of Energy and, in fact, he has before the board now a standard form of the power purchase agreement, which he’s asking our approval on, so that he can begin the exercise of putting out a request for proposals for additional renewable energy. He has a timeline - and I’m not part of that process - but he has a timeline which is already underway. The theory is that, except for projects which are COMFIT, they will bid into this process and they’ll have to win. So if they have the best price, terms and conditions, they’ll win; if they don’t, somebody else will.

 

MR. MACKINNON: Very quickly, if I may, you have jurisdiction over natural gas access and distribution, right?

 

MR. GURNHAM: We do.

 

MR. MACKINNON: We have, going through Pictou County, natural gas but no distribution and there are quite a few businesses that are very, very interested in getting involved with natural gas. Nova Scotia Power Inc., the Trenton generating facility, has indicated that it isn’t capable of a 100 per cent conversion there; in fact, it would be more feasible to build a new facility if they had to be forced to do that. I’m concerned about the process of recent conversations in relationship to the truck tanker distribution that is being talked about right now. I’m wondering how that would work and how will prices be fixed there in relationship to this new concept.

 

MR. GURNHAM: Well, I would say it’s yet to be decided. What has happened was that Heritage Gas applied to the board to amend their franchise territory to transport compressed natural gas from their pipeline near Oxford, Nova Scotia, to the Minas Basin facilities in the Annapolis Valley, using trucks to compress natural gas, and applied to us to make that part of their franchise. Shortly after that, the Department of Energy announced that they were going to undertake consultation to see whether, in fact, that should be a regulated service and that consultation is currently underway.

 

In the circumstances, the board suspended that hearing because if the legislation is going to change, there’s not a whole lot of point in us having a hearing, so that hearing is on hold until the government decides whether the transport of compressed natural gas is going to be part of a franchise or not. Once that’s clarified, if government ultimately decides that it will be part of the franchise, then our hearing will continue. If government decides that’s not to be a regulated service, then we wouldn’t have anything to do with it, but it is an opportunity, whether regulated or not, to expand the use of natural gas.

 

MR. MACKINNON: One concern that I think is important to a lot of ratepayers is time-of-use, real-time price rate, and a lot of people don’t take advantage of that and that's something that people who are in lower-income brackets should be looking at. Any comments on how valuable that is to the consumer?

 

MR. GURNHAM: Are we talking electricity or gas?

 

MR. MACKINNON: Electricity, jumping back to electricity.

 

MR. GURNHAM: The interesting situation in Nova Scotia is that the off-peak and on-peak price differential for electricity is not nearly as significant as it is in other provinces. That's simply because of the nature of the generation we have. So for domestic users, the most effective use of on-peak/off-peak hours is if you heat your home using thermal storage, so if you can heat your home and preserve the energy by using thermal storage facilities during the off-peak hours and also time your dishwasher and washing machine during the off-peak hours, you can save a significant amount on your electric bill.

 

For somebody like me, who has an oil furnace, my opportunities to take advantage of time-of-use rates aren't nearly as significant. The reason for that is that the on-peak/off-peak differential in Nova Scotia at the moment is not as significant as it is in, say, Ontario or New York State.

 

MR. CHAIRMAN: Order, please. I actually let you go over the time on that one to answer that question.

 

That concludes our questions. Mr. Gurnham, if you'd like to make some wrap-up comments, please do. After that, we have some committee business we have to do.

 

MR. GURNHAM: I came here today with the object of trying to help you folks, and through you folks your constituents, have a better idea of the work we do. If I accomplished that in some small way, I've done what I came here to do today.

 

I also would hope that in the manner in which we answered the questions that you at least think to a certain extent we know what we're doing, and if I accomplished that, I've accomplished what I came here to do today. I hope I was helpful, I hope we were helpful.

 

MR. CHAIRMAN: Thank you very much. I personally found it very informative and I'm sure that the other members did as well. So again, thank you very much for coming today. We appreciate your time and effort coming and the work you do.

 

With that, we have some committee business to continue with. You can either leave or stay, it is totally up to you. We'll just be a few minutes anyway.

 

Okay, we have a few things on the agenda here we have to look at. We have, number one, the record of decision from the subcommittee and it's proposed that we add to our witness list, Communications Nova Scotia and it's around the rules and criteria associated with government advertising costs. That has tentatively been scheduled for May 9, 2012, pending approval of the whole committee.

 

Could I have perhaps a motion for that? Moved by Mr. d'Entremont, seconded by Mr. Younger. Any comments?

 

Would all those in favour of the motion please say Aye. Contrary minded, Nay.

 

The motion is carried unanimously.

 

The second item we have by the subcommittee was the Department of Environment land purchase and land protection, but under some investigation, Natural Resources is also involved with this process as well. That is tentatively booked for June 13th, pending approval by this committee. The only change would be that the Department of Environment and Department of Natural Resources give us a better understanding of what it is.

 

I'd entertain a motion for that.

 

Moved by Mr. d'Entremont and seconded by Mr. Whynott.

 

Would all those in favour of the motion please say Aye. Contrary minded, Nay.

 

The motion is carried unanimously.

 

Those two meetings will be finalized.

 

We have some information here provided to us by the Department of Agriculture that was asked for some time ago and we have that information for the members.

 

The only other thing here is we have, with the approval of the committee, May 9th has been tentatively booked with Communications Nova Scotia and I believe that is finalized now, as approved by the committee. Our next meeting will be May 9th at 9:00 a.m. and that will be Communications Nova Scotia.

 

Motion to adjourn?

 

MR. MAT WHYNOTT: So moved.

 

MR. CHAIRMAN: We stand adjourned.

 

[The committee adjourned at 10:55 a.m.]