Pacific West Power Rate Decision

DECISION
NOVA SCOTIA UTILITY AND REVIEW BOARD

2012 NSUARB 126
M04862
IN THE MATTER OF THE PUBLIC UTILITIES ACT
-and-
IN THE MATTER OF AN APPLICATION by PACIFIC WEST COMMERCIAL
CORPORATION and NOVA SCOTIA POWER INCORPORATED for approval of a
Load Retention Rate mechanism for the Point Tupper paper mill and related approvals
BEFORE:
APPLICANTS:
PARTICIPANTS:
BOARD COUNSEL:
Document: 206878
Peter W. Gurnham, Q.C., Chair
Murray E. Doehler, C.A., P.Eng., Member
Roberta J. Clarke, Q.C., Member
PACIFIC WEST COMMERCIAL CORPORATION
DavidS. MacDougall, LL.B.
James MacDuff, LL.B.
Jessie Irving, LL.B.
NOVA SCOTIA POWER INCORPORATED
Rene Gallant, LL.B.
Colin Clarke, LL.B.
AVON GROUP
Nancy G. Rubin, LL.B.
Maggie A. Stewart, LL.B.
CONSUMER ADVOCATE
William L. Mahady, LL.B.
PROVINCE OF NOVA SCOTIA
Mark V. Rieksts, LL.B.
John Traves, Q.C.
SMALL BUSINESS ADVOCATE
E.A. Nelson Blackburn, Q.C.
S. Bruce Outhouse, Q.C.
HEARING DATES: July 16, 17 & 18, 2012
FINAL SUBMISSIONS: July 31, 2012
LIST OF PARTIES: Appendix A
DECISION DATE: August 20, 2012
DECISION: Application is granted with conditions, see summary
paragraphs 220 to 242
Document: 206878
TABLE OF CONTENTS
1.0 INTRODUCTION AND BACKGROUND .............................................................. .4
2.0 THE APPLICATION .............................................................................................. ?
2.1 Load Retention Tariff Pricing and Dividend Calculation Mechanism .......... 9
2.2 Arrangements Relating to the Biomass Plant.. ......................................... 10
2.3 Tax Structure ............................................................................................ 11
2.4 The Agreements ....................................................................................... 11
2.5 The Negotiations ...................................................................................... 16
2.6 Informal Submissions ............................................................................... 18
3.0 ISSUES AND FINDINGS .................................................................................... 19
3.1 Jurisdiction ............................................................................................... 19
3.1.1 Findings ......................................................................................... 21
3.2 Necessity and Sufficiency ......................................................................... 22
3.2.1 Findings ......................................................................................... 31
3.3 Pricing Mechanism for Electricity .............................................................. 33
3.3.1 Incremental Costs .......................................................................... 34
3.3.1.1 Determination of Incremental Price ....................................... 35
3.3.1.2 Agreed Additional Incremental Costs .................................... 36
3.3.1.3 Other Incremental Costs ....................................................... 38
3. 3.1.4 Findings ................................................................................ 39
3.3.2 Contribution to FCR Deferral ......................................................... 40
3.3.2.1 Findings ................................................................................ 41
3.3.3 Administration Costs.................. .. .. . .. .. .. . . . . . .. . . . .. . . .. . . . . .. .42
3.3.3.1 Finding .................................................................................. 42
3.3.4 Credit Risk ..................................................................................... 42
3.3.4.1 Finding .................................................................................. 43
3.4 Settlement Mechanism ............................................................................. 43
3.4.1 Finding ........................................................................................... 44
3.5 Overall Findings on the Mechanism ........................................................ .44
3.6 Tax Structure and Risk ............................................................................ .44
3.6.1 Findings ......................................................................................... 48
3.7 Term and Reopener ................................................................................. 48
3.7.1 Findings .......................................................................... , .............. 50
3.8 Steam Supply ................................................ , .......................................... 51
3.8.1 Findings ........................................................... , ............................. 52
3.9 Risk ............. , ............................................................................................ 52
3.9.1 Findings ......................................................................................... 58
3.1 0 RES Costs ................................................................................................ 57
3.1 0.1 Findings ................................. , ....................................................... 59
3.11 Regulatory Accounting Issues .................................................................. 60
3.11.1 Findings ......................................................................................... 61
3.12 Environmental Issues ............................................................................... 61
3.12.1 Findings ......................................................................................... 63
3.13 Reporting and Audit.. ................................................................................ 64
3.13.1 Findings ......................................................................................... 65
3.14 FCR Deferral ............................................................................................ 66
3.14.1 Findings ......................................................................................... 68
4.0 COMPLIANCE FILING ........................................................................................ 68
5.0 SUMMARY OF BOARD FINDINGS .................................................................... 69
Appendix A- List of Parties ........................................................................................... 75
Document: 206878
-4-
1.0 INTRODUCTION AND BACKGROUND
[1] Despite having what has been described as world class equipment for
making supercalendared paper, a reputation for a high quality product, and a dedicated
work force, the paper mill located at Point Tupper (the "mill") continues to face
challenges.
[2] The mill has been manufacturing paper since 1962, and has two
papermaking machines, PM1 which manufactures newsprint, and PM2 which
manufactures supercalendared paper. The mill uses an electrically-driven mechanical
pulping process and steam to dry the paper during manufacture.
[3] During an application before the Nova Scotia Utility and Review Board
(the "Board" or "NSUARB") in September, 2011, in which the then owner of the mill,
New Page Port Hawkesbury Inc. (NPPH), together with Bowater Mersey Paper
Company Limited ("Bowater"), the operator of a paper mill in Brooklyn, were seeking
relief by way of a Load Retention Tariff for the costs of electricity supplied by Nova
Scotia Power Inc. ("NSPI"), NPPH announced the shutdown of the mill. It then made
application to the Supreme Court of Nova Scotia (the "Court") under the Companies'
Creditors Arrangement Act. R.S.C. 1985, c. C-36, as amended (the "CCAA").
[4] The mill was the largest single customer of NSPI, consuming in excess of
10% of the electricity NSPI produced. Its permanent closure would mean a substantial
reduction in the load requirements of the electricity system. It also would mean the loss
of the mill's contribution to the fixed costs of the system.
Document: 206878
- 5 -
[5]
Since the CCAA application the mill has remained in a "hot idle" state.
While not producing paper the mill would be able to re-commence operations in a
relatively short time.
[6] Ernst & Young, the monitor appointed by an order of the Court, undertook
a process to find a buyer for the mill. This process resulted in acceptance of a proposal,
subject to creditor approval, from Pacific West Commercial Corporation ("PWCC"), a
member of the Stern Group of Companies, to purchase and operate the mill, provided it
could obtain or negotiate satisfactory agreements with various parties, including its
unionized work force, the Province of Nova Scotia {the "Province") regarding wood fibre,
and NSPI with respect to energy costs. The latter has been described as the largest
component of its costs of operation.
[7] Recognizing the declining market for newsprint, it is the intention of PWCC
to operate PM2 only. This machine is reported to produce more than 20% of the North
American supercalendared paper output. Operating PM2 only would result in a
significant reduction (approximately 450,000 MWh annually) in the amount of electricity
required in the mill operation.
[8] As a result of negotiations between PWCC and NSPI, a means of
addressing the cost of electricity which would satisfy both parties was developed,
hinged on the acceptability to Canada Revenue Agency ("CRA") of the use of non-
capital losses accumulated by NPPH and tax-free payment of dividends. NSPI and
PWCC through their respective tax advisors have requested an Advance Tax Ruling
("ATR") from CRA regarding the proposed transaction.
Document: 206878
- 6 -
[9]
PWCC and NSPI applied to the Board for approval of a Load Retention
Tariff ("LRT") pricing and dividend calculation mechanism. Each of them filed
Applications, dated April 27, 2012, with the Board, which then set down a hearing to
commence on July 16, 2012 at its offices in Halifax.
[1 0] Notice of the Hearing was published in both the Halifax Chronicle Herald
and the Cape Breton Post on April 28, May 2, and May 5, 2012.
[11] PWCC was represented by David MacDougall, James MacDuff, and
Jessie Irving. It filed direct and reply evidence as well as responses to Information
Requests ("IRs"). Testimony was given at the hearing by a panel consisting of Ron
Stern, President of PWCC; Wayne Nystrom, a business partner of Mr. Stern and
consultant to PWCC; Shawn Lewis, General Counsel and Secretary of PWCC; Bill
Stewart, Director of Woodlands and Strategic Initiatives, NPPH; and Douglas Ewens,
Q.C. of McCarthy Tetrault.
[12] NSPI was represented by Colin Clarke and Rene Gallant. It also filed
direct and reply evidence and responses to IRs. The panel testifying at the hearing on
behalf of NSPI consisted of Rob Bennett, President and Chief Executive Officer; Mark
Sidebottom, Vice-President, Power Generation and Delivery; and Eric Ferguson,
Director, Regulatory Affairs.
[13] The Consumer Advocate (the "CA") represented by John Merrick, Q.C.,
and William Mahody, the Small Business Advocate (the "SBA") represented by E. A.
Nelson Blackburn, Q.C., the Avon Group ("Avon") represented by Nancy Rubin and
Maggie Stewart, the Province represented by Mark V. Rieksts, the Municipal Electric
Utilities of Nova Scotia Co-operative ("MEUNSC"), and the Municipal Action Group
Document: 206878
- 7-
("MAG") represented by James R. Gogan, were granted Intervenor status.
Subsequently, MAG withdrew as an Intervenor and participated in the public session
only. MEUNSC did not participate in the hearing.
[14] Direct evidence of Paul Chernick, of Resource Insight, Inc., was filed by
the CA. Mr. Chernick testified at the hearing, and had filed responses to IRs, as did
Todd Williams, of Navigant Consulting, who filed direct evidence and testified on behalf
of the Province. The direct evidence and IR responses of John Athas of LaCapra
Associates, on behalf of the SBA, as well as the direct evidence and IR responses of
Mark Drazen of Drazen Consulting Group, Inc., on behalf of Avon, were filed but Mr.
Athas and Mr. Drazen did not testify because none of the parties required their
attendance for the purpose of cross-examination.
[15] S. Bruce Outhouse, Q.C., appeared as Board Counsel. Jack Bernstein
and Stuart Bollefer of Aird & Berlis LLP, and J. Richard Hornby, of Synapse Energy
Economics Inc., filed direct evidence and IR responses. They testified via telephone
conference on behalf of Board Counsel.
[16] This Decision follows the hearing of the Applications over the period from
July 16-18, 2012, inclusive.
2.0 THE APPLICATION
[17] In its Application, PWCC says it is " ... applying for approval of an
arrangement that would allow it to acquire control of NPPH and enter into agreements
that would enable NPPH to self-supply electricity to the Mill" (Exhibit P-3, p. 5). The
self-supply requires a relationship with NSPI whereby certain assets are dedicated to
the use of a partnership in which initially each of NPPH and NSPI will be limited
Document: 206878
- 8 -
partners. In exchange for the dedication of the assets, NSPI would receive prescribed
distributions of cash tied to a defined quantity of electricity consumed by the mill. The
proposed structure would allow PWCC to utilize tax losses of NPPH, and NSPI to
receive inter-corporate dividends which, unlike revenue from the sale of electricity,
would not be subject to income tax.
[18] PWCC also proposes that NPPH would self-supply steam through a
dedicated use agreement with NSPI for certain quantities of steam generated from the
adjacent Biomass Plant owned by NSPI.
[19] The term of the arrangement is seven and one-half years.
[20] In its Application, NSPI asked the Board to approve, as filed, the Load
Retention Tariff Pricing and Dividend Calculation Mechanism (the "Mechanism") and the
Dedication of Use Agreement for the dedicated facilities ("DUA 1 "); the arrangements
regarding the Biomass Plant including the Dedication of Use Agreement for that facility
("DUA2"). It also asked for approval to extend the 2012 General Rate Application Fixed
Cost Recovery Deferral ("FCR Deferral") during 2013 and 2014 and to apply dividends
received for fixed costs contributions from NPPH to the FCR Deferral, and approval to
account for the arrangements on a cost basis, and for the arrangements to cease if
NSPI is unable to follow "rate regulated accounting for external reporting purposes at
any time in the future" (Exhibit P-4, p. 26). Its final request was for:
Confirmation from the Board that, subject to the usual requirements of prudent operation
of the utility, NS Power will not be at risk for any consequences of the arrangements
proposed herein, including tax consequences.
[Exhibit P-4, p. 26)
Document: 206878
2.1
(21]
- 9 -
Load Retention Tariff Pricing and Dividend Calculation Mechanism
The Mechanism is set out in Appendix E of PWCC's direct evidence. It is
stated to be available only to the partnership that owns the mill, and is for a term ending
December 31, 2019. The partnership is required to reduce its electrical load in a similar
manner to customers of NSPI who take service under interruptible riders.
[22] The proposed LRT states:
This Mechanism is intended to result in Nova Scotia Power Inc ("NSP!") rece1v1ng
dividends from NPPH and direct compensation from the Partnership in an aggregate
amount economically equivalent to and determined by reference to NSPI's otherwise
incremental costs of serving the Mill including all variable costs, plus a significant positive
contribution to fixed costs, with the result that other customers are better off by retaining
the Mill load rather than having the Mill shut down and make no contribution to fixed cost
recovery. The dividends will provide equity distributions to NSPI for its dedication of
certain of its generating facilities ("Facilities") to the use of the Partnership.
[Exhibit P-3, Appendix E, p. 1)
[23] As discussed in greater detail later, NSPI is entitled to receive dividend
payments calculated in accordance with a formula set out in the tariff, as well as
payment for any energy taken by the mill above what is produced by the dedicated
facilities. In addition, NSPI is to be paid an administration fee of $20,700 per month.
[24] NSPI is entitled to terminate DUA 1 at any time upon seven days' notice in
its " ... sole and unrestricted discretion ... ". Further, the tariff requires that NSPI terminate
DUA 1 on specified conditions, unless the Board orders otherwise, including: NPPH's
failure to make any payment on time; NPPH's inability to declare dividends; written
notice from CRA of revocation of the ATR; any action by PWCC " ... that would
jeopardize the validity of the tax consequences of the structure provided for. .. " in the
ATR; changes to Generally Accepted Accounting Principles ("GAAP") preventing NSPI's
use of rate regulated accounting for external reporting purposes; or, direction by the
Board. In all but the last of these instances there are short curative provisions.
Document: 206878
- 10-
[25) The Board notes that the tariff also provides that dividends are to be paid
to NSPI on a weekly basis, in advance, based on estimates, with true-up adjustments to
reflect actual consumption.
[26] The partnership is not to be charged with any cost recovery for Demand
Side Management {"DSM"), and no Fuel Adjustment Mechanism ("FAM") charges or
credits apply to the partnership. The rate is designed to cover actual hourly fuel costs.
2.2
[27]
Arrangements Relating to the Biomass Plant
As noted earlier, NSPI owns the cogeneration biomass fired boiler (the
"Boiler") located on property adjacent to the mill. This Boiler and the arrangements
between NSPI and NPPH were the subject of a hearing before the Board in 2010.
[28] The Boiler creates thermal energy in the form of steam to generate
electricity. Pursuant to the Renewable Electricity Regulations, N.S. Reg155/2010,
made pursuant to the Electricity Act, R.S.N.S. 2004, c. 25, NSPI is entitled to include
the electricity generated by the Biomass Plant as part of its Renewable Energy
Standards ("RES") compliance requirements.
[29] NSPI will continue to own and operate the Biomass Plant. Under the
terms of DUA2, NSPI dedicates to the use of the partnership a 24% undivided interest
in the Boiler, which entitles the partnership to 24% of the thermal energy produced by
the Boiler. This energy is then used to heat and operate the mill, and is intended to be
a self-supply.
[30] NSPI described the arrangements in its Application thus:
NS Power plans to operate the Port Hawkesbury Biomass plant. A dedication of use
agreement will exist for the proportional component of the steam plant that supplies the
Partnership, so that the Partnership will be self-supplying steam. NS Power will be
provided equity distributions by way of Second Preferred Shares based on the mill's
anticipated steam consumption. This will result in tax-effected value to NS Power of
Document: 206878
2.3
[31 J
- 11 -
$4.72 million, with up to 24% of the biomass steam production being taken by the mill. In
addition, the mill will provide sufficient fuel to produce its required steam.
The Partnership will supply various services to NS Power, such as water, compressed
air, fire protection, demineralized water and storeroom, for an annual cost to NS Power of
$750,000. In certain circumstances, NS Power will operate but have no responsibility to
maintain such common services. This will be documented in a Biomass Operating
Maintenance and Shared Services Agreement. ...
[Exhibit P-4, p. 20]
Tax Structure
Both NSPI and PWCC point to the joint request made by their respective
tax advisors to CRA for an ATR on the proposed structure. They confirmed both in
direct evidence and testimony at the hearing that a favourable ATR is a condition
precedent for the proposed arrangements. If it is not granted, neither party will proceed
further. PWCC describes the request thus:
[32]
[331
2.4
[34]
.. the Mill intends to self-supply electricity and steam via the facilities and Boiler DUAs,
wh1ch would form a critical part of the Mill's restructuring to enable the Partnership to
earn a profit from operating the Mill. This would enable NPPH to pay preferential cash
dividends to NSPI on its preferred shares and further dividends to NSPI on its common
shares. PWCC and NSPI have jointly requested an Advance Tax Ruling from the Canada
Revenue Agency to ensure that the tax treatment noted above will be accorded to NSPI
for dividends on its preferred and common shares of NPPH, and that there will not
otherwise be any adverse income tax consequences on NSPI or PWCC. A favourable
Advance Tax Ruling is a prerequisite to PWCC's investment in the Mill and obviously
integral to the overall electricity and steam self-supply arrangements discussed above.
NSPI says in its Application that:
" ... in the absence of the ATR, it would not be prudent to proceed with the proposed
transaction. On that basis, NS Power suggests that Board approval of the proposal be
conditional upon receipt of the ATR."
The Board discusses this issue later in this Decision.
The Agreements
NSPI listed the relevant agreements underpinning the structure of the
arrangement and the proposed LRT for the mill, all of which have been provided to the
Document: 206878
- 12-
Board for review. The Board has synthesized a brief description of each document, as
understood by the Board, for the purposes of this Decision, as follows:
1. Load Retention Tariff Pricing and Dividend Calculation Mechanism -
described in Section 2.1 above.
2. Net Settlement Model - appears as Appendix 1 to the Net Settlement
Agreement and also at the end of the Mechanism; it is intended to illustrate " ... the value
flow methodology applicable to the net settlement provisions agreed ... " by the
partnership and NSPI regarding " ... (i) the net settlement of Energy delivered by the
Partnership to the System and the subsequent delivery of electricity by NSPI to the
Partnership, and (ii) the provision for payment by the Partnership for electricity which is
consumed by the Partnership in excess of the amount of Energy generated by the
Facilities ... " (Exhibit P-7, p. 7).
3. Net Settlement Agreement - the agreement between NSPI and the
partnership whereby the partnership is to deliver the energy produced by the dedicated
facilities under DUA 1 to the NSPI electricity transmission system in exchange for which
NSPI delivers an identical quantity of electricity to be used by the mill to make paper. If
there is an excess of energy produced over the amount consumed, it can be carried
forward. The agreement adopts the Net Settlement Model referred to above.
4. Facilities Dedication of Use Agreement ("DUA1") - the agreement
between NSPI and the partnership whereby NSPI dedicates the use and enjoyment of
certain hydro and wind electricity generating facilities to the partnership, which will then
use the facilities to generate the same volume of electricity which the mill operation will
consume. The partnership will reduce its load when NSPI deems it necessary. NSPI
Document: 206878
- 13-
has the right to terminate the agreement on seven days' notice. The facilities remain
the property of NSPI, and it remains responsible for their capital requirements.
5. Boiler Dedication of Use Agreement ("DUA2") - the agreement between
NSPI and the partnership whereby NSPI dedicates a 24% undivided interest in the
boiler and related assets at NSPI's cogeneration biomass plant to the partnership which
is then entitled to use that interest to generate steam to help heat and operate the mill.
The arrangements relating to the biomass plant are outlined in Section 2.2 above. NSPI
remains responsible for the capital requirements of the biomass plant. NSPI has the
right to terminate the agreement on seven days' notice.
6. Facilities Operating and Maintenance Agreement ("FOMA")- pursuant to
DUA 1, the partnership and NSPI agree on the manner in which the dedicated facilities
will be operated by NSPI as an independent contractor and not as an agent of the
partnership. The partnership may terminate the agreement if NSPI fails to operate and
maintain the facilities, and NSPI may terminate on seven days' notice if payments
required under the agreement are not made. NSPI agrees to carry out all necessary
operations of the facilities, and the partnership agrees to pay the prior week's estimated
billing. NSPI is required to deliver to the transmission system all of the energy output
of the facilities as set out in DUA 1. The prescribed rate payable by the partnership for
services is stated to be $10 per MWh. The agreement contains provisions for resolution
of disputes.
7. Indemnity Agreement- this agreement between NPPH and NSPI provides
for certain indemnities from NPPH to NSPI for environmental claims, for employee
Document: 206878
- 14-
related claims and for risks associated with the ATR. The agreement also provides that
NSPI will have no liability to NPPH for termination of either or both DUA 1 and DUA2.
8. Real Time Energy Protocol - this document sets out the manner in which
the incremental cost of electricity taken by the mill from the NSPI system is calculated
and recovered. It provides:
The purpose of this Protocol is to ensure that PWCC covers the actual incremental cost
of electricity for all electricity taken from NSPI's system and that NSPI's customers do not
incur any additional cost as a result of PWCC load requirements. Whenever this Protocol
can be interpreted in multiple ways, the option that best protects the interests of NSPI's
customers (which for clarity does not include PWCC) shall prevail.
Based on the following Protocol, PWCC and NSPI agree to operate under a Cost-
Quantity (CQ) Pair structure on a day-ahead and hourly basis. NSPI will provide PWCC
with hourly price forecasts for specific blocks of incremental load and PWCC shall
provide NSPI its forecast load requirements within the CO-Pairs based on these price
forecasts.
[Exhibit P-3, Appendix J]
9. Boiler Operating Maintenance Agreement ("SOMA") - pursuant to DUA2,
the partnership and NSPI agree on the manner in which the Boiler is operated by NSPI
in terms similar to those found in the FOMA, and obliges NSPI to deliver 24%, or not
more than 1.2 million gigajoules ("GJ"), of the steam/thermal energy output of the Boiler
to the mill.
10. Shared Services Agreement - made between NSPI and the partnership,
the agreement notes that the partnership owns the mill, NSPI owns the biomass
cogeneration plant, and the partnership owns defined assets within the cogeneration
plant facility and at the mill which are used to provide shared services as outlined in the
agreement, and requires each of the parties to provide to the other party the
responsibilities outlined. While the term of the agreement is ten years, with rights to
renew for successive four year terms, it can be terminated earlier and, in particular, by
NSPI on seven days' notice. NSPI is required to pay $62,500 monthly, in advance, for
Document: 206878
- 15-
the provision of shared services. The partnership is required to provide adequate fuel to
meet its steam requirements, and to pay NSPI $393,333 monthly in advance for the
steam. These payments may escalate after seven years based on a CPI formula.
11. Shareholder and Related Party Agreement - this agreement between
PWCC or an affiliate, NSPI, and Port Hawkesbury Paper Inc. ("PHP") provides for NSPI
to have 30% of the common shares of NPPH (to become PHP) and all of the first and
second preferred shares. It imposes an obligation on PWCC or its affiliate and gives it
rights in place of a new company ("NewCo1 ") which holds the remaining 70% of the
common shares. The agreement prevents PHP from taking certain actions without the
consent of both NSPI and NewCo1. It includes "Put and Call" options in the event that
either of the DUAs are terminated, or one of the parties becomes insolvent It also
imposes restrictions on the transfer of shares, includes 'Tag Along" and "Drag Along"
rights which NSPI may exercise or have imposed upon it, as well as a dividend policy
which confirms the intention of PHP to pay dividends as required.
12. Limited Partnership Agreement - this agreement is made between NSPI
and Port Hawkesbury Paper GP Ltd. ("PHPGP Ltd.") who form the limited partnership.
NSPI is a limited partner and PHPGP Ltd. is the general partner. They will admit NPPH
to the limited partnership if the PWCC and NSPI applications are approved by the
Board, and a favourable ATR is received, as a result of which NPPH transfers the mill to
the limited partnership in exchange for a defined interest. The partnership is for the
manufacture and sale of paper and will be managed by the general partner. The
partnership may not sell all or substantially all of its assets without the consent of the
limited partners, and the liability of each limited partner is restricted to its contribution
Document: 206878
- 16-
and any outstanding share of any undistributed partnership net earnings. The
agreement provides for the interests of each party and sets out the terms of the
payments due to the unit holders. It includes the distribution policy upon which the cash
distributions will be made.
13. General Partner Agreement - this agreement is made between NSPI and
PHPGP Ltd. and sets out the rights and obligations of PHPGP Ltd. as general partner.
It includes "Special Minority Protections" which prevent PHPGP Ltd. from taking certain
actions without having first obtained the written approval of NSPI, and prescribes the
basis on which related party transactions may occur.
[35] NSPI has requested approval of the agreements and documents as part of
its Application. The Board considers approval of the Mechanism below NSPI's request
for approval of the other agreements and documents is addressed as part of the
Board's discussion of its jurisdiction later in this Decision.
2.5
[36]
The Negotiations
Mr. Stern described, in his opening statement on behalf of PWCC, the
negotiations which led to the Applications:
In order to arrive at the proposal in front of the Board today, there were vigorous
negotiations carried out for more than six months between Pacific West and Nova Scotia
Power, with the participation of the government of Nova Scotia and the court-approved
appointed monitor.
Those negotiations are fully documented in the record of this proceeding, and
demonstrate the considerable effort made by all parties to achieve a resolution that
meets the business requirements of Pacific West and the mill, while at the same time
meeting the regulatory requirements for the applied load-retention tariff mechanism,
which will provide, in our view, a significant benefit to all other ratepayers.
[Transcript, p. 43]
[37] Mr. Bennett testified that the parties had undergone " ... a very difficult set
of negotiations ... " (Transcript, p. 489) in which the parties " ... started out at opposite
Document: 206878
- 17-
ends of the spectrum ... " (Transcript, p. 296). Agreeing that the negotiations were
vigorous as Mr. Stern had indicated, Mr. Bennett stated that NSPI was, over the lengthy
period, negotiating in the best interests of its customers. In response to a question from
Mr. Mahady, he said they were " ... negotiating as if it was our own money ... "
(Transcript, p. 289).
[38] Mr. Stern confirmed that the price in the LRT which was before the Board
is higher than his company's original objective, and he was aware that NSPI had sought
a shorter term for the LRT and an earlier re-opener date or trigger. In response to a
question from the CA about the re-opener, Mr. Stern testified in greater detail about the
nature of the negotiations:
MR. STERN: ... With respect, Mr. Mahady, as you've seen from the materials, we've
been going at this for over six months. To say that the negotiations were vigorous is an
understatement They were very, very hard, extensive negotiations. In that process, in
that process we indeed moved a great deal from what our original objectives were,
always looking at what our overall position was going to be for the business going
forward. And with all due respect, and it's hard for us to -- you say well -- you always
want to say, "Well, you can do this," because you're looking to get a deal done, but we
have reached the point in our negotiations where we've gone as far as we believe we can
prudently go to and that's why I'm saying -- that's why I'm saying that the terms that
we've presented here are our minimum terms. They already -- as a result of our
negotiations with Nova Scotia Power, we have modified our original objectives, shortened
the term, increased the risks that we're undertaking and really tried, really tried to meet
the requirements of a load retention tariff as articulated to us by Nova Scotia Power and
by our own counsel.
So we tried to take that into account and balance that with what we feel is required to
make this an investment that we're prepared to make and really a restart that we're
prepared to commit ourselves to. The last thing in the world we want to do is to get
involved in this mill and the restart of it -- and we're very committed to it, but the last thing
we want to do is be involved and do it in a way where we haven't gone far enough. We
haven't quite made it competitive enough to survive. And that's why, in our discussions
with the union we said, "This is what we have to have," and they understood that. And
we're saying to this Board, with respect, after all our negotiations with Nova Scotia
Power this is what we have to have. We've modified it as much as we can and, you
know, 'we don't want to appear disrespectful but we've reached the conclusion that this is
what's required. We hope very much that the Board can support that.
MR. MAHODY: Mr. Stern, your comments seem to put a great deal of weight on the
nature of the negotiations that you had with Nova Scotia Power. My understanding,
having reviewed the record in this matter, is that Nova Scotia Power indicated to you on
at least one occasion that they weren't really your counterparty in this matter and what
they could do would be to assist you with designing a rate which may be acceptable to
Document: 206878
- 18-
other ratepayers and may receive favourable consideration from this Board. Have I got
that wrong?
MR. STERN: They said that but they didn't act that way.
[Transcript, pp. 63-65)
[39] Mr. Williams, the consultant engaged by the Province to assist in the
negotiations, stated in his direct evidence:
Both parties bargained hard for their respective positions and, from my perspective, were
pretty far apart when I got involved in the discussions. Both parties also worked hard to
understand the other party's perspective and worked together to explore various
alternative approaches and arrangements. That they have been able to come to a
common agreement as reflected in the application given their different perspectives and
objectives indicates to me that the proposed Load Retention Rate Mechanism is a fair
deal for both parties and a fair deal for NSPI's customers.
[40] In closing submissions, Avon argued that it was the Stern group which
undertook the hard bargaining and that, NSPI, in representing customers' interests
should have " ... drawn a line in the sand". In response, Counsel for PWCC suggests
that this does not accurately characterize what the record shows, nor does it reflect the
evidence of Mr. Stern and Mr. Bennett.
[41] The Board has before it, as part of the record, over 3,000 pages consisting
of meeting notes, email communications, and draft documents between the teams
negotiating on behalf of NSPI and PWCC as well as Mr. Williams and the court-
appointed monitor. As noted in the hearing, the record is as full and complete as seen
by the Board.
2.6 Informal Submissions
[42] During the public session, the Board received presentations from two
registered speakers. Ray Larkin, Q.C., accompanied by officials of Local 972 of the
Communications, Energy and Paperworkers' Union (the "Union") and its National office,
Document: 206878
- 19-
offered comments in support of the proposal before the Board on behalf of unionized
workers and retired union members at the mill. Billy Joe Maclean, Mayor of Port
Hawkesbury, who spoke on behalf of MAG, strongly supported the re-opening of the
mill. They noted the accommodations made by current and former members of the
Union, suppliers and contractors, to allow the PWCC proposal to the mill's creditors to
go forward.
[43] The Board also received several letters of comment from members of the
public, none of which supported any subsidy of the costs of electricity for the mill.
[44] The Board appreciates that the speakers and members of the public have
taken the time to have their respective views made known.
3.0 ISSUES AND FINDINGS
3.1 Jurisdiction
[45] In this Application NSPI and PWCC seek, among other things:
[46]
(a)
(b)
Approval of the Mechanism, including DUA 1;
Approval of arrangements relating to the Biomass Plant, including DUA2.
Based on NSPI's pre-filed evidence it appeared that NSPI was seeking
approval of each of the 13 specific agreements previously described.
[47] Mr. Bennett clarified, however, that what NSPI expected was confirmation
that NSPI had negotiated a reasonable set of project agreements:
MR. OUTHOUSE: And what it said was -- I'm just going to -- it's not necessary to enter
this as an exhibit, Mr. Chair. This is just part of the Board's decision.
In paragraph -- starting at paragraph 30 through 33, after describing the contracts and
saying that to understand the prudence of the project it needed to look at the contract
terms referred to them as definitive contractual terms, signed contracts, talked about
which'were the most important contracts. And then said:
Document: 206878
"The Board is satisfied in general terms that NSPI has negotiated a
reasonable set of project agreements." (As read)
-20-
Now, is that the sort of approval you're talking about here?
MR. BENNETT: Yes.
MR. OUTHOUSE: Okay. You're not looking for a formal Order approving these
contracts?
MR. BENNETI: We're looking for acknowledgement that we've put together a package
that makes sense for ratepayers and for the mill. And to the degree that making that
decision requires knowledge of all of the agreements, we've provided the agreements for
that approval.
[Transcript, pp. 599-600]
[48] NSPI seemed to return to its original position in its reply brief; however,
the Board accepts the evidence of Mr. Bennett as that of NSPI, outlining the Company's
request to the Board.
[49] Avon suggested that the extent of the Board's jurisdiction should be to
supervise the use of facilities that are in the rate base and further that the Board has
authority to ensure that payments received related to the provision of electricity through
commercial arrangements related to the facilities, benefit ratepayers. Avon contended
that, while the Board has the authority to approve the Mechanism, the remaining
agreements and contracts, particularly those related to NSPI's arrangement surrounding
the Biomass Plant should only be reviewed, if at all, to assess if the Board is satisfied
that NSPI has negotiated a reasonable set of project agreements.
[50] Avon cautioned that the Board should not fetter its discretion under s.45(2)
of the Public Utilities Act, R.S.N.S. 1989, c.380, as amended (the "PUA'), to review the
reasonableness and prudence of NSPI's operating expenses by issuing a premature
declaration of prudence with respect to a complex set of private commercial
arrangements.
Document: 206878
- 21 -
[51] The SBA argued that the Board may only make orders with respect to
rates, tolls and charges and the dividend arrangements may be beyond the Board's
authority to approve.
[52] PWCC submitted that the Application falls within s.64 of the PUA as it is a
specific request for determination of the ultimate rate that NSPI will be entitled to charge
PWCC for the provision of electricity. If approved, PWCC noted that it will be
responsible for the payment of this rate for such service pursuant to the conditions
established by the Mechanism. PWCC goes on to say:
Having previously found the jurisdiction to consider "the approval of a well designed
LRT ... to help prevent the closure or relocation of an extra large industrial customer due
to economic distress", it is difficult to see how the Board might somehow lack jurisdiction
to consider the appropriateness of the underlying business arrangements necessary for,
and integral to, the proper implementation of such a rate, and to ensure it meets the
Board-approved regulatory requirements.
[PWCC Closing Submission, pp. 45-46]
3.1.1 Findings
[53] While unique and complex, this transaction involves a supply of power and
energy in exchange for "dividends" that recover the incremental cost of supplying the
power and energy and make a contribution to the fixed costs of producing that power
and energy. The calculation of the rate is designed to recover the incremental cost
obligation, including a contribution to fixed costs for the service. The actual usage
multiplied by the rate determines the liability of the partnership. The non-taxable
dividend is a settlement mechanism designed to satisfy the liability. As such, the Board
finds it meets the test of a charge to be paid to a public utility for services rendered or
facilities provided (see s.44 of the PUA). The Board is satisfied that, pursuant to the
provisions of s.44 and s.64 of the PUA, it has jurisdiction to approve the Mechanism and
the tariff in a broad sense, as described in the tariff and various documents.
Document: 206878
-22-
[54]
Based on the evidence of Mr. Bennett, the Board is not required to
all of the 13 project agreements. The Board does make comments on the
agreements in the risk section of this Decision.
3.2
[55]
Necessity and Sufficiency
The opening statements of the CA, the SBA, PWCC, and the Province all
address the question of whether a load retention rate is necessary for the mill operation,
and whether the proposed rate and mechanism is sufficient. Both the CA and the SBA
questioned whether the reduced rate is in fact necessary, in contrast with the position of
PWCC and the Province who claim that it is, for PWCC to take over and operate the
mill.
[56] Mr. Stern, in his opening statement. described PWCC's desire for a long-
term and sustainable operation of the mill, saying:
MR. STERN: ... In order to be successful on a long-term basis -- and I emphasize that
because we are only interested in this if we can reach the conclusion -- it can be
successful on a long-term basis. In order to be successful on a long-term basis, it is
simply imperative that the Port Hawkesbury mill substantially reduce its input costs.
Electricity is the mill's biggest cost. As is clear from our restructuring plan, the recent
history of pulp and paper mills in Nova Scotia and elsewhere, and as supported by the
TO Report that NSPI has filed in this Proceeding, unless the Port Hawkesbury mill can
become a very low-cost operation, it simply will not succeed.
A truly extraordinary amount of effort has gone in to developing this proposal for a load-
retention mechanism that is critical for us to complete the acquisition of the mill and
resume the manufacturing of paper while at the same time providing a significant
contribution to the fixed costs of the utility, to the benefit of all ratepayers in Nova Scotia.
This is a compelling and beneficial scenario for everyone involved.
The arrangement before the Board is comprehensive. In reaching it, we've agreed to the
maximum costs that are acceptable to us, including taking on all risk for fuel changes.
The 30 percent equity interest provides an equitable and substantial participation in the
future profits for other ratepayers. The $2 per megawatt fixed costs and cost-saving for
the biomass project, together, provide a significant minimum contribution to fixed costs of
the utility.
Document: 206878
-23-
We also recognize that, for the residents of Eastern Nova Scotia, the reopening of the
mill is of critical importance. This is reflected in the enormous support that has been
provided to the process and the development of a sound restructuring plan. We very
much appreciate the support that it was given.
(Transcript, pp. 41-44 J
[57]
The CA explored PWCC's desire to produce supercalendared paper at the
lowest cost with Mr. Stern:
MR. MAHODY: And you state further on in that paragraph that electricity is the mill's
biggest cost
Does it follow, Mr. Stern, that in order to be the lowest-cost producer of SC paper, the mill
requires to-- requires, effectively, the lowest electricity costs?
MR. STERN: No, sir, it doesn't.
MR MAHODY: Okay. The effective electricity costs which you're seeking in this
application, have you determined where they would fit from a competitive cost
perspective on a North American basis?
MR STERN: Not comprehensively. We could try to dig into that. Our focus has been
the cost structure of the mill, complete, all -- as an entity, and that's why we have focused
-- not only we're talking here about electricity costs but, similarly, I mean, the efforts going
into all the other areas of costs of the mill have been similarly rigorous.
MR. MAHODY: But is it fair to say that if electricity represents your biggest area of cost,
that the effective rate of those costs needs to be either the lowest or among the lowest on
a North American basis?
MR STERN: Yes.
MR. MAHODY: And in this application, Mr. Stern, there are two mechanisms which
combine to reduce the effective electricity costs for the mill. There's the load retention
mechanism and then there is the dividend transfer mechanism. Do you agree with that?
MR. STERN: I'm not sure I heard the first part of your question. Perhaps you should just
repeat it so I'm correct.
MR. MAHODY: Sure. In order to reach your goal of the --among the lowest electricity
costs, this application achieves that through the load retention mechanism, coupled with
the dividend or tax structure. Is that correct?
MR STERN: Yes, that's correct.
MR MAHODY: And so the load retention rate has the effect of bringing down the rate to
be charged electricity to an acceptable level to Pacific West?
MR. STERN: The load retention rate, together with the CRA ruling, would together bring
it to a rate that, in fact, is higher than our original objective in the negotiations in the
process we went through, considerably higher, but we determined that we would live with
and go forward on that basis.
Document: 206878
[58]
-24-
MR. MAHODY: And if you can achieve, Mr. Stern, your anticipated cost savings for
electricity and the other areas which you've identified, when do you anticipate the mill
would begin to turn a profit?
MR. STERN: It would be in the year 2013.
MR. MAHODY: And is it fair to say, Mr. Stern, that your business objective is to operate
the mill at a certain level of profit during the term of this arrangement, the seven and a
half years that the rate's been applied for?
MR. STERN: Yes, of course, as with any business, that's our objective.
Mr. Stern responded to the SBA by saying that in view of the competitive
environment in the paper manufacturing business, " ... it may well be that it is only the
lowest-cost producer that really is going to be soundly profitable." (Transcript, p. 93)
[59] He elaborated further in response to Ms. Rubin:
MS RUBIN. Do you perceive this deal or this arrangement to be a risky one?
MR. STERN: I think it's a difficult thing to do just about anything in the paper industry
today. If I can go on for a moment-- I've been told to keep my answers short. I'm not
doing a very good job on that. But I think it is a very challenging one, but l do think it's a
worthwhile one. Otherwise, we wouldn't be here.
The -- as you know, the consumption of paper is declining at a material level, and there's
more production capacity than is needed to meet the market You know, so it's risky
because of the uncertainties of the market, in terms of pricing of paper, volume of paper.
There's risk attached to what the future prices of fuel will be.
But we've reached the view -- we've reached the view, with the -- all of the things being
put into place -- I mean, there's some very talented people in Port Hawkesbury who've
agreed to a labour agreement that is very progressive and very flexible, and can make a
big difference in terms of the costs and the effectiveness of production. There is a
marvellous physical set of assets there, probably the best paper machine in North
America. It's a phenomenal asset.
If we can put into place the power rates that are needed and all the other things we're
doing, we think that we will have a very sound opportunity for this to be a successful
operation.
But nobody would say that it -- there wasn't, you know, significant risks in terms of going
into the paper industry with just about any mill today, and here's one that we have to
restart that has complications to it. We've got to break into the market and all those
things.
Document: 206878
[60]
-25-
But if we can -- if it makes sense for us to have the power rate we need and we can get
the CRA approval that we need, we then think we will have an operation that should start.
Mr. Stern told Mr. Mahady that PWCC was not prepared to increase its
contributions to fixed costs:
[61]
... our concern is that we not burden the mill to any greater level of fixed costs than we
absolutely have to because, as you appreciate, the paper industry is challenging and it's
going to be -- it's going to be a very hard process getting this mill back in and getting the
share of the market that we have to take because the competitors are going to fight us
very hard. So that's why we're very cautious of not wanting to take on any more fixed
costs than we absolutely have to.
[Transcript, p. 67]
However, Mr. Stern testified in response to the SBA about the impact of
an increase in costs on the viability of the business, particularly fuel costs:
MR. STERN: Without getting into the details of the confidential information, at $5 or $10
increase, our business wou!d obviously be a lot less attractive, but we would sttl! be
there. We would be there digging, trying to find other ways to save money to try to make
up for it, but we would still be viable at that level.
We wouldn't be here --we wouldn't be here if we were starting it up that close to the line,
in theory. I mean, this is just a model you're using. The real world is-- always turns out
a bit differently. But-- so we're still, you know, we're still there. We're not on the line, but
many things often change at once. But if it's just the power costs, because the fuel costs
are up $5 or $10, we're going to still be in business and ---
MR. BLACKBURN: But if the fuel costs went up $20, you may not be?
MR. STERN: You know, if everything else was the same, we would still be hanging in
there. It would be getting pretty marginal, but we would still be there. We're not going to
run away. We -- you work on these things on a long-term basis to -- and you're always
hoping that the market is going to get better and you're going to find other ways.
There's all sorts of other things we're going to be working on, you know, to lower our
costs, and although we say that fuel costs are our biggest single cost, they're just one of
many costs, and there's the revenue side. I mean, fuel is critical. We need what we're
asking for here.
We know going into this that we're not going to have the lowest cost fuel of anybody in
North America. We know that. We know we buy electricity for less in our other m1lls.
We're doing that today. We're doing that last year and the last several years. We're
paying less for electricity than we're proposing here. We're proposing this because we
understand that this is the only level that this jurisdiction can go to with not just the
regulatory process, but the nature ---
Document: 206878
[62]
-26-
MR BLACKBURN: Okay. So in a nutshell, you're saying that with respect to the fuel
costs and other incremental costs, if things get out of proportion, you're prepared to make
some adjustments and stick with the mill?
MR STERN: We can tell you we've done that before and that's why we have a capital
structure in this case that we think gives us a certain level of resilience and staying
power. And you know, and I can tell you, if need be on a confidential basis --we can
show you times where we've worked harder than ever with mills during periods where
they've been losing money and eventually seen them come around so that they're once
again profitable.
That's what you do with a business. You don't cut and run, but at the same time, you
don't get into them unless you think you've got a good sound plan and you've got a
capital plan that will allow you to work through a!! of those issues.
[Transcript, pp. 1 08-112]
Both counsel for the SBA and Avon pursued with Mr. Bennett the question
of the necessity of a LRT if the mill becomes profitable. Ms. Rubin suggested there
should be a trigger to evaluate whether the rate should continue:
MS. RUBIN: ... what I'm asking is should the Board review the rate to evaluate its
necessity at the proposed level in light of excessive profits?
MR BENNETT: Well, in the event that there are profits, it's beneficial for everyone,
including ratepayers, and if the profits are significant to the degree as they're forecast in
the business plan, then they will approach the Load Retention Rate that's been agreed
on in the past.
MS. RUBIN: But it may not be necessary to be on a Load Retention Rate at all, and I'm
asking in light of excessive profits should the Board review the rate to evaluate its
ongoing necessity?
MR. BENNETT: That's not the package that's being proposed. The package that's being
proposed is a package that provides some degree of stability for PWCC's planning
purposes over the next seven and a half years and affords the ability for us to share in
success if that success can be had.
And by "we" I mean the global "we" customers, but that's not the nature of the proposal
that's here today.
MS. RUBIN: I understand that's not the nature of the proposal, but I'm asking that the
reason for a Load Retention Rate is because it's necessary, and if the rate is no longer
necessary because of excessive profits, shouldn't there be a trigger if there's excessive
profits?
MR. BENNETT: Well, that's not the arrangement that has been successfully negotiated
at this point. So I'm not saying that this should be opened in the event that people are
uncomfortable that a contribution -- a too high of a contribution is being made to fixed
costs.
Document: 206878
[63]
-27-
At the end of the rate period there's an opportunity to do that when a new rate is set. But
again, this is a very complex matter and we negotiated for the shortest term possible to
afford that opportunity for review, but a term shorter than seven and a half years was not
acceptable.
In its opening statement, PWCC maintained that if the mill is profitable,
NSPI will share in that profit by way of the common share dividends.
[64J In his direct evidence, Mr. Athas, the SBA consultant, opined on the
concept of using an LRT, relating it to the mill's situation:
[65]
I believe that rate reductions from Load Retention Tariffs are beneficial to other
ratepayers and the local economy only when they are demonstrated to be both
'necessary' due to a business downturn vulnerability, to aide a business in its plan to
become competitive in its markets, or competitive customer generation opportunity, and
'sufficient' to actually change the economics of an industrial customer continuing to
remain in business or considering the restart of a dormant operation. Loss of large
electrical load negatively impacts other electric ratepayers and could result in both a
direct and an indirect loss of jobs in Nova Scotia. The direct loss of jobs refers to workers
laid off when ttie Mill closed. The indirect effect refers to a multiplier effect where JObs are
lost as a result of the Mill no longer purchasing from suppliers in Nova Scotia. This
unemployment increase will most likely result in less retail purchasing and less household
consumption of electricity, further increasing electric rate upward pressures as NSPI's
fixed costs are spread over reduced total electric sales.
In Mr. Athas's opinion, there is insufficient evidence on the record to
conclude that the mill would not re-open without the LRT. However, in response to the
question whether PWCC or NSPI had " ... provided adequate justification of the
necessity of the proposed complex LRT arrangement. .. ", he answered in the
affirmative, and went on to comment on PWCC's restructuring plan. Mr. Athas
concluded that:
... this discount is greater than the level necessary merely to operate competitively.
1 believe that the level of discount granted by this arrangement is greater than the level
needed to simply be a solvent, profitable operation.
[Exhibit P-24, pp. 16-17]
Document: 206878
-28-
[66] Mr. Athas stated that permitting the mill to "achieve minimal profitability"
would not be desirable and sought assurance that NPPH could not accumulate excess
profits instead of declaring dividends. He suggested that there should be an increase in
the mill's contribution to fixed costs as it becomes more profitable, concluding that the
proposed LRT is more generous than is necessary.
[67] PWCC stated in its closing submission that the evidence before the Board
satisfies the test of necessity to retain the mill's load, and sufficiency to allow its
operation. It stated that the granting of its Application is a prerequisite to the re-opening
of the mill. It suggests that there was no "fundamental challenge" to the PWCC
restructuring plan which shows the LRT is sufficient to allow the mill operation to be
successful. Additionally, PWCC pointed to the report which NSPI had commissioned
from TO Securities, which in PWCC's view supported its business plan.
[68] In its closing submission, NSPI said:
The future of the Port Hawkesbury paper mill has been the subject of numerous
regulatory proceedings over past decades. It has now reached a point where, pending
the response from CRA, the parties to this proceeding will be deciding whether this
facility will have an opportunity to continue to operate. While the Board's approval of this
Application will not guarantee long-term success of the mill, an approval will provide a
realistic opportunity to help customers with the fixed costs of the system.
NS Power supports the Board's approval of its joint Application with PWCC. The
arrangement will provide for the continued operation of the Port Hawkesbury facility,
while providing a guaranteed contribution to utility fixed costs that would otherwise not be
realized. Further, the arrangement provides NS Power's customers with an opportunity to
increase their benefits should the mill flourish. It is a deal which is in the public interest
and beneficial to all customers.
[NSPI Closing Submission, p. 4]
[69] The CA identified the test which the Board must apply in such an
Application:
This Board succinctly set out the test to be applied when considering an application for a
Load Retention Rate in 2011 NSUARB 184:
Document: 206878
-29-
[174} Load retention tariffs are utilized in circumstances where providing
the discounted tariff benefits not only the customers qualifying for the
tariff but also the other customers on the system. Other customers will
benefit if the customer receiving the discounted tariff would cease
purchasing power in the absence of a discount and the discounted tariff
fully recovers the marginal cost of supplying power to the customer, in
addition to making a contribution to the fixed and common costs of a
utility's electricity system.
{175] Mr. Todd succinctly set out the legal test:
Hence, an LRT is in the public interest if and only if its use is limited to
circumstances in which:
(i) making the LRT available to the customer is necessary
and sufficient for retaining the load; and
(ii) the total revenue received from the LRT customer
exceeds the total incremental cost of serving that
customer.
[CA Closing Submission, p. 2]
[70] Mr. Mahady went on to address whether other ratepayers are receiving a
benefit by the contribution to fixed costs. The Board considers this in greater detail
below. Suffice it to say at this point, Mr. Mahady concludes the benefit is minimal at
best.
[71] The SBA submits that PWCC and NSPI have met the tests of necessity
and sufficiency "to justify a special rate", but that the rate should be amended to provide
for greater contribution to fixed costs. In other words, there should be a LRT, but not
the one proposed. As suggested by its consultant, the SBA is satisfied with a "larger
discount in the early years ... in order to give PWCC some flexibility in operating costs in
a volatile industry" {Exhibit P-24, p.19), but asks the Board to order higher contributions
in later years of the term.
[72] Saying that a load retention rate ("LRR") must benefit other ratepayers, be
necessary and sufficient to retain the load and exceed the incremental cost of serving it,
Document: 206878
- 30-
Ms. Rubin adopted the test identified by the CA. She elaborated a little further by
adding the following from the Board's 2011 NPB Load Retention decision:
[185] The test that the Board has applied in this case is whether, on a balance of
probabilities, the other customers of NSPI would be better off by having NPB remain on
the system (on the load retention rate) than those customers would be if NPB stopped
taking service. The test is satisfied if the load retention rate fully recovers avoided costs
of supplying NPB and makes a positive contribution to the fixed and common costs of
NSPI. The Board will not, and indeed cannot, approve a rate in circumstances where the
other customers are worse off (because they are subsidizing NPB) than they would be if
these customers left the system.
[Avon Closing Submission, p. 3]
[73] Ms. Rubin went on to suggest that there was limited evidence of the
necessity of the rate during the hearing and what little there was came from PWCC
through Mr. Stern's testimony. Ms. Rubin submitted:
The Applicants have asked the Board to approve the entire package "as is" and it is open
to the Board to do so if it is satisfied that the Pricing Mechanism and the entire set of
arrangements surrounding the Biomass Plant are both necessary and sufficient to allow
the Mill to resume operation and if the Board is further satisfied that other ratepayers will
not be subsidizing the Mill's operations.
[Avon Closing Submission, p. 24)
[74] Ms. Rubin concluded that the rate does not meet the "basic test" for a
LRT. Her submissions regarding the sufficiency of the contribution are discussed in
greater detail below.
(75] Mr. Williams' evidence was that the proposed rate mechanism
represented a "fair deal" for both PWCC and NSPI and for NSPI's customers (Exhibit P-
26, p. 16). He also described it as striking "the appropriate balance" and opined that
" ... any material movement - either way - from this delicate balance point. .. " might
make the customers worse off than they would be under the proposal (Exhibit P-26, p.
17). However, the Province made no closing submissions on the necessity or
sufficiency of the arrangements. It commented, in its opening statement, on the
Document: 206878
- 31 -
importance of the mill to the economy, and went on to say the test had been met,
adopting PWCC's view that it is necessary for it to acquire control of the mill, and it is
sufficient for its long term viability. The Province's opening statement observed that if
the mill does not re-open there will be no contribution to fixed costs.
3.2.1 Findings
[76] In the September, 2011 hearing before the Board, NPPH and Bowater
("NPB") proposed that the LRT be extended to situations where, due to economic
distress of NSPI's largest customer(s), closure of the business was potentially imminent.
The Board found it had jurisdiction to permit a LRT in such circumstances; however,
while finding that Bowater qualified for a new LRR, it made amendments to the
proposed rate.
[77] The Board adopted the test referred to above by both the CA and Avon.
Identifying challenges of currency fluctuation, reduction of demand for paper, high costs
for fibre and labour, and significantly expensive electricity, which the Board described as
"daunting", and based on the evidence before it, the Board concluded that both
companies met the necessity part of the test. The Board recognized that evidence of
sufficiency was difficult to provide, but based on the terms it approved, accepted the
evidence of Bowater on this issue.
[78] As for NPPH, because of the announcement of the mill closure, and the
process to find a new owner, the Board said:
When the owner is identified, provisions of the LRT, as proposed by NewPage, should be
followed in that the new company should apply to NSPI who would then come to the
Board. The focus of any examination by NSPI and the Board would be whether the mill
and its new owner continue to meet the necessity test. In saying that, the Board believes
that the LRR being approved in this Decision would have been an appropriate LRR for
NewPage, had it continued to operate the mill.
[2011 NSUARB 184, para. 224]
Document: 206878
-32-
[79] The financial challenges facing NPPH were previously recognized by the
Board in the biomass decision of October, 2010 [2010 NSUARB 196]. It appears to the
Board that there has been no improvement in the intervening years. The mill has not
manufactured paper and has been in a "hot idle" state since September, 2011.
[80] The Board understands that PWCC will not proceed with the acquisition of
the mill if the present Application is not approved or if changes are made to the proposal
in either the financial terms, or the term, of the relevant Agreements.
[81] The court-appointed monitor went through a process of seeking buyers for
the mill over a period of approximately six months. The Board notes that only two
bidders who intended to carry on operations came forward, and that the bid of PWCC
was accepted, subject to the approval of the Court and creditors of NPPH. In the view
of the Board, this in itself is indicative of the necessity of a load retention rate in order
for the mill to operate.
[82] The Board also notes that the Province, the representatives of the union,
and Mayor Maclean all point to a need to maintain the mill operation as a vital part of
the economy of Nova Scotia, and particularly the northeastern part of the province.
[83] Pursuant to the provisions of the PUA, the Board regulates NSPI in the
public interest. In its 2011 decision, the Board stated:
[171) Moreover, the establishment of an LRT based on economic distress is grounded
on long-established and well accepted ratemaking principles applied in various
jurisdictions, including by the Board in this province.
[172) Further, such rates are in the public interest. In the end, the approval of a well
designed LRT, whether it is to avoid the switching of load in the instance of co-generation
by the customer, or to help prevent the closure or relocation of an extra large industrial
customer due to economic distress, benefits all other customer classes on the system. In
the Board's opinion, such a result provides for rates that are reasonable and appropriate
for all customers.
[2011 NSUARB 184, paras. 171-172]
Document: 206878
- 33-
[84] The Board observes that the Bowater mill closed during the course of this
proceeding. Even with the LRT granted in November, 2011 to Bowater, the operation
was clearly not successful as its owners had hoped. While this might lead to questions
about the efficacy of the LRT, the Board notes that in the case of the NPPH mill, both
Mr. Stern, who testified to the success PWCC has had with other mills, some of which
were struggling, and the evidence filed by NSPI as a result of its due diligence review of
the PWCC business plan, suggest that the proposed rate and payment mechanism may
yield positive results. The Board is not, however, making any finding on the business
plan itself, nor predicting the likelihood of its success.
[85] The Board is satisfied that the evidence of PWCC establishes the need for
a LRR in order for the mill to re-open and afford it the prospect of long-term viability
The Board considers that some contribution to fixed costs is better than the other
ratepayers having to bear all of the costs. The Board therefore finds that the granting of
a load retention rate is necessary.
[86] While the Board understands from the testimony of Mr. Stern that the rate
is sufficient, from PWCC's perspective, to allow it to meet its financial objectives, the
Board cannot ignore the question raised by Mr. Athas on behalf of the SBA as to
whether it is more than sufficient. Further, the Board considers that a crucial question is
whether or not the rate is sufficient from the perspective of the other ratepayers. The
Board examines this issue below in its discussion of the recovery of incremental costs.
3.3 Pricing Mechanism for Electricity
[87] The pricing mechanism has four components: incremental costs,
contribution to overall fixed costs, administration costs and credit risk. Within
Document: 206878
- 34-
incremental costs are the fuel costs, variable operating costs, and incremental capital
expenditures.
[88) In this section all prices and costs are expressed on a per megawatt hour
(MWh) basis for the LRT pricing. The payment is made through a settlement
mechanism which reduces it to an "after tax" rate.
3.3.1 Incremental Costs
[89] The Application proposes the partnership will be charged for electricity to
operate the mill at the incremental costs to serve it:
The purpose of this Protocol is to ensure that PWCC covers the actual incremental cost
of electricity for all electricity taken from NSPI's system and that NSPI's customers do not
incur any additional cost as a result of PWCC load requirements. Whenever this Protocol
can be interpreted in multiple ways, the option that best protects the interests of NSPI's
customers (which for clarity does not include PWCC) shall prevail.
[Exl1ibit P-3, Appendix .J, p. 1]
[90] The interests of the customers was explored with the NSPI panel:
MR OUTHOUSE: ... If I were to say that the governing principle is that this proposal, this
package proposal that's being presented to the Board, must meet is that it provides a
benefit to other customers, do you agree?
MR. BENNETT: Yes.
MR. OUTHOUSE: And I'm not going to get into parsing what's significant or what's not
significant, but it must provide a benefit, correct?
MR. BENNETT: That's correct.
MR. OUTHOUSE: And it means, to me anyway, and I think to you and the Board, that
other customers will be better off as a result of this mill coming back on the system under
this proposal than if it just simply disappears from the system?
MR. BENNETT: That has been the absolute intention all along, yes.
MR. OUTHOUSE: And that's the way we test incremental costs?
MR. BENNETT: Yes.
[91] Mr. Stern summarized the costs that are to be recovered:
Document: 206878
[92]
[93]
[94]
[95]
costs.
[96]
-35-
Yes, it's our intention that we'll be responsible for all the fuel costs. We'll be responsible
for the OM&G costs, as presented to us, to the variable capital costs, again, as presented
to us after a lot of digging by NSPI to be certain ....
(Transcript, p. 58J
Incremental costs also include imported energy, whether used or not:
MR. SIDEBOTTOM: .. So there's two things; one is they're responsible for the
incremental cost of the import, but it's also important to know that they've taken on the
obligation that if we do import on their behalf and then they choose to run differently such
that they don't use the import, they're still liable for the generated incremental costs
associated with moving away from that schedule.
Ms. Rubin explored the obligation to serve the electricity needs of the mill:
MS. RUBIN: ... So when you say "a limited obligation to serve", what you mean is you
have a limited obligation to offer a price and, if accepted, you will serve, but you have no
obligation to serve in the sense of planning for your generation or dispatch around the
mil! load?
MR. SIDEBOTTOM: Correct. What we've said is that the first plan is a plan that has
them not served, and then that we would provide them the incremental cost calculation
that would then compare not serving them to serving them, and in that way we'll cover
the incremental costs of them taking that decision to take that energy at the time.
[Transcript, p. 400]
By having a limited obligation to serve, NSPI:
... will plan and optimize its fleet on this basis, independent of whether the mill operates.
The mill will be responsible for the incremental costs that result.
[Exhibit P-41, p. 1 OJ
As proposed, incremental costs do not include any renewable energy
3.3.1.1 Determination of Incremental Price
It is NSPI's obligation to determine the incremental price as it is in the best
position to do so. The actual costs are calculated by a sophisticated computer program
with many data components. As stated by Mr. Sidebottom:
... One of the things 1 see is that there's a feeling that there's a lack of detail, and I think
the reasoning for that is that the calculations are actually complex, and it's performed by
a linear regression model, so it's not a mathematical piece of work that comes out of a
Document: 206878
[97]
- 36-
spreadsheet, which would be fairly easy to produce. You're relying on a utility-grade
piece of software that's used for economic dispatch, and you actually compare two runs
with a myriad of characteristics that are required to actually dispatch the system in two
different states. So I think it's just not practical to actually describe the many moving
parts
[Transcript, p. 645)
This program will provide the forecasted and actual costs. Mr. Stewart
stated the mill has had good experience with the accuracy of the forecasts:
[98]
[99]
That's correct. But I would point out that that protocol and that process and those
timelines are no different than what's existed under various RTP rates in this jurisdiction
for more than a decade. And I think it's a mature calculation. It's a mature protocol that's
well understood by both the utility and the customers.
And I think on balance, the evidence that's been provided over the years, the annual
reports on the RTP rate have shown that the results have been accurate to within a tenth
of a percent. ..
NSPI concurs with the accuracy of the forecasts. As Mr. Sidebottom said:
MR. SIDEBOTTOM: Sure. I think a good point of reference here is the real-time rate
that we've analyzed in the past, and in that there's -- there isn't as much precision. I think
the analysis that was done -- I think we did analysis over a period. I think there was a
$200,000 mismatch over a period of time, and that doesn't have near the certainty of
customer response and load, and so that for me was a good indication of the type of
magnitude that we might experience.
Remember, it can be plus and minus through time. So I would accept that there could be
-- and there will be, frankly -- differences between the exact forecast and ultimately what
is, what it costs. But you know, taking a look at our experience in the last several years
with real-time pricing, also with the added benefit that comes with a customer that is
committing in advance to a load profile -- which, frankly, we didn't have in the past; they
could choose to move their load. We actually will get benefits from that side.
So I took comfort from that and my experience in that world and I believe that's a
reasonable view of the type of magnitude we might be dealing with.
3.3.1.2 Agreed Additional Incremental Costs
The incremental costs include $1.50 per MWh for variable operating costs
and $1.17 per MWh for incremental capital costs ("adders"). NSPI analyzed its cost
structure to determine that these are correct incremental costs. This was explored by
theCA:
Document: 206878
- 37-
MR MAHODY: ... Is Nova Scotia Power comfortable that all incremental costs categories
have been identified?
MR SIDEBOTTOM: ... When we went in and looked at both the operating and the
variable capital, we took a look back into history and also forward into the future, as best
we know it, and using our experience, both on the O&M side and the capital side, we got
comfortable that, as proposed, that they provided the best available forecast of what the
incremental costs would be for that period.
MR. MAHODY: And in addition to being comfortable that you've identified all of the
applicable categories, are you also comfortable, Mr. Sidebottom, that you have identified
what the costs associated with those categories are going to be?
MR. SIDEBOTTOM: Yes, I have.
When we took a look through it, the variable costs, obviously, there's a lot of components
inside of the business and we had our engineering teams take a look at the types of
investments. And I know there was a question of why they're different from the last load
retention rate, and it was because of the unique nature of this negotiation that allowed us
to explore effectively, having a limited obligation to serve.
And what I mean by that is that there is an agreement that PWCC will not be planned for
when we go into our planning horizon. That means a lot in our capital world and it allows
us to really get down to thmgs like real wear-and-tear items that exist in the various
plants, and that changes the way capital is calculated on the increment. And I know that
was a point of discovery through the process, so I do feel comfortable about that.
[1 00] The accuracy of these adders, in particular for incremental capital costs,
was challenged. The amount eventually derived during negotiations changed from
those used in other NSPI proceedings.
[101] In their closing submissions, both theCA and Avon expressed continued
concern about the accuracy of the incremental capital costs recovery amount. Avon
stated:
... As noted by Mr. Drazen, the transmission system, like generation plant, requires
ongoing maintenance and expenditure to maintain its capacity and to deliver power. No
allowance has been made for this, creating further risks and costs for other customers.
[Avon Rebuttal, p. 3]
[1 02] The incremental capital costs only cover the "wear and tear" on equipment
caused by supplying electricity to the partnership.
Document: 206878
- 38-
[103] As suggested by several of the parties, and agreed to by the proponents,
a rigorous reporting and auditing of the actual costs during the term of the tariff is
needed.
3.3.1.3 Other Incremental Costs
[104] PWCC has agreed that incremental costs include line losses. These are
calculated after the use of power and, effectively, there is a "true-up" of the actual line
losses.
[1 05] Concern was expressed over whether all"incremental" costs to secure the
mill load will be properly measured and recorded by the computer program. One area
of potential concern, noted by Mr. Hornby, is "cycling costs":
... So, for example, if the NSPI, when it runs the software, is not including an estimate for
the cost it incurs to cycle its various coal units, which include start-up costs and ramping
up and ramping down, and the variation in heat rate when they operate at different levels
and so on and so forth ....
THE CHAIR: When you say cycling costs, do you mean the unit spinning and available to
produce energy but not producing it? Is that what you mean?
MR. HORNBY: Yes.
[1 06] If there are defects in the rate design, NSPI will take the risk:
MR. OUTHOUSE: ... For example, if there's a defect in the rate, that it's missing some
incremental cost, should that rest -- should that shortfall rest with other ratepayers, or is
that something the company ought to wear, because it's the one who's made the mistake
in designing the rate?
MR. BENNETT: If a mistake has been made in the design of the rate and it's been
imprudent, then we accept that accountability.
MR. OUTHOUSE: And if the shortfall was due to improper administration of the rate, not
being careful enough to apply the rate rigorously to collect the incremental cost, you
would expect NSPI to wear that?
MR. BENNETT: Under our control, so our accountability.
[Transcript, pp. 597 -598]
Document: 206878
-39-
[1 07] As discussed later, it is not the intention of PWCC or NSPI to reopen
negotiations on the pricing within the next five years.
[1 08] NSPI believes that if there are some differences over the term of the tariff,
in particular for the adders, they will balance out. Any such differences are thought to
be small, as stated by Mr. Bennett:
... the variability and accuracy of that might be 50 or $60,000; the capital component is
the same. So it's a very small number when compared to the avoided risk of exposure to
fuel cost ...
[1 09] Even if there is a significant difference, NSPI can cancel the arrangement.
As explained by Mr. Gallant:
The reason that that's there is to remind the Board and stakeholders that at all times,
really at its own discretion, Nova Scotia Power has the ability to stop the arrangement,
and on seven days' notice. And so if there is something Wildly out of whack that happens
in the next five years, we can stop the damage or the bleeding or however you want to
describe it.
3.3.1.4 Findings
[11 0] The Board accepts the Real Time Energy Protocol that outlines the
method to determine the actual incremental price to supply the mill with electricity. The
Board approves this Protocol on the basis that when it can be interpreted in multiple
ways, the interpretation that best protects the interests of the ratepayers (not including
the mill), shall prevail.
[111] The Board believes that the incremental costs to supply the mill will be
recovered. They are to be calculated after the cost to supply all other ratepayers.
These incremental costs are to include imported energy, whether used or not, and line
losses.
Document: 206878
-40-
[112] The Board is satisfied, based on the evidence of Mr. Sidebottom, NSPI
has a relatively sophisticated method of calculating incremental costs. The Board finds
that NSPI is in the best position, and is obligated, to determine the incremental costs to
serve the mill. The Board orders NSPI to record the prices and actual incremental costs
in accordance with a reporting format discussed later in this Decision.
[113] The Board finds that NSPI is also in the best position to determine the
accuracy of its own incremental costs for all the components of the LRT. NSPI has
agreed to accept responsibility if there is a defect in the rate design or improper
administration of the LRT.
[114] The Board finds, on a balance of probabilities, that the proposed LRT
pricing will recover all the incremental costs without subsidization from the other
ratepayers, thereby meeting the sufficiency test. In the event that there are significant
adverse differences, NSPI can cancel the agreement within seven days.
3.3.2 Contribution to FCR Deferral
[115] Under the proposed LRT, the partnership will make a minimum $2 per
MWh contribution towards the FCR Deferral. This is less than the $4 per MWh
contribution to fixed costs in Bowater's LRT. As noted by PWCC and NSPI, Bowater
was not assuming the fuel price risk, and hence a higher contribution to fixed costs was
required. As well, NSPI has the ability to earn more than the $2 per MWh, and even
more than the $4 per MWh for the FCR Deferral through its 30% interest in PHP. The
dividend policy of PHP will be to pay 60% of the profits to the common shareholders.
The business plan projects this to yield, in the near future, more than $4 per MWh.
[116] Mr. Stern was questioned by Ms. Rubin as to whether the $2 per MWh
was significant:
Document: 206878
-41 -
MS. RUBIN: Isn't it fair to say, Mr. Stern, that during the negotiations you never
anticipated that there had to be a significant contribution of fixed costs?
MR. STERN: No, that's not correct
That's not correct, Ms. Rubin. We took the view that the 30 percent equity ownership that
Nova Scotia Power would be receiving in the transaction was a significant contribution.
That's my view today. And I view that as much more valuable than the $2. The $2 is just
structured as a -- really, a minimum level of those dividends that we agreed to, you know,
after much discussions, provide.
But to me, it was always the 30 percent that was the real economic benefit for other
ratepayers and, you know, I hope that it -- and I expect it will be much more than that.
Otherwise, it wilt not have been a very -- not nearly as good a business as we hope this
can become.
[117] In the evidence filed by the SBA, Mr. Athas recommended an increase in
the minimum fixed cost adder contribution over the term of the tariff. The SBA endorsed
this recommendation in closing and rebuttal argument:
I recommend approval of the application, contingent upon the CRA Advance Tax Ruling,
and the finalization of the Credit Rating Study, and the provision that the contribution to
fixed cost $2/MWH rate component increase each year after 2.5 years by $1/MWH, while
still maintaining the opportunity for those values to be higher through increased dividends
if the NPPH Mill is very profitable.
[118] Mr. Stern rejected the possibility of adjusting the LRT to accommodate
such an escalation. As discussed earlier, in the course of the negotiations there were
adjustments made by both parties and the "package", as presented, stands complete.
3.3.2.1 Findings
[119] The Board approves the minimum $2 per MWh contribution to fixed costs.
PWCC's acceptance of the fuel risk justifies a lower minimum contribution to fixed costs
than under the current load retention rate. There is an expectation that there will be an
additional contribution from common share dividends. If the $2 per MWh contribution
and the additional common share dividends do not result in a minimum $20 million total
contribution to fixed costs, then the rate will be re-opened after five years.
Document: 206878
-42-
[120] The Board believes customers are clearly better off with this contribution
than if the mill does not operate over the course of the next five to seven and a half
years.
3.3.3 Administration Costs
[121] NSPI has stated that there will be costs to administer this pricing
mechanism. The administration charge was set at $20,700 per month, which is the
same amount paid by the former users of the ELI-2P-RTP rate. No intervenor filed
evidence contesting the reasonableness of the proposed charge.
3.3.3.1 Finding
[122] The Board accepts this charge.
3.3.4 Credit Risk
[123] The present mill operators are going through a financial restructuring that
will result in many creditors not collecting all that is owed to them. The business plan
for continued operation of PM2 is predicated on achieving an appropriate market share
in a highly competitive and over-supplied worldwide market. Electricity usage by PM2 is
significant to the total sales of NSPI. With this background, concern was raised about
collectability of the amounts owing for the consumption of electricity.
[124] To offset this risk, the mill is to prepay, by the week, its forecasted energy
usage. As stated by Mr. Stern:
... I mean, we prepay the dividends to start with, so from a -- there's no credit risk of a
conventional nature. So they're receiving the dividends, the preferred dividends, to cover
the fuel and other costs, plus the dividend on the $2 minimum.
They're all getting that in advance. And if those dividends aren't paid in that
fashion, 1 expect that-- you know, if we don't pay it within that few days period of time,
they're going to turn the power off.
[Transcript, p. 1 00]
Document: 206878
-43-
[125] It is the intention of the company to pay these dividends, as explained by
Mr. Lewis:
If you could declare the dividends without violating law and you could do so in
compliance with the lenders' covenants, the dividends will be paid.
[Transcript, p. 1 05]
[126] If NSPI is not paid, then it is to terminate the DUAs, and stop supplying
electricity, within seven days.
3.3.4.1 Finding
[127] The Board finds that the prepayment arrangement materially reduces the
credit risk to NSPI.
Settlement Mechanism 3.4
[128] NPPH has significant tax losses and, accordingly, the earnings of the
partnership that flow through it will not attract income tax (subject to a favourable ATR).
As such, PHP will be able to pay dividends on the earnings at a tax efficient rate. These
dividends are the means within the settlement mechanism to enable the partnership to
discharge the liability for the supply of electricity and steam, as illustrated by PWCC for
electricity:
... 31 *,t tZJZ
Inroute TtL't
Document: 206878
1J7
$4S67
-44-
[129] It is assumed that these dividends will be received tax free by NSPI. The
risk associated with this assumption is discussed later in this Decision. The conclusion
of the proponents is that with these dividends, NSPI and the ratepayers will be in the
same position as if the revenue from these services had been earned and taxable.
[130] The electricity and steam used by the partnership are from self-supply and
subject to the respective DUAs. The settlement of the liability for electricity and steam,
after the agreed operating costs, up to the amount of the self-supply, is to be made
through preferred dividends. Any consumption over the amount of self-supply (with
some balancing allowed for electricity) must be paid for at the full LRT rate without any
discount for income tax, but not by dividend.
[131] The agreed operating costs include the administrative costs in section
3.3.3, and the operating costs of the dedicated facilities outlined in DUA1. These
operating costs are not paid by dividends.
3.4.1 Finding
[132] The Board approves the settlement mechanism, which uses tax-free
dividends to discharge the liability incurred from the supply of electricity and steam.
This is only available for the self-supply of services.
3.5 Overall Findings on the Mechanism
[133] The Board approves the Mechanism which includes the pricing
mechanism and the settlement mechanism subject to the receipt of a favourable ATR.
3.6
[134]
Tax Structure and Risk
As noted, a corporate structure has been designed such that NSPI will
obtain a combination of preferred and common shares of NPPH (to become PHP).
NPPH will, ultimately, be the sole limited partner in the partnership that will own the mill.
Document: 206878
-45-
The preferred shares will entitle NSPI to receive tax free preferred share dividends for
the after-tax value of the electricity and steam consumed by the mill. The tax efficiency
is achieved through the use of roughly $1 billion of tax losses that were previously
incurred by NPPH. NSPI's 30% common share equity in NPPH provides an opportunity
for receipt of additional contributions to the FCR Deferral for the benefit of ratepayers.
This contribution represents a share of the mill's profit.
[135] PWCC and NSPI have requested approval from CRA for the proposed
structure and treatment for income tax purposes prior to implementation. The Board
understands that approval of the ATR request will provide the required comfort that,
upon CRA acceptance of the proposed structure and income tax treatment, the risks are
reduced to an acceptable level.
[136] The Board attempted to quantify the possibility of future tax consequences
during the hearing and was informed by tax counsel for each of PWCC and the Board
that NSPI and its customers are protected from future income tax consequences
through an indemnification from NPPH. In the event NPPH is insolvent, it is anticipated
that NSPI would have terminated the arrangement on seven days' notice as confirmed
by Mr. Ewens:
THE CHAIR: Okay, and let's assume they're not solvent, what risk is there to Nova
Scotia Power?
MR. EWENS: Well, I would assume that by that point in time Nova Scotia Power would
have terminated the dedication of use agreements and would have ceased to receive
dividends, would have ceased to permit the partnership to be using the facilities that
generate electricity.
[Transcript, pp. 156-157}
[137] Mr. Bernstein was asked to attempt to quantify the amount ratepayers
may have to reimburse NSPI for taxes:
Document: 206878
-46-
MR. BERNSTEIN: Well, I'm saying to you it's extremely remote and that, you know, it
depends where the issues are because all that Nova Scotia Power is receiving at the end
of the day are the dividends, you know, on the two classes of shares.
And anything to do with a limited partnership level really wouldn't impact Nova Scotia
Power. So if losses were disallowed, to-- you know, to be used for any reason, because
the nature of the business has changed ---
THE CHAIR: Right
MR. BERNSTEIN: --- in order for the losses to be used as you know on a change of
control it has to be the same or a similar business; in this case it's the same business.
Then suddenly you know NPPH could be taxed on its share of partnership allocations if
the losses weren't available, but NSPI would continue to receive dividends. Actually that
may impair their ability to pay, you know, the dividends if-- you know, if suddenly NPPH
became taxable on its share of the partnership income because the losses were no
longer available as a result of the change in the business.
But again, an extremely remote possibility that that would happen.
[138J The proponents both predicate the acceptance of the arrangement and
the Mechanism on the receipt of a favourable ATR in all respects. On the assumption
that a favourable ATR is received, the remaining possible risks to NSPI, and in
particular to the ratepayers, were examined. Board Counsel consultant Mr. Bernstein
undertook an exhaustive analysis of the tax arrangement and identified several potential
risks.
[139J In PWCC's reply evidence Mr. Ewens commented fairly extensively on Mr.
Bernstein's concerns:
MR. OUTHOUSE: And as I read those comments, you don't disagree that the risks
identified by Aird and Berlis exist, but you say, with respect to some of them -- and I'm
thinking particularly of the availability of the NLCs --that there are offsetting effects?
MR. EWENS: Correct.
MR. OUTHOUSE: Which would occur if, indeed, those risks materialized?
MR. EWENS: Yes, sir.
MR. OUTHOUSE: And that there would still be, for example, sufficient NLCs available
for the purpose of this transaction?
MR. EWENS: Yes.
Document: 206878
[140]
[141]
-47-
MR. OUTHOUSE: And with respect to other risks, you say that they are, in your view,
based on the information you've been provided by your client and may have from your
own experience, that they are very unlikely to materialize?
MR. EWENS: Generally, that is the case, yes.
[Transcript, pp. 132-133}
Board Counsel asked Mr. Ewens about a worst case scenario:
MR. EWENS: The worst-case scenario, Mr. Outhouse, I suppose would be a legislative
amendment to the Tax Act to deny a corporation the ability to deduct dividends it receives
from another corporation.
MR. OUTHOUSE: M'hm.
MR. EWENS: However, I should point out that we know that the Department of Finance,
who is, as you know, the body within the federal government that proposes legislative
changes, will be and has been reviewing our ruling request.
So the -- my judgment is that the chance of our receiving a favourable ruling followed by
an amendment to deny the impact of the ruling is a remote chance.
Board Counsel also explored the possibility of the ATR being rescinded
because of a material omission or misrepresentation, or for other reasons:
MR. EWENS: I think that would not likely occur. I should assure you and the Board that
both we and -- that is, PWCC, my firm and NSPI and their tax counsel, Osier, Hoskin and
Harcourt, have been extremely careful to ensure that we've provided a fulsome
disclosure of all the material facts and all the proposed transactions. So that's one
reason I think your question is unlikely to unfold in that manner.
MR. EWENS: I've never heard of a ruling being rescinded so I consider that
extraordinarily a remote risk.
MR. OUTHOUSE: So you've never heard of a ruling being rescinded?
MR. EWENS: Correct.
MR. OUTHOUSE: And certainly never heard of one being rescinded retroactively?
MR. EWENS: Even more correct.
Document: 206878
-48-
3.6.1 Findings
[142] Both PWCC and NSPI recommend acceptance of the proposed
arrangement, having prepared and filed all documents with CRA in support of their joint
ATR request. During the hearing, circumstances which might result in either the failure
of the proposed arrangement or a cost to NSPI or ratepayers were explored. Mr.
Ewens conceded there are potential circumstances that would result in the
discontinuance of the arrangement or risks related to additional costs; however, he
testified that the risks identified were "extraordinarily remote". Board Counsel
consultant Mr. Bernstein also testified that the potential for any event that would result in
a cost to ratepayers is "extremely remote".
[143] The Board is satisfied NSPI and PWCC have made significant efforts to
minimize and mitigate the tax risks, including the ability to terminate the arrangement
upon seven days' notice, which reduces the risk to ratepayers.
[144] The Board approves the proposed structure, contingent upon receipt of a
favorable ATR from CRA.
3.7
[145]
Term and Reopener
NSPI and PWCC are requesting approval of a term which ends on
December 31, 2019, roughly seven and a half years. In addition, the Mechanism would
be subject to a review after five years, if the mill's overall contribution to fixed costs
during that time period does not equal or exceed $20 million on a tax effected basis.
[146] PWCC made it clear throughout the course of the proceedings that it
would not proceed with the acquisition of the mill unless it obtains the term and
reopener provisions as requested.
Document: 206878
-49-
[147] While NSPI had attempted to negotiate a shorter term, NSPI accepted that
the term as requested was critical to PWCC agreeing to reopen the mil!. Indeed, Mr.
Bennett indicated that initially PWCC had wanted a 10 year term.
[148] There was some confusion during the course of the hearing as to exactly
how the term and reopener would work. That was clarified by Mr. Gallant, counsel for
NSPI (and concurred in by Mr. MacDougall, counsel for PWCC), as follows:
... The arrangement, under this mechanism, is that there will be a guaranteed dividend
contribution of $2 per megawatt/hour on a tax-affected basis and based upon the
anticipated load for the mill, that's about $2 million a year.
The arrangement also allows for additional dividend contributions depending on mill
profitability, and we're all familiar with those, but that would be essentially the source of
the excess amounts that would be used to measure the trigger for the review.
So over the five-year period, the guaranteed contribution would only be $10 million, but if
the mill is profitable, we would hope for the benefit of our customers that it would be in
excess of $10 million. And if it gets to $20 million on a taxaffected basis, that's when --
then that is the commitment that is made, and if that happens, there would be no review
at aiL
So $20 million or more over the first years, there's no review. And, of course, the essence
of the $20 million is that would be about $4 million a year or about $4 per megawatt/hour,
very similar to the existing load retention rate that was established for the Bowater milL
So the question becomes, then, the review gets triggered if $20 million is not contributed
and only if it doesn't get to $20 million. So let's assume it gets to $18 million, then there
would be a review. And during the course of that review, as was testified to yesterday by
Pacific West, we could reforecast -- reassess and reforecast the variable cost adders for
the final two years, and they could be reset
The proposal does not anticipate, and it would not be the position of either party, that it
could retroactively review and recover any variance or return to Pacific West any
variance in those adders. So the adders are set; they're in place for at least five years.
And they would be in place for the full term if $20 million or more is contributed.
So there would no -- not be an actual true-up after five years even if $20 million has not
been contributed, and even if, as I understand the paradigm presented by Mr. Mahady,
something less than $20 million is contributed and a retroactive look back would suggest
that the variable cost had been set too low and therefore were under recovered. That is
part of the risk.
But of course the testimony of Nova Scotia Power and Pacific West is that those adders
are set correctly and in balance; that would not happen. Although I hope that Mr. Mahady
will at least pursue with the panel what amounts were involved, even if you assumed any
kind of variance because in our view, they're quite small, even if there is a risk of that.
Document: 206878
-50-
So then the final point, I think, is why is reference here to the ability to terminate on seven
days' notice. The only provisions for automatic -- relatively automatic termination are in
the tariff itself. And it's not -- there is no automatic or relatively automatic termination if
$20 million is not achieved or provided.
The reason that that's there is to remind the Board and stakeholders that at all times,
really at its own discretion, Nova Scotia Power has the ability to stop the arrangement,
and on seven days' notice. And so if there is something wildly out of whack that happens
in the next five years, we can stop the damage or the bleeding or however you want to
describe it
Of course, from a commercial perspective, we would have to have a good-faith reason to
terminate and we wouldn't do so, you know, in a very quick way without having a good
reason.
So I think what you would expect to see is -- and what you'd expect the company to do is
to communicate that issue with Pacific West and have a discussion about whether indeed
a change should be proposed and brought back to the Board for approval to fix the
problem that has arisen, or whether termination is indeed the right course of action.
So it's simply designed to give the context that if something really serious is happening
and Pacific West is not willing to fix it for the benefit of our customers, we have the ability
to fix it ourselves. So I think that that answers all of the questions that were posed. Mr.
MacDougall may have more.
MR. MACDOUGALL I think that's the- that's our understanding, Mr. Chair.
[149] Mr. Stern confirmed that if the rate is reopened the Board could reassess
and reforecast the variable cost adders for the final two years and they could be reset.
[150] So to be clear, the rate runs to December 31,2019 and there would be no
reopener if the mill's contribution to the FCR Deferral during that time exceeds $20
million. If the reopener provision is triggered there would be an opportunity to adjust the
rate components for the final two years of the rate.
3. 7.1 Findings
[151]
It appears to the Board that there were extensive negotiations on the term
with NSPI arguing for a shorter term and PWCC a longer term. The Board accepts the
evidence of Mr. Stern that if the term is shortened PWCC will not purchase the mill.
Document: 206878
-51 -
[152] The Board is obviously concerned about granting a rate for such an
extended period. However, the most volatile component of this, and any other NSPI
rate, is the fuel component. This rate is designed such that actual fuel costs will be
recovered each and every week so PWCC bears the fuel risk. That is markedly
different from the existing LRT for Bowater where the fuel price was essentially locked
in for three years. Absent PWCC accepting the fuel risk, the term would be
unacceptable.
[153] The Board sees the reopener as providing very modest protection to NSPI
and its ratepayers. However, given that the term is fundamental to the transaction and
given that the design of the rate is to recover fuel cost, the Board is prepared to approve
the term and reopener as proposed.
[154J The Board takes some comfort from the contract documentation which
makes it clear that the rate is to recover actual incremental costs.
[155] The Board expects NSPI to be vigilant to ensure that all incremental costs
are in fact recovered in accordance with the Real Time Energy Protocol.
3.8 Steam Supply
[156] To operate, the mill needs steam. There are two boilers which can
provide this steam: the Biomass Plant, referred to as PB3 in the arrangement, and a
gas-fired boiler, referred to as PB4. The arrangement requires NSPI to operate the
Biomass Plant (and PB4 for up to 10 days a year if PB3 is not available) to deliver up to
1.2 million GJ of steam net energy. This represents 24% of the Biomass Plant's steam
production. In exchange, the partnership will pay $4.72 million on a before tax basis.
The partnership is to supply sufficient fuel, at its cost, to generate its needed steam.
NSPI will pay to the partnership $750,000 per year for various services such as water,
Document: 206878
-52-
compressed air, fire protection, demineralized water and a storeroom. Similar to
incremental electricity costs, this gross amount is to be paid by way of dividends on a
net after tax basis.
[157] The costs to be paid by the partnership were illustrated by NSPI as
follows:
2o13 GRA snarecr 3l'ld operatJGn
Tot.a! CoE.U (5'000i 6.36

C;ap!tal E!ldmate
Total SYndatone O&M

ROEnetr:t!Tate
Total FllreG Col!i.U;
3.8.1 Findings
0.75 Stem)
7. t f 0.8 5.6872
20.5112
[Exhibit P-15, IR-26, Attachment 1]
[158] The pricing with respect to the steam supply and shared services appears
to the Board to be reasonable, and not subsidized by ratepayers.
3.9
[159]
Risk
In its Application NSPI requested the following:
confirmation from the Board that, subject to the usual requirements of prudent
operation of the utility, NS Power will not be at risk for any consequences of the
arrangements proposed herein, including tax consequences.
[Exhibit P-4, p. 6]
[160] That request, stated in that manner, caused parties considerable concern
that NSPI was seeking to alter the normal rules with respect to prudence and risk.
Document: 206878
-53-
[161] What appeared to be a fairly unusual initial position was modified and
clarified by Mr. Bennett during the course of the hearing. Ultimately, it appeared that
Mr. Bennett was asking the Board to confirm that the normal rules of prudence would
apply to this transaction.
[162] The following exchanges are instructive:
MR. OUTHOUSE: Okay. So if it turns out that you're wrong, that subsequent audit
reveals that the rate isn't fully recovering incremental cost -- and I'll leave aside the
adders for a moment; let's assume it's not attributable to the adders. You-- wouldn't you
expect it to be reasonable for the Board to hold NSPI accountable for that?
For example, if there's a defect in the rate, that it's missing some incremental cost,
should that rest -- should that shortfall rest with other ratepayers, or is that something the
company ought to wear, because it's the one who's made the mistake in designing the
rate?
MR. BENNETT: If a mistake has been made in the design of the rate and it's been
imprudent, then we accept that accountability.
MR. OUTHOUSE: And if the shortfall was due to Improper administration of the rate, not
being careful enough to apply the rate rigorously to collect the incremental cost, you
would expect NSPI to wear that?
MR. BENNETT: Under our control, so our accountability.
[Transcript, pp. 597 -598]
MR. OUTHOUSE: Sure.
But to your knowledge, Mr. Bennett, has the Board ever done anything but demand that
you be prudent? Has it ever applied a higher standard?
MR. BENNETT: No. I have great faith in this Board and the decision making and, you
know, the quality of reflection that goes into the risk of the company, because I have now
a lot of experience.
THE CHAIR: But as I hear you explain this, Mr. Bennett, I want to make sure I
understand what your position is. That's fairly stark when you read the Section E. But as I
hear you explain what it means in response to a number of questions, it doesn't seem to
be much different than what we would normally do, and that is hold you to account for
your imprudent acts, and if your actions are prudent, then those costs would be passed
along.
So what's different about this clause than our normal mode of business?
Document: 206878
-54-
MR. BENNETT: I'm as uncomfortable as anyone in terms of talking more about risk
management of the company in an environment like this where everyone automatically
assumes that somehow we're trying to benefit shareholders instead of customers. I would
rather not talk about risk at all.
THE CHAIR: But what you're asking us to do is to, first of all, approve the rate which
flows from these tax consequences. You're asking us to examine these agreements and,
as we did in the biomass project, say they're a reasonable set of agreements.
And then you're not asking to be indemnified if you act imprudently. So I'm asking myself,
what's different?
MR. BENNETT: The external climate in which I exist is different and the necessity to be
more direct about the company's position on asking for this type of assurance is
something ---
THE CHAIR: No, I hear you saying that, but I'm not sure what you're asking for that's
different than what we would normally do. That's my point.
MR. BENNETT: Well, this conversation and the clarity around it serves, to a large
degree, to meet the needs that I have to be transparent to the external communities that
these are well-understood risks and that they're being managed by both us and by the
Board.
MS. CLARKE: Excuse me, Mr. Outhouse, if I could just follow up on that?
I'm struggling, I guess, Mr. Bennett, with what I'm hearing. Are you saying that this is a
condition for NSPI's support for this whole proposal, that the Board specifically do what it
says in E of that? And is it a condition if the Board doesn't do that, that you will then walk
away from this deal?
MR. BENNETT: I don't want to jeopardize the success of this deal unreasonably ....
THE CHAIR: 1 guess my concern is we maybe have created an issue here where none
exists. Because if indeed what you're expecting us to do is to apply the normal prudence
rules and act reasonably, I'd like to think that's what we do all the time.
So, I mean, this has been a real focus ...
[Transcript, p. 615)
Document 206878
-55-
[163] Following the exchanges noted above between the Board Chair and Mr.
Bennett, Mr. Gallant, counsel for NSPI asked that the Board clarify the rules concerning
prudence.
[164] In its final argument NSPI outlined in some detail the risk mitigation
measures it took with respect to the transaction.
Dividend payments that reflect the real-time incremental fuel and purchased power cost
associated with the amount of electricity consumed by the Partnership, including
incremental operating and capital cost (versus the three year forecast basis and non-time
differentiated price of the current LRT pricing mechanism).
Mill electricity consumption treated as fully incremental throughout the term of the
agreement. This means that the Company will not build generation capacity to serve this
load, will not include this load in its planning work and will not manage its fuel portfolio to
minimize cost associated with this load. All of these activities are required under the
current LRT pricing mechanism and as a result impose risk and costs on other
customers.
Provisions to terminate the Dedicated Use Agreements on seven days' notice for non-
performance.
Dividend payments in advance of load being taken by the mill.
A profit sharing mechanism through a material common equity investment by NS Power
(addressing the concern with the previous LRT pricing mechanism that a windfall could
result for the customer on the tariff without any commensurate benefit for other
customers).
An Administration charge of $248,400 per year. The current LRT pricing mechanism
has no Administration or Customer charge.
With respect to risks specific to the structure of this arrangement, NS Power has
undertaken the following risk mitigation activities:
Jointly applied with PWCC for an Advanced Income Tax Ruling from Canada Revenue
Agency and recommending the Board's approval remain contingent on a supportive CRA
ruling.
Acquired indemnities from NewPage Port Hawkesbury Corporation respecting
environmental risks, employer related claims, and advance tax ruling risks.
Requested an indemnity from the Provincial Government regarding environmental risk.
Engaged TO Securities to undertake a due diligence review of the mill's operations and
business plan to determine its capacity to pay dividends pursuant to the agreements. TO
Securities' findings were favourable.
[NSPI Closing Submission, pp. 14-15]
Document: 206878
-56-
3.9.1 Findings
[165] In 2005 NSUARB 27 (NSPI - P-881), the Board adopted the definition of
prudence as set out in a decision of the Illinois Commerce Commission as a reasonable
test to be applied in Nova Scotia.
[166] That test was set out at paragraph 84 of the Board's decision:
The standard for determining prudency of a utility's fuel procurement practices is well
established. As stated by the Illinois Commerce Commission, "prudence is that standard
of care which a reasonable person would be expected to exercise under the same
circumstances encountered by utility management at the time decisions had to be
made .... Hindsight is not applied in assessing prudence .... A utility's decision is prudent if
it was within the range of decisions reasonable persons might have made. . . . The
prudence standard recognizes that reasonable persons can have honest differences of
opinion without one or the other necessarily being imprudent.
[2005 NSUARB 27, para. 84]
[167] The Board went on to say:
[89] While the Board recognizes that the definition of imprudence varies somewhat
among the jurisdictions cited, there are several fundamental principles which are
common. These include:
Were the utility's decisions reasonable in the context of information
which was known (or should have been known) at the time?
Did the utility act in a reasonable manner and use a reasonable standard
of care in its decision-making process?
The imprudency test should relate to the circumstances at the time in
question and not to hindsight.
[2005 NSUARB 27, para. 89]
[168] The Board has, and will continue to apply, the normal rules of prudence to
this transaction.
[169] The Board notes the mitigation measures noted above.
[170] The arrangement is largely driven by tax law and tax considerations. The
Board notes that both PWCC and NSPI engaged leading tax counsel to advise them on
this transaction. The Board did the same.
Document: 206878
-57-
[171] The Board has reviewed the various project agreements as noted in
Undertaking U-5 and agreements filed subsequently. They appear to be a very
comprehensive and reasonable set of agreements related to a complicated transaction.
3.10 RES Costs
[172] Under the proposal, PWCC would not assume any responsibility for the
costs of meeting RES requirements. The first issue was whether the mill will trigger any
incremental or additional costs over the seven and a half year term in order to meet the
RES requirements. Both NSPI and PWCC argued that NSPI will have excess
renewable energy through at least 2019 whether the mill operates or not. They stated
that with the planned additions of additional renewable energy to be built for 2015
pursuant to awards arising from the request for proposals by the Renewable Electricity
Administrator, and with the recent closing of Bowater, the mill is not expected to cause a
requirement for any more RES energy than would already be built or purchased by
NSPI.
[173] The second issue related to the operation of the Biomass Plant. It
became clear from the evidence that the Plant would likely not need to operate in 2013
and 2014 absent the necessity to provide steam requirements for the mill. If the
Biomass Plant were to be dispatched out of economic order, additional costs would be
imposed on the system. Mr. Sidebottom conceded on cross-examination that, given the
current renewable situation and having regard to the fact that the Bowater load has
disappeared, the Biomass Plant would likely run infrequently in 2013 and 2014 and it
may or may not run in 2015 depending on generation additions.
[174] Mr. Bennett confirmed as follows:
Document: 206878
-58-
MR. BENNETT: The circumstances are still in flux, load on the system. And as we
discussed before, the point that you make about the biomass plant operation being
necessary in order to supply steam, but not being necessary in order - potentially not
necessary in order to meet renewable energy compliance creates an issue that needs to
be resolved.
MR. OUTHOUSE: And if it isn't resolved; that is, if this works as the proposal currently
stands and that incremental cost isn't recovered from, it doesn't technically qualify as an
incremental cost, it's clear that the additional fuel costs that other customers may pay
through the FAM could easily swamp either the $2 million contribution or the $20 million
contribution over five years, couldn't it?
MR. BENNETT: That's the essence of the issue, if the biomass plant is not required to
run to meet RES targets.
[175] Avon produced an analysis that showed that running the Biomass Plant to
produce steam for PWCC adds approximately $7 million in costs annually.
[176] PWCC disputed those costs indicating that they are significantly over
stated and also indicated that there is an offsetting benefit with respect to the mill
efficiency of approximately $3 million in value that comes with the operation in
cogeneration mode as opposed to stand alone mode.
[177] It became clear during the course of the proceeding that, without some
resolution to these two RES issues, the LRT would not likely recover all its incremental
costs.
[178} By letter dated July 20, 2012, the Deputy Minister of Energy wrote to the
Board addressing both issues. With respect to the incremental RES issue, the Deputy
Minister of Energy stated as follows:
Incremental RES issue:
Government Policy:
The Government created the Renewable Electricity Standards to achieve a number of
objectives: the obligation to meet a number of targets and the requirement that the
provision of electricity come from specific technologies, and come from both Independent
Power Producers as well as NSPI. Accordingly the Government has enabled the
procurement of new sources to enable all of these objectives to be met. The Government
is confident that there is enough RES supply coming on-line that the mill-load will not
trigger an incremental RES cost over the term of the proposed mechanism.
Document: 206878
-59-
Government Commitment:
The Government commits to ensuring that if the mill load does trigger an additional RES
obligation during the term of the proposed mechanism, and if this results in incremental
costs, then the Province guarantees that neither PWCC nor other ratepayers will be
required to pay these incremental costs.
[Exhibit P-69, p.2]
[179] With respect to the Biomass Plant issue, the Province stated as follows:
Biomass Plant issue:
Government Policy:
Government policy has always been supportive of using biomass for combined heat and
power. In 2011, the Government conducted a public consultation on changes to the
Renewable Electricity Standard Regulations. One of the proposed amendments to the
regulations creates a requirement that a portion of the renewable electricity purchased to
meet the standards be firm. Firm renewable generation enhances system reliability and
facilitates the balancing of non-firm intermittent wind generation. This requirement would
result in the obligation to run the biomass plant to achieve this objective, whether the mill
is in operation or not The policy intention has not changed.
Government Commitment:
The Government commits to ensuring that PWCC receives the full benefit of the
proposed arrangement it reached with Nova Scotia Power Inc. This will be accomplished,
as planned, through finalization of amendments to the Renewable Electricity Standard
Regulations so that the Port Hawkesbury CHP plant is operated as a base load and is
deemed must run or we will address the issue through an equivalent solution that meets
the objectives of the proposed arrangement.
[Exhibit P-69, p.1]
3.1 0.1 Findings
[180] With respect to the incremental RES issue, the Province appears to
guarantee that neither PWCC nor other ratepayers will be required to pay any additional
incremental costs.
[181] With respect to the Biomass Plant issue, the Province appears to commit
to amending the Legislation or Regulations to require that the Biomass Plant be
operated as base load and deemed "must run". If that were to happen, NSPI would be
obligated to run the Biomass Plant, even though it would not be dispatched based
purely on the rules of economic dispatch.
Document: 206878
-60-
[182] If that happened, it seems to the Board that the presence of the mill would
not create an incremental cost for the Biomass Plant to run, as it must run "by law", if
the Province follows through on this commitment.
[183] Having regard to the stated position of the Province, approval of the Board
will be subject to two conditions:
(a) If the mill load does trigger additional RES costs during the term those
costs may not be passed along to ratepayers; and
(b) No costs related to operating the Biomass Plant out of the normal
economic dispatch order may be passed along to ratepayers unless and until, as a
result of Legislation or Regulations imposed by the Province, it becomes a "must run"
facility.
3.11
[184]
Regulatory Accounting Issues
NSPI uses United States GAAP ("US GAAP") for the preparation and
presentation of its financial statements. Under US GAAP, it is able to apply alternative
accounting principles, if approved by the Board (rate regulated accounting).
[185] Under US GAAP, an investment of the size contemplated by this
mechanism in an operating company must be recorded on the equity basis. Broadly
speaking, this means any future change in the recorded book value of the mill would be
reflected in NSPI's financial statements. A proportionate share of the earnings of the
mill would be a part of NSPI's income statement. This is not acceptable to NSPI, and it
has asked the Board to approve the recording of the "investment" in the mill operations
on a cost basis.
[186] NSPI will have the right to appoint directors to the NPPH Board. At
present, NSPI does not plan on exercising that option.
Document 206878
- 61 -
3.11.1 Findings
[187) This non-traditional investment in the mill is a part of the Mechanism to
enable NSPI to be paid for supplying electricity at the lowest possible after-tax cost.
The Board approves the recording of this investment on a cost basis.
[188] NSPI should file appropriate wording changes to its accounting policies for
subsequent Board approval.
3.12
[189]
Environmental Issues
In its direct evidence, NSPI identified the risk of responsibility for pre-
existing environmental contamination at the mill site. While it considered the risk to be
relatively small, it acknowledged that, due to the nature of the operations at the site, the
impact could be significant. The risk could arise because, due to the proposed
structure, NSPI would be an owner of the mill site for a short time.
[190] Under the provisions of the Environment Act, S.N.S. 1994-95, c. 1, as
amended, an owner can be found responsible for the costs of remediation of
contamination, even if it occurred before the owner acquired the property.
[191] Both Mr. Hornby and Mr. Athas identified this potential risk.
[192] PWCC's evidence at the hearing indicated that it had undertaken due
diligence regarding the environmental state of the mill site and received positive results.
Mr. Bennett also confirmed that at the time of entering into the biomass project, NSPI
had done a comprehensive review of the environmental situation and did not anticipate
problems.
[193] NSPI stated, both in its direct evidence, and in response to Synapse IR-
25, as well as the evidence of Mr. Bennett at the hearing, that it had engaged in
discussions with the Province to obtain an exemption from liability or indemnification
Document: 206878
-62-
from the Province in relation to any pre-existing contamination of the site. NSPI also
made it clear that its support for the proposal is conditional upon receiving such an
exemption or indemnification.
[194] Further, Mr. Bennett emphasized, in response to a question from the SBA,
that NSPI was not attempting to absolve itself from liability from future activities on the
site:
MR. BLACKBURN: ... Dealing with environmental issues, this is something that I
understand is still before the Province and you hope to have that matter resolved; is that
what you said yesterday?
MR. BENNETT: Yes, and there was a report this morning that was inaccurate in the
media concerning -- I think there was a misinterpretation of that we're trying to avoid
some type of future responsibility for environmental issues. That's not the case at all.
What we're trying to do is avoid a responsibility for any legacy issues that exist and it's an
important part of the business transaction, and we'll prudently behave and we'll take
accountability for our company's responsibility going forward, absolutely. But not for the
actions of others in the past and we're quite certain that the provincial government will
provide an indemnity in that regard.
[195] NSPI indicated it was prepared to file a copy of the document with the
Board once it is obtained from the Province.
[196] With respect to responsibility for future environmental liability, Mr. Bennett
confirmed, in an exchange with counsel for Avon, that while PWCC was unwilling to
provide an indemnity to NSPI, there is such an indemnity from NPPH to NSPI. The
Board notes that the provision in question indemnifies NSPI unless it has caused or
contributed to the contamination, or it arises from its unlawful conduct.
[197] Mr. Bennett further stated that this risk has also been mitigated by virtue of
NSPI's being a limited partner, thus restricting its exposure. Additionally, the Board
notes that the SOMA requires the parties to operate the Boiler in accordance with
environmental regulations, which should result in further mitigation of this risk in the
Document: 206878
-63-
future. The Shared Services Agreement assigns to NSPI responsibility for various
activities which could result in future environmental liability. The Board expects NSPI to
be prudent in its operations under that Agreement to minimize such exposure.
[198] The Board notes that in discussing risks that might arise under the
corporate solvency test which could prevent the payment of dividends, Mr. Bernstein
noted that there might be unforeseen liabilities, such as environment liabilities, which
could result in the insolvency of NPPH. However, in its reply evidence, PWCC noted
that NSPI would be protected from such a financial risk by virtue of the seven days'
notice provision of the agreement(s).
[199] In their closing submissions, the SBA, Avon and PWCC emphasized that
the Board should not grant approval without imposing a condition that receiving the
provincial indemnity should first be obtained.
3.12.1 Findings
[200] The Board is satisfied that, unless and until NSPI receives a satisfactory
exemption or indemnification from the Province with respect to pre-existing
environmental conditions or contamination at the mill site, it will not enter into the
arrangement with PWCC The Board agrees this position is prudent.
[201] Order-in-Council 2012-227, issued on July 20, 2012, grants an
indemnification. NSPI filed a copy of the relevant documents with the Board on July 31,
2012. The Indemnity Agreement relates to the mill site, but not to the lands on which
the biomass facility is located. It becomes effective on the date when NSPI becomes a
shareholder of NPPH, and indemnifies NSPI from all claims under various specific
provincial and federal statutes, and generally " ... all applicable present or future
international treaties, federal, municipal, or local laws, statutes, regulations or
Document: 206878
-64-
ordinances relating to the environment, including ... the common law ... " arising prior to
that date. NSPI has not indicated a position with respect to the adequacy of the
indemnity.
[202] With respect to future environmental liability, the Board takes some limited
comfort from the indemnity given by NPPH. The Board is satisfied that NSPI intends to
act in a prudent fashion in its future operations. As noted in the section of this Decision
dealing with risk, the Board is not prepared to apply anything other than the normal
rules with respect to prudence and risk as far as future environmental issues are
concerned.
3.13 Reporting and Audit
[203] Several intervenors expressed a strong interest in appropriate reporting
and auditing.
[204] Mr. Bennett also supported the requirement for reporting and review:
MR. BENNETT: Yes, that is what we're proposing, but I'm -- I would also say that to the
degree that the Board desires or it's practical to report in some different way, we'll do it
whatever way is desired.
MR. OUTHOUSE: Okay. The -- you appreciate that this is -- adds a dimension to the
FAM reporting that wasn't previously there in terms of cost segregation to a specific
customer.
MR. BENNETT: Yes. We appreciate that nothing about this is easy for anyone.
MR. OUTHOUSE: Yeah. So this-- currently when the FAM audit is done, it's concerned
with prices and overall volumes and it's not concerned with saying, "Customer X ... " in this
case that mill, " ... should have this much fuel cost attributed to it.
It hasn't been attributed to it, and therefore it's not being allowed to flow through the
FAM." That's what you anticipate now would happen?
MR. BENNETT: It's different again because the accounting needs to be correctly
understood.
Document: 206878
-65-
[205] NSPI suggested that a quarterly report would be appropriate. This was
supported by Mr. Hornby, who also suggested that the reports should be audited to
ensure all incremental costs are captured:
Well, the audit could look at the NSPI's records, and the inputs and the calculation that
it's made to determine that that calculation that's done, and I know it's going to be done
by software, but there'll be records that - - the inputs to that calculation are including all
the relevant costs and - - so for example, there may be start-up costs.
I know the recent fuel adjustment mechanism is an identified - - that was filed July 9
1
h,
that identified that NSPI is not currently calculating the cycling costs associated with its
coal units ...
[206] He went on to recommend the first audit occur in the early stages, to
ensure concerns are promptly identified.
[207] NSPI offered the following in its rebuttal evidence:
... NS Power respectfully suggests that reporting will be inherently incorporated in the
requirements for fuel cost disclosure through the FAM (to demonstrate that customers do
not bear any variable fuel costs for the mill) and pursuant to the requirement that every
penny of fixed cost contribution will be directed to reduce the Fixed Cost Recovery
Deferral account. ...
[208] This position was altered in NSPI's reply submission:
In terms of auditing and reporting, NS Power respectfully suggests that establishing firm
and formal requirements at this early stage may not result in the most effective or efficient
approach. The nature of regulatory litigation is such that the positions of parties during
the course of a public hearing may subsequently change once the Board's decision has
been released and the mill resumes operation. NS Power would be pleased to work with
Board staff promptly upon approval of the PWCC LRT Mechanism, to establish the
specific terms and reports that would be most helpful in delivering the transparency that
is required by all parties.
[NSPI Reply Submission, p. 4]
3.13.1 Findings
[209] There are areas that require new reporting, analysis and auditing. Some
areas where differences are identified, such as the elements in the incremental price,
can be amended immediately. Others, such as the variable operating cost adder and
Document: 206878
-66-
the incremental capital cost adder, can only be altered if a five year review occurs.
There is also an expectation that the arrangement will be cancelled by NSPI if, for
whatever reason, the Mechanism does not recover, the actual incremental costs of
serving the mill load.
[21 0] The Board finds that the reporting of all the incremental costs and the
administration costs should be done quarterly. The Board also finds it appropriate to
report on variable fuel costs of the mill. The Board orders that NSPI work with Board
staff and interested intervenors to determine an appropriate and complete reporting
format. NSPI should then modify its accounting records so that they accurately support
the reporting format.
[211] The Board finds that six months (two quarterly reports) should be sufficient
to enable NSPI to develop appropriate reporting. The Board also finds six months to be
the appropriate period for the first audit of the Mechanism. The Board will appoint an
independent auditor. Depending on the findings of that initial audit, further auditing may
occur every two years.
3.14 FCR Deferral
[212] NSPI sought approval to extend the FCR Deferral which was a part of the
general rate application ("GRA") settlement agreement approved by the Board in its
Decision in November, 2011 (2011 NSUARB 184). NSPI asked that the deferral
continue during 2013 and 2014, and stated that it would apply the dividends received for
fixed cost contributions from NPPH to the FCR Deferral. The Board understands that
the common share dividends will also be applied to the FCR Deferral.
[213] Mr. Bennett indicated that this would be a benefit to the other ratepayers.
However, Board Counsel questioned whether the request for extension of the deferral
Document: 206878
-67-
was still required in light of the recently filed GRA, or more properly considered in that
application. In response, Mr. Ferguson testified:
MR. FERGUSON: The GRA does speak to a deferral and a rate stabilization plan. But
the application -- the request for the deferral as part of this application is appropriate
because it relates to, you know, a very specific asset and a specific operation totally
applicable to this application.
So the deferral is so closely related to the application that it's appropriate, in our view,
that the Board hear it as part of this application.
MR. OUTHOUSE: All right.
MR. GALLANT: I guess I will add, Mr. Outhouse, that we don't know the outcome of the
General Rate Application. And if the outcome of the General Rate Application is that no
deferrals are ordered by the Board, this deferral that is requested in this application
continues to be an important component of the entire package to make sure that we can
be very clear and demonstrate that the benefit of the arrangements flow to customers by
being applied to the fixed-cost recovery deferral and reducing that amount.
MR. OUTHOUSE: You're saying there has to be a receptacle for the money that clearly
tracks it?
MR. GALLANT: When you talked about superseding, for example, I would say it is quite
possible that this could be granted m this application and the outcome of the general rate
application could supersede this ---
MR. OUTHOUSE: Yeah.
MR. GALLANT: ---by providing a more comprehensive package for rates for customers
during at least this two-year period. But they are not directly connected. It's more of a
conversation I think for the general rate application. I'll -- and in saying that, I would be
assuming that this would be granted and would go forward when I say that.
[214] NSPI emphasized the importance of continuing the deferral when
addressing the issues of auditing and reporting in its reply submission:
NS Power confirmed in its Panel testimony that the Company remains committed to
transparency about the effective operation of the PWCC LRT Mechanism. It is critical that
customers are able to be informed about how much of a contribution the operation of the
Port Hawkesbury mill is actually making to the fixed costs of the system. Indeed, that is
why NS Power has requested the Board to continue the Fixed Cost Recovery deferral
mechanism, so that NS Power can direct every penny of fixed cost contribution to the
benefit of customers.
[NSPI Response to Final Submission, p. 4]
Document: 206878
-68-
3.14.1 Findings
[215} In its November, 2011 Decision, the Board commented that the deferral
provides some stability for ratepayers, as well as NSPI:
[35] The GRA Agreement also provides some stability to the ratepayers in the face of
uncertain economic conditions presently existing in Nova Scotia. As noted by counsel for
Avon, the deferral clause in the GRA Agreement offers "a mechanism to address the
uncertainty surrounding the indefinite shutdown and creditor protection of NewPage" and,
for that matter, the precarious situation of Bowater. Since the negotiated revenue
requirement is based on the NSPI Application load forecast, the ratepayers benefit from
the deferral of an immediate marked increase in rates. Thus, any recovery of lost NPB
contributions to non-fuel costs (net of non-fuel variable O&M costs) is deferred to 2013.
This deferral mechanism provides some stability for the Utility and ratepayers despite the
uncertain future of the NewPage and Bowater mills.
[Board Decision, 2011 NSUARB 184, p, 18]
[216] The Board notes that none of the Intervenors expressed a concern about
the request to extend the FCR Deferral. Given the need to clearly identify and track the
contribution of the mill to the fixed costs of the system, the Board finds that it is
appropriate to extend the FCR Deferral for the time being. This will be subject to any
amendments which may be made as part of the 2013 GRA which is to be heard in
September, 2012. If such amendments are made, then an alternative mechanism will
be established to identify and track the contribution being made by the mill to the fixed
costs of the system.
4.0 COMPLIANCE FILING
[217] NSPI is directed to file a Compliance Filing no later than August 27, 2012.
[218] The Board identified a number of revisions to the Mechanism, that were
agreed upon during the hearing, including: inclusion of line losses and import costs as
incremental costs; outlining the timing of payment of the monthly administration fees;
identifying the requirement for prepayment of dividends; and, details related to the
potential reopener. NSPI is directed to ensure these revisions, as well as any other
Document: 206878
-69-
additions or revisions agreed to by the parties, during the hearing, are included in the
Compliance filing.
[21 9] The Formal Intervenors must provide comments, if any, no later than
September 4, 2012.
5.0 SUMMARY OF BOARD FINDINGS
Jurisdiction
[220] With respect to the Board's jurisdiction, the Board is satisfied, pursuant to
the provisions of the s.44 and s.64 of the PUA, that it has jurisdiction to approve the
Mechanism and the LRT in a broad sense, as described in the tariff and various
documents.
Necessity and Sufficiency
[221] With respect to necessity and sufficiency, the Board is satisfied that the
evidence of PWCC establishes the need for a LRR to re-open the mill and afford it the
prospect of long-term viability. The Board considers that some contribution to fixed
costs is better than the other ratepayers having to bear all of the costs. The Board
therefore finds that the granting of a LRR is necessary, and the rate is sufficient.
Pricing Mechanism for Electricity
[222] With respect to the pricing mechanism, the Board accepts the Real Time
Energy Protocol that outlines the method to determine the actual incremental price to
supply the mill with electricity. The Board approves this Protocol on the basis that when
it can be interpreted in multiple ways, the interpretation that best protects the interests
of the ratepayers (not including the mill), shall prevail.
Document: 206878
-70-
[223] The Board considers that the incremental costs to supply the mill will be
recovered. They are to be calculated after the lowest cost to supply all other
ratepayers. These incremental costs are to include imported energy, whether used or
not, and line losses.
[224] The Board is satisfied that NSPI has a relatively sophisticated method of
calculating incremental costs. The Board finds that NSPI is in the best position, and is
obligated, to determine the incremental costs to serve the mill.
[225] The Board finds that NSPI is also in the best position to determine the
accuracy of its own incremental costs for all the components of the LRT, and NSPI has
agreed to accept responsibility if there is a defect in the rate design or improper
administration of the LRT.
[226] The Board finds that the proposed LRT pricing will recover all the
incremental costs without subsidization from the other ratepayers. In the event that
there are significant adverse differences, NSPI can cancel the Mechanism within seven
days.
Contribution to FCR Deferral
[227] With respect to the contribution to the FCR Deferral, the Board approves
the minimum $2 per MWh contribution to fixed costs. There is an expectation that there
will be an additional contribution from common share dividends. If the $2 per MWh
contribution and the additional common share dividends do not result in a minimum $20
million total contribution to fixed costs, then the rate will be re-opened after five years.
Administration Costs
[228] The Board accepts the $20,700 monthly charge for administration costs.
Document: 206878
- 71 -
Credit Risk
[229] The Board finds that the prepayment arrangement materially reduces the
credit risk to NSPI.
Settlement Mechanism
[230] The Board approves the settlement mechanism, which uses tax-free
dividends to discharge the liability created from the supply of electricity and steam.
Overall Findings on the Mechanism
[231] The Board approves the Mechanism which includes the pricing
mechanism and the settlement mechanism subject to the receipt of a favourable
Advance Tax Ruling.
Tax Structure and Risk
[232] The Board approves the proposed structure, contingent upon the receipt
of a favourable Advance Tax Ruling from the Canada Revenue Agency.
Term and Reopener
[233] The Board sees the term reopener as providing very modest protection to
NSPI and its ratepayers. However, given that the term is fundamental to the transaction
and given that the rate is designed to recover all fuel costs, the Board is prepared to
approve the term and reopener, as proposed.
Risk
[234] With respect to concerns related to risk, the Board has, and will continue
to apply, the normal rules of prudence to this transaction.
Document: 206878
-72-
[235] The Board has reviewed the various project agreements as noted in
Undertaking U-5 and agreements filed subsequently. They appear to be a very
comprehensive and reasonable set of agreements related to a complicated transaction.
RES Costs
[236] Having regard to the stated position of the Province related to any RES
incremental costs, approval of the Board will be subject to two conditions:
(a) If the mill load does trigger additional RES costs during the term those
costs may not be passed along to ratepayers; and
(b) No costs related to operating the Biomass Plant out of the normal
economic dispatch order may be passed along to ratepayers unless and until, as a
result of Legislation or Regulations imposed by the Province, it becomes a "must run"
facility.
Regulatory Accounting Issues
[237] The Board approves the recording of the investment in the mill on a cost
basis.
Environmental Issues
[238] The Board is satisfied that, unless and until NSPI receives a satisfactory
exemption or indemnification from the Province with respect to pre-existing
environmental conditions or contamination at the mill site, it will not enter into the
arrangement with PWCC. The Board agrees this position is prudent.
[239] With respect to future environmental liability, the Board takes some limited
comfort from the indemnity agreement given by NPPH. The Board is not prepared to
Document: 206878
- 73-
apply anything other than the normal rules with respect to prudence and risk as far as
future environmental issues are concerned.
Reporting and Audit
[2401 The Board finds that the reporting of all the incremental costs and the
administration costs should be done quarterly. The Board also finds it appropriate to
report on variable fuel costs of the mill. The Board orders that NSPI work with Board
staff and interested intervenors to determine an appropriate and complete reporting
format. NSPI should then modify its accounting records so that they accurately support
the reporting format.
[241] The Board finds that two quarterly reports is the appropriate period for the
first audit of the pricing mechanism. The Board will appoint an independent auditor.
Depending on the findings of that initial audit, further auditing may occur every two
years.
FCR Deferral
[242] The Board finds that it is appropriate to extend the FCR Deferral as
requested, for the time being, subject to any amendments which may be made as part
of the 2013 GRA
Document: 206878
-74-
[243] An Order will issue following the Compliance Filing.
DATED at Halifax, Nova Scotia, this 20th day of August, 2012.
Peter W. Gl.lrnham
Document: 206878
- 75-
Appendix A- List of Parties
PACIFIC WEST COMMERCIAL CORPORATION and NOVA SCOTIA POWER INC.
LOAD RETENTION RATE APPLICATION P-203 I M04892
Avon Group
(Avon Valley Greenhouses Ltd.)
(Canadian Salt Company Limited)
(CFK Inc.)
(Crown Fibre Tube Inc.)
(Halifax Grain Elevator Limited)
(Imperial Oil Limited)
(Lafarge Canada Inc.)
(Maritime Paper Products Ltd.)
(Michelin North America (Canada) Inc.)
(Minas Basin Pulp & Power Company Ltd.)
(Nustar Terminals Canada Partnership
(Oxford Frozen Foods Limited)
(Sifto Canada Corp.)
Board Counsel Consultants
Synapse Energy Economics, Inc. and
Aird & Berlis LLP
Consumer Advocate
Municipal Electric Utilities of Nova Scotia Co-operative
Province of Nova Scotia
(Departments of Justice and Natural Resources)
Small Business Advocate
Document: 206878

Pacific West Power Rate Decision

Enviado por

Dados do documento

Descrição original:

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Pacific West Power Rate Decision

Enviado por

Direitos autorais:

Formatos disponíveis

DECISION

NOVA SCOTIA UTILITY AND REVIEW BOARD

Você também pode gostar