20 November 2013

20 Answers to the Telly’s 20 Questions (Part 2) #nlpoli

(Continued from Part 1)

On October 19, Russell Wangersky wrote a column for The Telegram entitled "20 questions for the premier." Mr. Wangersky posed questions about the development of the Muskrat Falls project.

On November 9, Premier Kathy Dunderdale replied.

Unfortunately, the Premier did not provide much factual information. In the interest of informing Newfoundlanders and Labradorians on this important issue, here are 20 clear answers to 20 clear questions. The information presented here comes from the provincial government and Nalcor as well as publicly available information, such as  electricity markets across northeastern North America.  The post includes links to background information.

The Second 10 Questions

Question 11: Overall, are the bids that Nalcor is receiving in line with its expectations?

A:  The Premier’s answer was that she was pleased with the level of participation and the “significant” level of attention the project had received.  Then right at the end, she says the project bids are in line with Nalcor expectations.  She never explains what those expectations are.

90 words.

No concrete information.

Construction companies like government projects because payment is guaranteed. They can’t really lose, no matter what.  At Muskrat Falls, they really like the project because the provincial government decided to go ahead without all the facts and with an implicit promise to cover costs, no matter how high they go.  The companies are probably figuring that if this is the greatest project in the history of mankind – to paraphrase government rhetoric -  then it’s highly unlikely they will let something like climbing costs get in the way of finishing the job.

Question 12: Why can't taxpayers know what individual bid prices are?

A:  The owners of a private sector company would  get far more information on a major project than the people of Newfoundland and Labrador are getting on Muskrat Falls.  Even the shareholders of a publicly-traded, private company would potentially get more information.

Nalcor isn’t a normal company.  It’s not even a normal government-owned company.  Over the years,  successive provincial government have removed most of the meaningful public oversight of the company.  The company has become as much about patronage as anything else, with members of the board appointed for their personal and political connections to cabinet rather than their competence in directing an energy corporation. The government is following some of the worst management practices for publicly owned companies.

But that is nothing new: it’s been the provincial Conservative policy since 2003.  Take access to information, for example. Long before Bill 29, Kathy Dunderdale and her colleagues decided to make most of Nalcor’s business dealings secret from the people who will pay the bills.  There’s nothing new in the way Nalcor and the provincial government are handling Muskrat Falls. What’s amazing is that people who now wonder about the lack of information apparently didn’t notice what happened in 2008.

As for the “benefits” report the Premier mentioned in her answer to the Telegram, is a political document, not one that demonstrates that either Nalcor or the provincial government are genuinely accountable to the people who pay the bills. It just tells you how much money Nalcor spent in the previous month and where the people working on the project are from.

Question 13: Is the project on budget?

A: This was a simple question that needed a simple “yes” or “no” answer. Kathy Dunderdale took 129 words before she said that the project is “generally” on budget. The people who wrote the answer for her also used lots of cloudy phrases like “upside potential”.

Whenever people avoid straight answers and plain language, you should be concerned that the answer you got and the truth aren’t even on the same planet let alone of the same species.

Remember, as well, that we we talk about being “on budget”, Nalcor’s planning allows for significant cost increases beyond the numbers they’ve used publicly that would still fall within the range of possible costs they estimated. 

And then there’s the North Spur.  If it turns out to be a major problem, Nalcor’s existing estimates won’t cover it.

Question 14: How have the project's economics changed with the dramatic weakening of long-term oil prices?

A: You can tell the project economics are getting worse and worse because the politicians behind it are telling you more and more that everything is great.

The truth is that this project made no economic sense after 2010. The original idea – up to 2010 – was to build the larger, more cost-effective dam at Gull Island and sell the electricity into the United States and the rest of Canada at a profit. By 2010, the Americans were making electricity from shale gas at prices far lower than the Lower Churchill could ever match. Prices in Canada dropped, too, as we noted in the answer to Question 4.  Hydro-Quebec’s revenue from American electricity sales have dropped by up to 30% in recent years.  The company recently agreed to sell electricity to one New England state for a mere five cents a kilowatt hour for 25 years.

Over the past 35 years,  provincial governments in this province have walked away from a Lower Churchill development when the economics of the project didn’t work for the people of the province.  The most sensible thing to do in 2010 was to shelve the project.  Instead, Nalcor and the provincial government ploughed on and invented a new version that will force the people of the province cover all the costs and the profits while delivering free electricity to Nova Scotians and heavily subsidised electricity to mining companies in Labrador or any other place that wants to take it on the spot market.

This is a long answer but since we are talking about financial issues, let’s talk about oil prices.  Muskrat Falls was never really about replacing the Holyrood plant and getting away from petroleum costs altogether.  Nalcor plans to build new generators that run on petroleum (gasoline, diesel, Bunker C etc) because a reliable system needs different methods of making electricity.

The oil price issue with Muskrat Falls is not about making oil-fired generation cheaper. Low oil prices will cut how much the provincial government gets from oil royalties. Lower royalties would make it harder for the provincial government to cover its spending on hospitals and schools and at the same time pay for costs Muskrat Falls either now or in the future. Ultimately that will affect electricity rates.  Whether it is through the provincial government taxes or the Muskrat Falls tax (electricity rates) taxpayers will have to bear the burden.

The provincial government is heavily dependent on oil money.  When she talks with certainty about what oil prices will be 30 or 40 years from now, Kathy Dunderdale should remember that no one can predict the future. Brinco couldn’t do it in 1969. Jo-Jo and her psychic alliance can’t do it in a late night infomercial.  And Kathy Dunderdale and her best advisors can’t do it either, no matter how much smarter than everyone else she thinks they are.

Question 15: With ratepayers in this province responsible for the full cost of the dam and transmission line, how will electricity prices be kept competitive for industrial users?

A:  Provincial government policy is simple:  In order to keep industrial rates competitive, they would have to force residential consumers to pick up the extra costs either through their own electricity rates or through other subsidies from the provincial government.

Bill 61 – passed last December – deliberately stripped away one of the most reliable ways of delivering competitive, fair electricity prices for consumers and industries alike in Newfoundland.  The provincial government knowingly banished competition from the marketplace.  At the same time, Bill 61 gave cabinet powers that would – in effect – allow it to dictate electricity prices in the province.

In Labrador, the current provincial government created a scheme that will deliver heavily subsidized electricity to industries in Labrador in order to prevent companies from importing cheaper electricity from Quebec.

While they’ve tried to raise industrial electricity rates already, the provincial government won’t be able to increase industrial electricity rates to pay for Muskrat Falls without causing serious problems. When the Premier met with Vale officials in Brazil last month, the company told the Premier they were concerned about the cost of electricity for the new Long Harbour plant. Vale also filed serious objections with the public utilities board about Nalcor’s capital works plans for the next few years. Other industrial electricity users on the island are also concerned about rising electricity costs.

Question 16: If industrial prices remain competitive - something that's now, post-Muskrat, set by the provincial cabinet - how much will other users have to pay to make up for industrial discounts?

A: The Premier wrote: “This government has not put in place any policy that will change the way industrial electricity rates are set on the island. The board of commissioners of public utilities will continue to set electricity rates for both residential and industrial consumers.”

Simply put, that’s just not true. Go read the text of Bill 61 for yourself.

The answer to the question is as politically difficult as it is simple to state:  no one knows how much consumers will have to pay.

Question 17: How low will rates for the mainland sale of power have to be to be considered "cost-effective" by U.S. governors?

A:   As the Premier said, electricity prices in the United States are set by the market, not by government. That’s why it is strange the Premier told Telegram readers at the start of her article that the American governors are interested in Muskrat Falls. Truth is they don’t buy electricity for their states or set prices. Who cares what they think?

As for renewable energy premium prices, something the Premier mentioned, some states do offer incentives for electricity from renewable sources but most don’t consider Muskrat Falls fits that bill.

The main problem for Muskrat Falls in the marketplace is that the electricity from the project is just too expensive. Even if Nalcor gave away the electricity for market prices (25% of production cost or less), the cost of transmission from Labrador to the United States would likely drive the price too high to make money at it. Nalcor has had trouble in some years making money from selling a bit of Churchill Falls electricity to Emera in New York through Quebec along the lowest cost route to market they could get.  That’s why Nalcor plans to force local taxpayers to cover all the costs of Muskrat Falls instead of selling the electricity into the United States at a profit.

Question 18: Have negotiations to "sweeten the pot" to match the expectations of Nova Scotia's power regulator taken place?

A:   Since Mr. Wangersky originally asked that questioned, we’ve learned that the answer was “yes”.

The politicians have been so anxious to sign deals for Muskrat Falls that they have already sweetened the pot for Emera to near diabetic levels. The Premier told the House of Assembly on Tuesday that Emera will pay market prices for its basic block of electricity.  That’s not true. They get it for no cost per kilowatt hour or any other annual charge. Emera also gets a share of electricity transmitted within the province.  That part of the deal will expire more than 70 years from now, even if there’s no Maritime Link. On top of that, the recent agreement commits Nalcor to supply additional electricity to Emera at rates well below the cost of making it at Muskrat Falls.

Question 19: What's on the table in those negotiations?

A:  The UARB wanted a guaranteed supply of additional electricity at market prices. Basically, Nalcor has offered whatever extra electricity Nalcor can produce in years when we have more rain than usual.

Will that be good enough?  We’ll know soon enough.

In her answer, the Premier claimed that the price for this extra electricity will be the same as Nalcor could get “in the lucrative U.S. market.” Well, as we’ve noted already, the American market isn’t all that lucrative any more. More importantly, whatever the market price is, we know it is far below the cost of making the electricity in Labrador and delivering in the United States whether across Nova Scotia or Quebec.

Question 20:   Why is there so much we're not allowed to know?

A:  For all the information the provincial government claims it has released about Muskrat Falls, the fact is that the provincial government hasn’t let any genuinely independent agency review the project that could – as in Nova Scotia – stop it if the numbers didn’t add up.

The joint federal-provincial environmental review panel concluded that Nalcor failed to make its case. 


The terms of the public utilities board review were dictated by Nalcor and the provincial government.  The board had no power to halt the project or change it:  the Lower Churchill project is exempt from the public utilities board’s jurisdiction by cabinet order.

At the same time, the provincial government has never released information on many of the key issues, such as alternatives to meet domestic electricity needs. The reason is simple: Nalcor never did the studies in 2010 when they should have. Instead, the provincial government paid consultants to produce reports based on information and conditions set by the provincial government to deliver the answer they wanted.

All of that makes the Premier’s claims about the transparency of this project like so much of what she has said about it:  simply not true.