23 January 2012

Wading through Locke on Muskrat (Part 1) #nlpoli #cdnpoli

An hour-long presentation, 48 slides and an interview with David Cochrane.

For all that, some apparent confusion lingers about what Memorial University economist Wade Locke included in his presentation and what he didn’t.

Let’s see if we can pick our way through the entire thing and assess Locke’s comments in detail.

The Topic

“Muskrat Falls:  The Best Option?”.  That was the title of the presentation on January 17.

The advance publicity included these questions, suggesting that the talk would cover the topics they mention.

“Is this the best option for meeting the province’s need for energy? Will we be paying too much to generate electricity? Are there other technologies which will provide lower cost energy and still meet the expected demand? Are the costs of the project, the estimated cost of oil and other important factors realistic? Will the province be burdened with unmanageable debt?”

The poster for the event contained fewer questions but the general sense remains of what the presentation would contain.

The Slides and the Video

In keeping with its usual practice, the Harris Centre broadcast the presentation via the Internet and made both the slides and the video available online the day after the session.

Locke also appeared on CBC’s On Point on Saturday. 

What follows, as far as Locke’s comments are concerned, is all taken  from those sources.

Locke and Muskrat Falls

Slide 2 is Locke’s outline for the presentation.  His outline included these points:

  • Introduction
  • Why get involved?
  • How did NALCOR Derive the Price?
  • Island Load Forecast Production Mix
  • Can we price ourselves out?
  • C.D. Howe Study
  • Cost Comparison of Alternatives
  • Calculating the Supply Price
  • Oil and Gas Prices
  • Lower Fuel Cost – A Viable Alternative
  • Is Natural Gas an Alternative?
  • LNG
  • NL Electric Bills
  • Shale Gas
  • Debt Burden
  • Conclusion

Slide 3 is the Introduction.  Locke notes that "he has been “on the record as supporting the Muskrat Falls Development as a good for the province” but that David Vardy’s assessment caused Locke “to look more closely at the issues.”

On slides 4 and 5 Locke deals with some of the public comments made online about him and his relationship to Nalcor and the provincial government.  Locke states that he is “not under contract to NALCOR or the provincial government for anything pertaining to Muskrat Falls.” [Emphasis added]

On Slide 6, Locke gives the three questions that he believes needs to be answered.  Even with the introduction, this suggests that Locke’s presentation will address these questions:

    • Do we need the power?
    • Can we avoid the need?
    • What is the least cost alternative?

Deriving the Price

Slides 7 and 8 describe the process by which Locke suggests that Nalcor derives what Locke terms as the “price associated with Muskrat Falls.” Locke doesn’t make clear what price he is referring to. He also doesn’t give any firm indication where he gets the information.   The use of wording such as “would have” makes the whole thing appear highly speculative and uncertain.

The most significant comment in this pair of slides, though, is Locke’s reference that the cost of the project “is 100% equity financed (NL Gov.) and that the required rate of return would be 12%.”  This appears to come from PUB Exhibit 15.

There are very few public comments about how Nalcor and the provincial government propose to structure the corporate ownership of the project. We’ll take a deeper look at this as we progress through the slides and in a future SRBP post on project financing.

The second most significant comment is this one:

Eight, this gives them a revenue flow that ignores initially the potential revenue from the residual energy and the Nova Scotia 20% commitment…”.

This confirms that the financial model for the entire project, including a guaranteed profit for an equity interest holders, is based entirely on the sale of power within Newfoundland and Labrador.  There are no export sales at all.

Locke does hint at the potential for other sales in the last bullet on Slide 8.  What he doesn’t do here or anywhere else is examine the potential export market, the cost implications of the proposed routing, or the physical capacity on the proposed line to Nova scotia that would limit the export potential of that line.

In other words, Locke holds out a prospect here of export sales without assessing – at any point – if this prospect is real or entirely theoretical.  That’s a major shortcoming of his presentation.

The Need

Slide 9 is a graphical representation of the forecast demand on the island for 2010 to 2067.

This is not new information. You can find details in the joint environmental assessment panel documents and the public utilities board documents. 

Locke’s comment on the bottom seems to be a defence of the people who made the forecast: “ I have no reason to believe that they are motivated by anything other than to do their job as best they
can.”  Locke offers no assessment beyond stating that he thinks the forecast is “reasonable.” He does not explain why he thinks this or how he came to the conclusion.

Note, however, that except for the arrival of Long Harbour in about 2016 and two other years where annual growth is forecast to be above 1.0%, growth is consistently less than one percent.

Note as well, that demand isn;t forecast to exceed 10,000 gigawatt hours until about 2036, i.e. five years before the end of the 1969 Hydro-Quebec contract for Churchill Falls power.

This information appears to come from PUB Exhibit 16.  This is a document Kathy Dunderdale has erroneously called a strategy.  Exhibit 16 is a planning document.  It describes the demand forecasts, generation capacity and planning assumption that Nalcor uses to manage the island electricity system using two scenarios.

Comparison of Total Production Mix;  Isolated Island versus Infeed

In Slide 10, Locke presents what is essentially the stock Nalcor comparison. It matches PUB Exhibit 99.  On the left, the generating requirement after 2036 is met by an increased thermal output from what appears to be a thermal generator replacement for Holyrood that burns Bunker C, like Holyrood.

Blow the slide up, if you need to and see if you can find any amount of wind energy.  Essentially, there isn’t any beyond the modest amount already in place. In the “Infeed” scenario, wind appears to vanish as a power source.

“Infeed” means Muskrat Falls.

The Feehan Straw Man

Locke devotes six slides (Slides 11 to 16) to deal with the approach proposed by Memorial University economist Jim Feehan in a paper released on January 11, 2012. That’s about 14% off Locke’s presentation not including the title slide and the introduction and conclusion.

Locke misrepresents Feehan’s paper, particularly on slide 15 when he refers to jacking up prices by 80% above current levels. Feehan did not suggest price changes as a way of avoiding increased generation by wiping out the demand need. 

Feehan suggested using a different pricing approach to induce a change in how demand grows.  A change in the pricing approach would also reduce the difference between what it costs Nalcor to run Holyrood – when it does – and what Nalcor recovers from the current electricity rate on the island.

When Locke notes in red that on slide 13 that “It does not appear that NL is highly subsidized relative to other jurisdictions” there is no information in the presentation to back that up.  Slides 13 and 14 only show the cost per kilowatt hour for electricity paid by consumers in Canada compared to an average.  It does not give any information on the difference between what the electricity costs to produce and what consumers pay.

Slide 16 contains incorrect information.  Locke claims that “In July 1, 2011, rates rose by 7% because fuel costs increased from $84/bbl to $103/bbl. That is, prices are going up anyway in the presence of higher oil prices.”  Prices may move up and down based on several factors including oil prices and the amount of oil used by Nalcor to generate electricity. This is an important distinction.

Supply Price

This slide (17) is a bit of a head scratcher and Locke did not explain what all the lines meant.  The slide excludes significant information and anyone reading this slide who wasn’t familiar with the issues could be easily mislead as a result.  The “supply price” is the assumed cost of generating electricity at Muskrat Falls.  The figure is given as a cost per megawatt hour.

Problem:  this slide excludes transportation and other costs that would added to give a final cost to the consumer.

Locke did not indicate what “energy adj. [usted?] for inflation” means.

Slide 17 repeats the supply price information. It also omits crucial information to determine the cost per kilowatt hour for consumers.  As such, the slide lowballs the costs and also gives a false comparison were someone to compare this cost to the ones presented on slides 13 and 14, for example.

This slide also contains the claim that:

The higher the required return, the higher the monthly electricity cost to the ratepayer and the larger will be the dividend to the shareholders and the better off are taxpayers (more expenditures, lower taxes or reduced public debt).

Nothing in the presentation deals with those concepts. Locke doesn’t give any clue as to where he got these ideas from.

Certainly, logic suggests that a higher rate of return would require a higher cost to the consumer.  A higher rate of return does not necessarily mean that the dividend would be greater for the shareholders of the public and private sector companies involved in a project.

Another Unsubstantiated Claim

And on the last claim, Locke has absolutely no information to support his contention that taxpayers would be “better” off paying a higher profit margin and consequent higher unit price to companies in the public sector or private sector.  Each of the three benefits Locke claims would flow are all matters to be decided by a future provincial government at a future time based on factors Locke doesn’t consider in this presentation or anywhere else.

[In Part 2, SRBP will start at Slide 20]

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