Mr. Speaker, I have Return to Written Question 26-16(2) asked by Mr. Hawkins on June 16, 2008, regarding the cost of NWT Power Corporation operations.
1) a) The Public Utilities Board (PUB) approves
NTPC’s revenue requirement at the corporate level (as opposed to the community level), and as a result, the income statement is recorded and audited on a corporate-wide basis and not by community. In order to be responsive to your question, the corporation has prepared the requested information on a community basis; however it is for illustrative purposes only. Certain costs such as interest expense, head office, operations support and year end adjustments and revenue (e.g., interest income) not directly attributable to any specific community have been allocated using assumptions based on the allocation methodology that is reviewed by interveners and approved by the PUB during phase 2 of the general rate application process.
Rates are set based on forecast sales and expenses. The rates in effect for the 2004–05 and 2005–06 years were set during the 2001–03 General Rate Application (GRA) based on forecasts done in 1999–2000. The rates in effect for the 2006–07 year were set during the 2006–08 GRA based on forecasts done in 2005–06.
Revenues and expenses in the income statements by community are based on the actual revenue and expenses for the year.
Later today, at the appropriate time, I will table the Income Statement by Community.
1) b) NTPC receives payments from the GNWT
under the residential Territorial Power Support Program (TPSP). The GNWT also makes TPSP payments to Northland Utilities (NWT) Ltd. and customers who qualify and apply under the commercial subsidy program.
Later today, at the appropriate time, I will table the payments received by NTPC from the GNWT under the residential Territorial Power Support Program (TPSP) by community for the years ended March 31, 2008, 2007, 2006 and 2005. These amounts do not include any payments under the TPSP to Northland Utilities or under the commercial subsidy program, as it is administered directly by the GNWT.
2) c) The corporation has paid a dividend of $3.5
million to the GNWT for the years ended March 31, 2008, 2007, 2006 and $3.3 million in March 31, 2005. The dividend is paid out of corporate net income and not on a community by community basis. Total dividends since 1989 have been $79,373,000 all of which have been used to fund the TPSP.
3) NTPC’s profit is used for two purposes. Part of it
is paid as a dividend to the GNWT to be used to fund the TPSP. The second purpose is to reinvest in assets to serve customers in order to reduce the requirement to fund assets with debt. The profit is based on a fair return on equity as set by the Public Utilities Board after a detailed review during the GRA process. The PUB determined that the fair return on NTPC’s invested equity for the 2007–08 year was 9.25 per cent allowing NTPC the opportunity (it is not a guaranteed return) to earn approximately $9 million. The need for NTPC to make a profit is contained in its incorporating act, the Northwest Territories Power Corporation Act (NTPCA), its regulations and the Public Utilities Act (PUA). The regulations to the NTPCA created equity in NTPC when the GNWT purchased the shares in NCPC in 1988. This provided the beginning of the equity that NTPC’s return (profit) were based on.
The NTPCA limits NTPC’s borrowing to three times equity; therefore, it is necessary to have equity and profits to a be able to borrow and continue the utility’s operation. The NTPCA provides for NTPC to pay a dividend to the GNWT to fund the TPSP. Dividends are paid from profits.
The NTPCA provides that NTPC will be regulated by the PUB which will establish the rate base, rate structure and revenue requirement of NTPC. Under the PUA, the rates that NTPC customers pay are set by the PUB at a level that is “just and reasonable” for the customers and one that will provide a “fair return” for the utility.
Fair returns include excess revenue (profit) that is necessary for the operation of the utility. The Supreme Court of Canada has recognized a public utility’s need to make a profit on its services and a fair return on its investment and its assets. In considering what constitutes a “fair return” for a public utility, the Court stated:
“By a fair return is meant that the company [public utility] will be allowed a large return on the capital invested in its enterprise (which will be net to the company) as it would receive if it were investing the same amount in other securities possessing an attractiveness, stability and certainty equal to that of the company’s enterprise. [Northwestern Utilities v. The City of Edmonton [1929] S.C.R. 186 at page 192].”
In 2006 the Supreme Court of Canada affirmed why a utility can earn a profit, stating “the regulated company must be able to finance its operations, and any required investment, so that it can continue to operate in the future. [ATCO Gas and Pipelines Ltd. v. Alberta Energy and Utilities Board et al, [2006] 1 S.C.R. 140 at paragraphs 62, 63].
With regard to public utilities, the U.S. Supreme Court has also recognized that “it is important that there be enough revenue not only for operating expenses but also for the capital costs of the [public utility] business.
These include service on debt and dividends on the stock.” [Federal Power Commission et al. v. Hope Natural Gas Company, 320 U.S. 591 (1944) at page 591].
Sections 28 and 29 of the NTPCA demonstrate the Legislature’s intention that NTPC could earn a profit as these sections provide that the utility must declare dividends from time to time on its common and preferred shares.
As affirmed by the Supreme Court of Canada in ATCO, “the PUB approves or fixes utility rates which are estimated to cover expenses plus yield the utility a fair return or profit.” [ATCO at paragraph 65]. When determining those rates, the Board considers many factors, some of which are set out at section 51 of the PUA:
a) the cost of the property of a public utility used or
required to be used to provide service to the public within the Territories at the time that property was first devoted to public use, and to
the prudent acquisition cost to the public utility, less depreciation, amortization or depletion;
b) the necessary working capital of the public
utility;
c) all revenues and costs of the public utility;
d) any excess revenue (or a deficiency of revenue)
received by the utility; and
e) the cost of any franchise tax or fee charged by a
municipal taxing authority.
Both the NWT Legislature and the Supreme Court of Canada have recognized a public utility’s need to earn a profit. This is necessary in order for NTPC to earn enough income to maintain assets (i.e., replace and repair broken equipment), to acquire new assets (like the Bluefish Hydro Station), to pay a dividend to its shareholder.
Thank you, Mr. Speaker.