17 May 2012

How’s that again, Jerome? #nlpoli

Natural resources minister Jerome Kennedy in the House of Assembly on Wednesday explaining some of the financial aspects of Muskrat Falls:

The one thing I need to make clear though to the people of this Province that any equity investment in Nalcor is on the basis of the project being sanctioned. The money stays in the Department of Natural Resources and is then disbursed to Nalcor as money is spent, Mr. Speaker. Also, it does not go to the net debt of the Province because it is a capital investment. In this particular case, Mr. Speaker, we have a revenue generating asset which can produce monies and revenues for this Province, along with hydroelectricity, for 100 years. [Emphasis added]

In the first bit he describes how the cash goes from the provincial government to Nalcor.  That would be the $2.9 billion they plan to spend on the dam itself. 

The problem comes with that bit in bold print.

The cash transferred to Nalcor would not go toward calculating the net debt.  You see “net debt” is nothing more than an accountant’s calculation of everything you owe, less any assets.  Once you spend the cash – as in transfer the equity – you don’t have it as an asset any more.

What you might try to do is count what you bought as an asset.  In this case it would be the dam and the transmission lines.  But since those things would be owned by Nalcor, you’d have a hard time counting them as an asset of the provincial government directly.

So what is Kennedy getting at here?

Well, it looks like he is trying to say that the provincial “net debt” is going to go up, but he would have a hard time squaring that with the claim that he and his colleagues have paid down the public debt.  If he were to say straight out that the “net debt” will go up, Kennedy would be telling the truth. And he’d be acknowledging what your humble e-scribbler and others have already said.

We won’t get into the rest of the public debt implications of the Muskrat mess right now.  Let’s just leave that one to sit with you:  the “net debt” will be going up if they build Muskrat Falls.

What we will look is the last bit:

…we have a revenue generating asset which can produce monies and revenues for this Province, along with hydroelectricity, for 100 years.


Well, Nalcor justified this project solely on the basis of selling the electricity from it in Newfoundland and Labrador.  No export sales at all.  Just sold in the province.

And for the first 15 years or more, you likely won’t be using the electricity from the project for more than a few weeks in the winter time.  You will pay higher electricity rates all year long.  No one knows today how much higher your rates will be.  That depends on the final cost of the project.

But you will pay more, guaranteed.  Nalcor based their projections on that fact.  Muskrat Falls isn’t supposed to bring in any new money from selling electricity to Quebec, Ontario or anywhere else. 

Here’s how Nalcor answered one question from the public utilities board process:

For the purposes of analysis, Nalcor has assumed there are no export sales and consequently, Hydro customers are assumed to pay the full cost of Muskrat Falls and the Labrador Island Transmission Link. [Emphasis added]

Cool, eh?

Given the development of electricity from different types of natural gas,  Muskrat Falls electricity would likely never be competitive in the North American marketplace, even on the spot market. Sure, you will hear Kennedy and some others talking about export sales but don’t hold your breath waiting for it to happen.

So really, Muskrat Falls is less about bringing in revenue and “producing monies” as it is about creating a whole new kind of tax on local taxpayers.  Interesting notion, isn’t it.  We spend billions in cash, increase the public debt and we don’t make any money off it. We just create a whole new tax so we can buy the electricity we already paid for.

And that tax is called Muskrat Falls.