Nova Scotia Power boss Rob Bennett discusses energy costs, pension shortfalls, his own mega salary and much more with the Truro Daily News
CUTLINE #2: Rob Bennett has risen up through the ranks after working in virtually all areas of the company during the past 25 years. RAISSA TETANISH - TRURO DAILY NEWS
TRURO - Rob Bennett was still in grade school when he settled in Sunny Brae, Pictou Co. in the early 1970s, after his father left the navy and went to work at the Michelin plant in Granton.
He lived there at his grandparents house up until his teenage years when he left for university.
"When we lived with my grandparents we didn't have in-door plumbing," said Bennett, now 50 and the president and chief executive officer of Nova Scotia Power (NSP). "There was a telephone, the central heating was the wood stove. I have lots of pictures of me as a kid getting a bath in a galvanized bucket."
Bennett was married at age 20 and has been employed with NSP for about 25 years after working in practically all areas of the company and rising up through the ranks to its top executive position.
It is one for which he is well compensated, to the tune of over $1 million last year, but one that puts him square in the spotlight and open for criticism in light of rising energy costs.
Bennett addressed these topics and more in an hour-long interview with the Truro Daily News.
Here is a portion of the question and answer session, some of which have been edited for length:
Q; What's your reaction to media reports that suggests Nova Scotia Power owes Nova Scotians a $22-million refund for spending too much on natural gas and coal?
A: This is a normal part of the regulatory process. Nova Scotia Power is regularly audited and reviewed and tested for compliance against a myriad of regulations and programs that we need to meet.
It's normal to have some level of criticism of some of the actions that the company has taken. And the next phase is us bringing forward our explanation of why things went the way that they did. We hire the best experts that are available to advise us on the actions to be taken, we behave prudently, we are one of the best-run utilities in the country and I can assure you that many of the assertions that have been made are just not correct, because the people who have done the review don't have the benefit of all of the information that we have and all of the background.
When that is brought forward in the regulatory hearing process, people will see that and it will be explained.
Q: Nova Scotia Power reportedly has a $185 million pension fund shortfall. The Progressive Conservative Caucus says the shortfall is a problem for the company to resolve internally and should not be bailed out by the ratepayers. What's your reaction to that?
A: We're not asking for anybody to recognize anything in our pension plan that's any different than any other pension plan that exists in Canada or in the United States right now. Pension plans across the country are challenged because of poor performance in the financial markets. And every organization that operates a pension plan like ours has an obligation to meet the pension rules and do what they need to do, as a business, to inject cash into the plan or do whatever needs to be done. I would describe it as normal business for most businesses that have large pensions like ours. In our business, part of working with the pension plan includes talking to the regulator about the implications on rates and talking to our employees about the implications on things like their employment arrangements, particularly with ... the union in our company who are affected and have a say in what happens with pensions. So we're just working through the process. And it's a very transparent, open process that people are aware of and no different than anywhere else.
Q: The Nova Scotia Liberals want to break NSP's monopoly and let producers of renewable and clean energy sell directly to consumers, which they say would force the company to work harder and actually compete for its business in a highly regulated market. What is your response to that?
A: Well, there is a perception among many people that a competitive market for electricity is better for consumers than a monopoly or vertically integrated utility. I've worked in both during my experience in the (United States) and I can tell you that a competitive market does not necessarily translate into better value for customers. And that's been seen in many jurisdictions that have deregulated their markets. It's being witnessed right now in Alberta where the market is deregulated and where political leaders there are very much concerned about the impact that deregulation's having on customer prices in that market.
I think the structure that we have here today is a very effective structure. Not perfect by any means but very, very effective. And, if there is an opportunity to lower prices for customers, by having renewable energy providers sell electricity directly to customers, I'd be happy to entertain that. But the fact of the matter is, customers would not buy that energy because it's much more expensive than the blended energy product that we sell today, which is a component of renewable, a component of gas-fired, coal-fired, hydro produced and imported energy, bundled together ... . Let's say for a megawatt hour of energy, the energy component may be $50, versus the $90 or a $100 you would need to pay for wind farm energy from an independent power producer. It's the simple economics. It wouldn't work today because energy from a wind farm is much more expensive than the blended product that we produce today.
Q: Top NSP executives saw pay increases of 23 per cent and more in the past year and the company has sent more than a billion dollars of profit to its parent company Emera. Why are such constant rate increases - 40 per cent over the past nine years - necessary and what is the reason for the most recent power rate increase request?
A: Just like any large company, Nova Scotia Power manages with an executive management team. I'm proud to tell you and tell anyone else that one of the jobs that I have is controlling the cost of that executive management team overall. And I mean every cost (salaries, travel, the cost of the pens and pencils they use) ... everything it takes to provide executive management. And in Nova Scotia Power last year, in 2011, the executive management in the company was cheaper than it was in 2010 ..., about the same as it was in 2007.
So, we've been able to keep our executive management costs relatively flat since 2007, in spite of inflation and all the other pressures that are on us ... by minimizing the number of executives that we have on the team, by having more executives take on more work.
The competitive salaries studies that we composed from across Canada require that we provide competitive compensation for the level of work that those executives are doing. So, some of them have seen increases in pay. In my particular case, which is the 23 per cent that you speak of, I assumed the responsibilities of chief operating officer and the CEO, which in the past there was another colleague who worked with us as chief operating officer, who did a lot of work.
I've assumed that job and other members of the executive have assumed part of that job and our salaries have gone up somewhat but not nearly to the level that was being paid to that executive who is now no longer with us. So that's how we've kept the costs flat at the top.
The concept of a billion dollars in profit being provided to Emera, it's the wrong framework in which to describe that. Number one, Nova Scotia Power has made almost a billion dollars worth of investment in the last four years in capital investments ... in wind farms and transmission upgrades and numerous activities that we've been involved in. Nearly a billion dollars invested in this province.
Where did that billion dollars come from? Well, it came from Emera in the form of equity investments and from financing from external banks.
And in return for that investment in Nova Scotia we have to pay interest payments to the banks, which we pay on an annual basis of about a hundred million dollars. And we have to pay interest payments to Emera or to our shareholders for the equity investment that they made, which turns out to be about a hundred million dollars. So that hundred million dollars a year that you see being made to Emera or to shareholders is a part of the financing cost of running a large, capital intensive organization like Nova Scotia Power. People characterize it ... when, in fact, it's just like paying the interest on your mortgage. It's part of borrowing money from somebody to facilitate what you need in order to operate.
And the reason for the rate increase request? There are a number of factors: the cost of the fuel that we use to make electricity is a significant factor that drives rates. The cost of infrastructure that's been built, particularly to meet our desire to get off of fossil fuels to move to more renewable infrastructure, or renewable energy assets.
We have to finance that and that causes higher interest payments, higher equity return payments, all of those things. And then a small amount just for general escalation in the operating costs of the business.
Q: Emera was created out of the privatization of the provincial Crown corporation Nova Scotia Power Inc. in 1991. Some of your 490,000 customers would think we would be better off under the old system. What's your reaction to that argument?
A: I believe in the structure and the system that is set up in Nova Scotia. We're not unique but we're relatively unique in Canada in terms of being an investor-owned and fully vertically integrated utility in a province. And vertically integrated means we do distribution, transmission and we generate electricity.
We have very advantageous situations in terms of how we're managed by government and by the regulator here to perform for customers. We have taken all of the risk of capital investment in the utility. We do all the financing work for what is a $4 billion enterprise. So that's been taken off the books of the province, in the privatization. Four billion dollars worth of expense and transferred to the private sector to be financed by them, managed by them.
As an operating manager I operate under all of the scrutiny of the regulator, in terms of compliance of fuel adjustment mechanisms and everything else that needs to be complied with and I also operate under all of the scrutiny of an investor-owned board directed shareholder organization that's traded on the Toronto Stock Exchange, which comes with its own level of intensity around being well managed and cost controlled.
And customers see all the benefit of that. So at the end of the day in our structure, government gets to make the regulations that we need to follow, the regulator gets to impose those regulations on the company, the company takes all of the risk of financing and compliance with the regulations and operations.
And it's resulted in a utility that when we benchmark our performance, we're a top quartile performer in Canada. We perform as well or better in almost all areas (including cost control) than any other utility in the country.
Q: NSP reportedly has a guaranteed rate of return that is higher than nine per cent, which Nova Scotians pay for through their power bills. Can you explain why this guaranteed rate is necessary?
A: The rate of return is set by the Utility and Review Board in a rate hearing process. And they set it so that is about the equivalent rates of return of all of the other utilities in Canada. It needs to be set that way, otherwise we couldn't effectively compete for the capital that we need to raise on the capital markets to make the investments to serve customers in Nova Scotia.
Q: The Liberals want NSP to undergo regular performance audits to ensure there is as little waste and inefficiency as possible within their organization. When NSP asks for a rate increase they want it to prove the company has trimmed its own fat before asking Nova Scotians for more money. How do you feel about that proposal?
A: We are regularly audited, externally by the Utility and Review Board and internally by our own processes as well as by our investors and shareholders to make sure that we are running as effectively as we possibly can be. So there are a lot of audits that happen and we behave prudently in terms of the operation of the business.
I understand why people would want to see more of that. There's a great deal of information that's already available. In fact, filed with our rate case is a very comprehensive audit of our utility's performance done by UMS and all of that information is available in the rate case filing.
I should point out that the most substantial audit or review of performance that happens for a utility, happens in the rate-making process. So every cost, every miniscule expense of a company is reviewed and validated by a myriad of experts and interveners in the rate-setting process, which is what we're in right now.
Q: NewPage and Bowater Mersey were two of your biggest customers and there has been talk that their demise will result in rate increases for other NSP customers to make up the shortfall. Is this true?
A: They are the largest energy-consuming segment of our company. Probably 17 per cent of the energy in Nova Scotia is going to supply the production of paper at those two mills so it's very significant. The situation that we're in today at those mills and in making their power payments, we're helping to pay for part of the fixed costs of infrastructure.
Part of the transmission lines, part of the power plants, the stuff that doesn't go away when load goes away. When load goes away, the amount of fuel that we buy is reduced.
But it's equivalent to having an apartment shared between four roommates. When one roommate moves out, it doesn't change the rent on the apartment. It needs to be split up among the other three until you get a new roommate. That's why we're working so hard with Pacific West Commercial Corporation right now. We're trying to get our roommate back.
Q: Does this mean that if everyone in Nova Scotia started using less energy - went uber green in effect - would the end result be that NSP would have to charge us more for using less?
A: No, not at all, because the more conservation that we all enact the less fuel we have to buy. If you have a $100 power bill, $50 of that power bill went to pay for fuel. The other $50 goes to pay the interests and operating costs on all of the fixed infrastructure that's in place to burn that fuel and deliver that electricity to you. So, the more that we can conserve, the less fuel we use and the better off we all are.
Q: In the opinion column that we published in the Truro Daily News on June 20, you talked about the rate stabilization plan. That indicates that it takes the troubles of the mills out of the picture for the next two years. But does that mean much larger increase requests are likely after that point?
A: What happens is, the mills were making a certain contribution to fixed costs, which they can no longer make. And if we follow a traditional rate making process, that means that other customers would need to make up those costs immediately....
We have a plan to deal with those costs for the next two years or so. We can take those costs and basically accumulate them in an account and then we know in 2015 that we have another expense that we incur that is going to be paid off.
It's another mortgage that we have today that we will have paid off. So the mortgage payments that we're making on that mortgage can then be used to pay down the mortgage of the preferred asset that we're creating. So, for the next couple of years we can mitigate that problem with the mills by replacing one expense with another and financing it until we get there.
But we need to work on a plan for how do we make up that loss in fixed cost recovery over the longer period of time? You know, we need more economic growth, we need a bigger population in Nova Scotia, we need all kinds of things.
And quite frankly, we need to be as efficient as we can be in the utility. That's why one of the steps that we've been taking is reducing the staffing in the company, closing our power plants, going to seasonal operations, which we've done at our Lingan plant in order to reduce costs. Because those plants, that energy is not needed when the pulp/paper industry is not running.
Q: Do you ever foresee power rates remaining stable for a few years and can you ever foresee the day when you will be asking for a one or two per cent increase, rather than three, four or eight per cent?
A: Well, believe me, there is nobody in Nova Scotia that would like to spend some time without having to deal with power rate increases more than me. I feel worse about this than anybody I'm sure. But the fact is, while we're dependent on fossil fuels, it would be the same as saying can you promise me there won't be an increase in gasoline prices. We just don't know. But what we do know is that if we make the right steps today and invest in the right things today, we set ourselves up for much better probability of having stability in the future, without betting the farm.
Q: Published reports indicate that you made more than $1.1 million in combined salary, bonuses and benefits last year. It's a 23 per cent increase over the previous year. What do you do to merit that kind of an increase?
A: In a private company like ours, there are very diligent processes that are followed by the board of directors to set executive compensation. And that's consistent with every public company in Canada. There are consultants who are hired to do reviews and essentially my compensation is set to be about the average of every other CEO in Canada who runs a similar company to Nova Scotia Power.
And there's some adjustments made for an assumption that it's cheaper to live in Nova Scotia than it is in Toronto. But on the whole our board of directors has a requirement to shareholders and to customers to demonstrate that executive compensation is not out of line with the compensation of anybody in a similar role in this country and that is the way my compensation is set.
Q: Given that electricity is an essential service ..., for some low-income families that rely on electricity for their heat ... if they were sitting here, how do you justify not only your own salary but that of all of the executives in the company who also make high salaries and bonuses?
A: I'm absolutely aware of the situation with low-income customers. Earlier this week we had a workshop with representatives of organizations that work with low-income customers to explore opportunities for the company to be more supportive than we can be under the current regulations that exist in Nova Scotia to try to find ways to help. And I understand why people would be concerned when they look at a compensation level of a salary like mine.
But the fact is we're trying to run an effective utility and attract executives that are capable and competent and can do the best for customers to manage this business and in this country we have to be competitive with any other province or any other business. Executive compensation included in rates has actually gone down, not up. It's not a factor in driving rates at all.
Q: What's the biggest misconception that the public and possibly politicians have about Nova Scotia Power?
A: I've heard people say that they believe Nova Scotia Power is owned by a foreign organization. Many people don't realize that Nova Scotia Power is owned by Emera, which is a Nova Scotian company that's headquartered in Halifax, that employs many other Nova Scotians who are working on energy projects all over North America, Canada, the U.S., the Caribbean and in other parts of the world. It is a successful, international energy company. It's unique in this market ..., it's a tremendous attribute to the economy of Nova Scotia and it's a bit of an icon of international success.
But there's some misperception about what it really stands for and how it's succeeded. Emera's succeeded not by drawing money from Nova Scotia Power as people often say it does. It's succeeded by using the characteristics of good Nova Scotian hard work and practical thinking, ingenuity and valuing relationships with people and being direct and honest. All of those values that we have in Nova Scotia Power are reflected in Emera and that's the foundation of how Emera has succeeded in these other energy markets. And I'm extremely proud of that."