12 May 2014

The market is closed, Ken. #nlpoli

Part of the problem the folks at Nalcor have had in trying to build support for on Muskrat Falls is that they never explain things completely, in plain English.

The result is that they look like they are hiding something .That is, they look like they are not being candid or sincere.  They often come across as if they are not telling you the whole story.

Take as a fine example, the war of words that is erupting between Nalcor board chair Ken Marshall on the one hand and David Vardy and Ron Penney on the other. Marshall had a lengthy op-ed piece one Saturday,  Vardy and Penney had a rebuttal on April 19 and now Marshall is back again.

One issue is the monopoly that Nalcor has on the domestic market.

Here’s what Vardy and Penney asked in April:

8. Why did the province enshrine in legislation the monopoly power of Nalcor and limit free trade in electrical power, thereby contradicting the province’s long standing position in favour of free trade in energy from one province to another (e.g., wheeling power through Quebec) and across national boundaries?

Here’s what Marshall said most recently, in answer to that question:

Bill 61 provided the certainty Nalcor required to achieve competitive financing terms for the project by demonstrating to the federal government and lenders that there was a guaranteed customer (Hydro) and revenue stream to service the project debt. Open access on the provincial electricity grid is not impacted by Bill 61 and this bill does not change Hydro’s obligations to provide open access for interprovincial electricity transmission, as required by market rules and reciprocity obligations where Nalcor/Hydro operate. Franchise rights similar to those granted to Hydro in Bill 61 are common in other jurisdictions that have open transmission access.

Bill 61 amended a couple of pieces of legislation to give Nalcor a monopoly on electricity supply, sales, and transmission in a part of the province.  In the summary of the purposes of the bill right at the beginning,  you will find these words:

*  provide to Newfoundland and Labrador Hydro the exclusive right to supply, distribute and sell electrical power or energy to a retailer or an industrial customer in respect of the business or operations of that retailer or industrial customer on the island portion of the province, subject to certain exceptions; and

*  require that a retailer or an industrial customer buy electrical power or energy from Newfoundland and Labrador Hydro in respect of the business or operations of that retailer or industrial customer on the island portion of the province.

That’s pretty clear. 

If you are on the island portion of the province and you want to make electricity,  sell it, or fire it down transmission lines, you must be a Nalcor subsidiary named Newfoundland and Labrador Hydro.  No one else can do that.

So a person who builds an energy efficient house and wants to sell surplus electricity from the house into the grid is legally prohibited from doing so. 

Anywhere else in North America that sort of project is not just legal, it’s encouraged. 

In this province:  verboten.  Forbidden.  Not allowed.

Nalcor will force taxpayers to cover all costs

Next to that bit of clarity,  note Marshall’s explanation of why  Nalcor has a monopoly.  It is not clear. 

Here’s the explanation in words you will definitely understand: Nalcor has a monopoly – the market is closed – because Nalcor required the certainty of a captive market in order “to achieve competitive financing terms for the project by demonstrating to the federal government and lenders that there was a guaranteed customer (Hydro) and revenue stream to service the project debt.”

In order to get the billions in loans this project will need,  Nalcor need guaranteed income.  Since Nalcor could not find any customers anywhere for the electricity outside the province, Nalcor got the provincial government to agree that every single person in the province would be forced to pay for the electricity

All of it.

Plus profit for the companies involved.

However much it takes.

There are no other customers for this electricity except the ones on the island.  SRBP has pointed that out since before Danny Williams announced this project.  Nalcor built the entire plan on its ability to force domestic customers to pay whatever it takes to fund the project.

The provincial government passed Bill 61 because without giving Nalcor an absolute monopoly over electricity,  they’d never be able to get enough cash from banks and other lenders to build it.  This is, without a doubt one of the most expensive and – given the necessity of a monopoly – one of the least economically viable projects imaginable. 

But there it is.

Nalcor confirms scheme

Nalcor has since confirmed that you can get cheaper electricity anywhere else.  Last December, some company officials told the Telegram about the plan to buy electricity more cheaply than they can produce it outside the province and import it to meet local needs not just once in a while but regularly.

In other words,  if Newfoundland Power could find cheaper electricity for its customers in Quebec or Maine,  they could bring it here and sell it for less than the hugely expensive Muskrat Falls.  That would be bad because no one will buy Muskrat Falls power:  it is too expensive.  Nalcor has known that since before they announced the project in late 2010.


So the market in the province is effectively closed to competition.

And Muskrat Falls is not the cheapest way to meet the province’s electricity needs.  Logically if they can buy cheaper electricity outside the province…  d’uh.

And that thing about 98% green isn’t true either. If Nalcor is willing to buy electricity from any source because it is cheaper… well, they can’t truthfully claim that the province’s electricity supply will be 98% green.

American Trade Rules Favour Competition, not Monopoly

Marshall says that everything is okay because you can still send electricity through the province and that meets the American transmission rules, commonly known as FERC Order 888.  It dates from the mid-1990s and means that if you want to sell electricity into the United States, you have to provide competitive access to your transmission grid as well.

What Marshall and the other folks at Nalcor will tell you is that their grid will be open.  You just won’t be able to sell any electricity from outside into Newfoundland and Labrador.   So the lines are open but the market is closed.

There’s no small contradiction here in that Nalcor has been  arguing all along that it wanted open competition into the American market.  They accused Hydro-Quebec of opposing competition.  Well, as it turns out, Nalcor is the only electricity company in the only jurisdiction in northeastern North America that runs a closed system with no competition. 

By the way,  that isn;t the only contradiction, the only bit of hypocrisy in all this. The St. John’s Board of Trade is the largest business lobby in the province.  The Board backs Muskrat Falls and the anti-competition legislation that supports it.

But that’s a whole other issue.  Let’s get back to the mess at hand.

Untested Assumptions Lead to Problems

Before we go one step farther, let’s point out that Marshall’s interpretation is – at best – untested in court.  Nalcor likes to claim lots of things and that what they do is perfect.  Hydro-Quebec and water management.  January blackouts.  Lots of claims from Nalcor that proved to be false.

Beyond that, though, there are three specific points worth noting.

First,  there’s not really any situation one can think of where Nova Scotia  or New Brunswick or anyone else on the eastern seaboard of North America might want to send electricity through Newfoundland and Labrador to Quebec or – frankly – vice versa.  It’s the longest way round and it would be extremely costly.  There are shorter and cheaper routes just like there are cheaper sources of electricity than Muskrat Falls. 

So even if the line were actually open,  it’s not really situated such as to provide an attractive option.

Second, Bill 61 makes no specific mention of transmission through the province.  It still reads as if the proposed island interconnections to the mainland don’t exist.  The purpose of Bill 61 was to preserve Nalcor’s existing monopoly on the island portion of the province in order to fund Muskrat Falls.

But open transmission? 

Not mentioned.

There’s also no mention of competition in the provincial government energy plan.

In other words, we won’t know what the actual policy will be until some time in the future and so we are quickly back to the untested Nalcor assertion.

Third,  there’s a huge problem with the physical way that Nalcor has built the interconnections that would make wheeling very difficult.  We’ve talked about it before in a discussion of why Nalcor plans to meet Nova Scotia’s power need from an old, cheap source at Bay d’ Espoir and deliver the most expensive electricity in North America to its monopoly in Newfoundland.

To get power to or from Nova Scotia via Newfoundland and Labrador, you have to send it vice high voltage direct current, then convert it to alternating current within the province and then convert it back again to efficiently export it.  You have to do the same thing no matter whether you are coming down through or up through the island.

In other words, if you look ahead to some time around 2020, there will be an HVDC line from Bay d’Espoir to Nova Scotia.  There’s another one from St. John’s up to Labrador.  In between there is the domestic AC transmission.  That adds hugely to the cost of transmission because at each conversion you shed electricity.  The transmission losses are ridiculous.  No one in his or her right mind would do it.

Then there’s the issue of line capacity.  Nalcor would have to upgrade the existing transmission grid to handle that extra load for wheeling and may well have to build entirely new capacity that – frankly – they don’t have now.  Now if, on the extremely off chance, someone wanted to wheel through the province,  they would likely have to pay to install the capacity.  That only adds more cost to an already co9stly solution.

Taken altogether, you can see that while Ken’s words look wonderful, the reality behind them is a lot less perfect.  Indeed, Ken really isn’t clearly giving the whole story.  Truth is, the whole truth doesn’t look much like what Ken said. 

The electricity market in Newfoundland and Labrador is closed no matter how you look at it.