Paper mill power deal could be costly6/14/2012
A deal to help reopen a closed Cape Breton paper mill by making Nova Scotia Power a partner in the operation could wind up costing other electricity customers $15 million to $20 million a year, a Missouri-based energy consultant says.
Drazen Consulting Group, hired by the Avon Group, says the province’s Utility and Review Board should reject the proposed agreement between the power utility and the mill’s potential buyer, Pacific West Commercial Corp. of Vancouver.
“A load retention rate must pass the test of other ratepayers being ‘better off’ by retaining the load,” the consultant says in a regulatory filing made public Wednesday.”
“The revenue must be ‘greater than’ the incremental cost to serve and must make a ‘significant positive contribution’ to fixed costs. Unfortunately, the proposal before the board fails that test by a wide margin.”
The deal could cost ratepayers an extra $150 million over its entire 7.5-year term, Drazen says on behalf of Avon, which includes other large industrial ratepayers such as Imperial Oil, Lafarge Canada, Michelin, Minas Basin Pulp and Power and Oxford Frozen Foods.
Drazen said it’s concerned the agreement will hike Nova Scotia Power’s fuel, operating, maintenance and capital costs.
The consultant also says reopening the former NewPage Port Hawkesbury mill will increase the utility’s need to obtain higher-cost renewable energy and lessen its ability to rationalize the generation fleet.
The consultant said the mill should be required to make higher payments, which would be in the form of dividend instead of cash, to get a deep discount on electricity.
Pacific West has said the agreement will cut the mill’s energy costs by $32 million a year.
Under the proposal, the Point Tupper mill would buy power at a rate that is set hour by hour the day before delivery. That will allow the mill to decide when and how to operate in a way that reduces its costs.
For the arragement to work, the plant has to time its purchases so that it draws from excess electricity on the grid. If it needs power beyond that, the mill will have to pay the higher cost of generating new electricity.
Besides paying for energy rates, the mill is also required to contribute a minimum of $2 million a year to the utility’s fixed costs of operating the system.
The contribution will be higher if the mill is profitable and able to issue more dividend to the utility, which would be a limited partner and own a 30 per cent stake in the operation.
Another consultant, one hired by the review board, also says the arrangement could increase Nova Scotia’s Powers costs but not by as much as Avon says.
Richard Hornby of Massachusetts-based Synapse Energy Economics says the cost of adding renewables to service the mill would be at least $11 million.
The consultant also said the utility hasn’t provided enough information on the method it will use to determine its exact costs under the deal.
“My conclusion, based on those findings, is that the revenues from the proposed rate mechanism may be less than NSPI’s incremental cost to supply the mill,” the Synapse report says. “The rate mechanism would not be just and reasonable if NSPI’s other customers would ultimately pay for a portion of the incremental costs.”
Underestimating costs by two per cent would increase the utility’s costs by about $1.1 million, Hornby says.
Meanwhile, two other energy experts say the deal should be approved.
John Athas of La Capra Associates, representing the provincial small-business advocate, said the discounted rate is structured in such a way to help mimimize risks to other ratepayers.
“It is important to NSPI’s other customers that the (load-retention tariff) prices and the complex ownership arrangements be approved,” the Boston-based expert concludes.
Athas does recommend that the mill’s contribution to fixed costs be increased after the first 2.5 years of the deal to make “a good deal for NSPI customers better.”
Athas’s report also says the province has provided loan guarantees to Pacific West.
But a company spokesman said Tuesday that’s not the case.
“No deal has been signed yet,” Marc Dube said.
A Toronto consultant hired by the province says the proposal does include mechanisms that would require the mill to cover addional costs, including ones caused by a last-minute decision to operate based on real-time energy rates.
“I believe that this provision, in combination with the other elements of the real-time energy protocol, ensures that the partnership ... and (the mill) ... would fully cover the actual incremental costs incurred by NSPI serving the mill load,” said Todd Williams of Navigant Consulting.
Williams, who was involved in the negotiations between Nova Scotia Power and Pacific West, says the agreement does ensure ratepayers are better off having the mill operating.
The review board has scheduled a hearing on the deal starting July 16.
(The Chronicle Herald)