How a leaner, regulated Nalcor could save millions and better protect consumers

Newfoundland and Labrador's energy corporation, already described as "downtrodden" by one of its leaders, is coming under more scrutiny and criticism as efforts intensify to keep electricity rates affordable in the Muskrat Falls era.

One of the cost-saving recommendations for the corporation is the elimination of100 positionsatthe executive, managementand supervisory level sfor an annual savings of up to $21 million. Others include having the corporation be fully scrutinized by the Public Utilities Board, andstripping away Nalcor's power supply division and integrating it into one of its subsidiaries, Newfoundland and Labrador Hydro.

These and other recommendations in a sweeping report by Liberty Consulting could lead to ashakeup at the powerful government-owned corporation and create a "unified and more effective operating entity,"Liberty's John Antonuktold the Public Utilities Board during hearings in St. John's on Thursday.

The moveswould eliminate duplication, save millions in salary costs, and ensure Nalcor is subject to the full scrutiny of the utility regulator to ensure a circumstance like the one imposed by Muskrat is not repeated, Antonuk explained.

Liberty says a workforce reduction of five to 10 per cent at Nalcor is achievableand could begin now.

Antonuk did not mince his words.

"The execution of that effort will show that here or there, somebody does have too many people reporting to him or her."

He referred to N.L. Hydro as "substantially over the norm" with respect to employee numbers.

"Even with these reductions, Nalcor will remain above Crown corporation comparators in staffing and numbers," he added.

Exempt from PUB oversight

Liberty is also recommending that Nalcor be fully scrutinized by the utility regulator, much like N.L Hydro and Fortis-owned Newfoundland Power.

The Lower Churchill project, which includes the Muskrat generating station and a massive network of transmission assets, was exempt from PUB oversight when it was approved at an all-in cost of $7.4 billion in 2012.

The price tag has since ballooned to $12.7 billion, and is threatening to send electricity rates into the stratosphere when the project is commissioned in two years, which is why the utility regulator is now holding public hearings to hear options on how that can be avoided.

Without PUB oversight, Antonuk said Nalcor "will be empowered to make capital investments and expend operating costs without the discipline either of the market or of regulation."

"In our view it's difficult to understand why that should be the case for Nalcor," he said.

"There's nothing about them that makes them infallible. There's nothing about them that makes them better than the industry as a whole. There's nothing about them that makes us think regulation is less useful from a customer perspective."

If you continue to look at advancing energy projects by transferring what we consider owner'srisk to customers, then we think that is troublesome.- John Antonuk

Muskrat's financing framework puts the entire cost burden on ratepayers, and Antonuksees that as a problem that should not be repeated on a project like Gull Island, if it's ever sanctioned.

"If you continue to look at advancing energy projects by transferring what we consider owner'srisk to customers, then we think that is troublesome," he said.

As for Nalcor'spower supply division, which was established by CEO Stan Marshall in 2016 as the project was in crisis, Liberty believes it should be folded into Hydro.

This division is responsible for the operation of Muskrat's generating and transmission assets, and its integration into Hydro would "create a structure much more typical of a small, vertically integrated utility," said Antonuk.

He said most of the job losses would be at the senior management level, and produce "substantial savings."

Stressing an already precarious situation

Liberty was one of two consulting companies hired by the board, and Antonuk and other members of his team appeared at hearings Thursday and Friday.

It was clear from their presentation that paying the Muskrat mortgage beginning at $726 million in 2021 will severely test the limitations of a province already teetering on a financial cliff.

• Staring down Muskrat's 'extraordinary' pressure on N.L. electricity rates
• Nalcor a 'downtrodden organization' that needs a few wins, says board chair

The firm is recommending that government subsidize power rates by hundreds of millions each year, which could set up a scenario where ratepayers get a break, but taxpayers essentially the same group of people are forced to shoulder the Muskrat burden.

Antonukacknowledged that political leaders face a daunting task.

"As tough as our work was, we did the easy part when it comes to making those kind of judgments," he said.

Liberty has identified $200 million in rate mitigation opportunities for 2021,composed mostly of the dividends the province will receive from its $3.7-billion equity investment into Muskrat construction.

That figure grows to nearly $600 million by 2039, and could help mitigate rates by more than 12 cents.

This money will not appear out of thin air, since the provincial government is still required to pay back the massive amount of money it borrowed to build Muskrat. Yet Premier Dwight Ball has pledged to keep rates affordable, and avoid tax increases.

But that won't be easy.

"These are not net new dollars. These are dollars moved from another source to mitigation," said Antonuk.

"We've created a large pot here. The larger the pot, the better it looks for rate mitigation. Well, the larger the pot, it's tougher for the province to figure out how to do without that money. So it's really going to have to come down to affordability from the province's perspective."

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