Interesting idea, no?
Well, that’s what Jim Feehan suggested last week. He told a luncheon meeting of the St. John’s Rotary Club that the government should consider financing the rest of Muskrat Falls through a special tax. Start paying today, Feehan said, and avoid borrowing money and paying that money plus the interest in the future.
Don’t dismiss the notion quite so quickly. There is some sense in the idea. But before you give a big thumbs up to Feehan’s idea, though, consider all the details.
Consider, for example, that we learned the provincial government is having some trouble raising cash in the long term bond markets. That means Muskrat Falls is going to have trouble with financing. If we can't just scrap the project altogether, then they’ll either have a hard time raising enough cash or the only way to get cash would be to offer a really high rate of interest. That only jacks the cost up higher for the project.
In that context, Feehan’s idea makes a lot of sense. It’s like a pay-as-you-go arrangement. The problem is that we are talking about raising something between $3 and $5 billion to finish the project. The Auditor General’s 2015 report on the public accounts listed about $3.0 billion in commitments for Muskrat Falls we have to finance. All things considered, you can probably tack another couple of billion on that.
That’s on top of the $5 billion already spent and paid for with money raised under the federal loan guarantee. The thing about the two pots of cash is that the federally-backed money is at a lower interest rate than the money we will borrow on our own. The rest of the project and any more cost over-runs are going to get more and more expensive and the project is not even half finished yet. If we can't stop the project in the first place - by far the best option - we could pay as we go and avoid a big interest bill, then that makes a huge amount of sense.
But in another context, imposing a new tax in order to build a new tax is just another sign of the fundamentally nutty idea of Muskrat Falls in the first place. Regular readers should be familiar with this idea, but for those who aren’t, you really need to understand how much of a change Muskrat Falls is for the province’s energy policy.
Until the Williams Conservatives came along, governments of Newfoundland and Labrador set up electricity services so that - by law – they delivered the lowest cost electricity to the consumer. Electricity is a necessary service, after all, so the government quite sensibly decided that people ought to have reliable service of the quality they needed at the lowest cost. To make sure electricity was delivered at the lowest cost, government set up the public utilities board as an independent committee to set the rates.
And that worked for decades.
The provincial Conservatives demolished the provincial energy policy in 2010 with the announcement of Muskrat Falls. They sealed its fate in 2012 when they introduced new laws that gave Nalcor a monopoly on electricity generation in the province and gave cabinet the ability to set electricity rates. That was done solely to protect Nalcor since Muskrat Falls is not the cheapest source of electricity for the province's consumers.
You see, Muskrat Falls has always been about making money for the government. In fact, they’ve been quite truthful when they talked about Muskrat Falls generating revenue for the government. The part they downplayed was where the money came from. They really didn’t want to admit the only source of the cash was domestic ratepayers.
You and me, in other words.
Free electricity to Emera plus cash for Emera from transmission
No one else is definitely paying for anything the Muskrat Falls plant produces and certainly no one is paying the entire cost of producing the electricity. The issue was so sensitive for Nalcor and the Conservatives that they actually made up stories to pretend it wasn’t really true. Take Emera, for example. The company gets a block of electricity, guaranteed, for 35 years. They pay nothing for it.
The people behind Muskrat Falls insist that Emera is paying for the electricity by building the link to Cape Breton. Well, no. Emera is paying for a transmission line. They pay absolutely nothing at all for 35 years of electricity. It’s amazing the number of sensible and intelligence people who will try and tell you that Emera is paying for electricity when they aren’t. Frightening might be a better word.
What’s worse, actually is that Emera not only gets free electricity but they make money off shipping it through the province Part of the Muskrat Falls deal is a partial privatization of the electricity grid in the province. Emera gets a piece of electricity transmission on the Labrador link until some time in the 2080s. We pay to move the electricity along the line: Emera makes money off it.
The whole thing gets even more perverse when you realise that, in all likelihood, Nalcor will send its block of free electricity to Nova Scotia from Bay d’Espoir. That way they avoid the whole business of shunting the electricity from Labrador all the way to St. John’s, converting from direct current to alternating current, sending it back along another transmission line to the west end of the Bay d’Espoir complex, converting it back to direct current and then sending it to Nova Scotia.
All that distance and conversion loses electricity It makes more sense to take electricity from Newfoundland to give to Nova Scotia and then use the Labrador power on the island. But it also means that on top of its free block of electricity, Emera gets to make money off all the electricity run down the line from Labrador to the island.
No exports worth speaking of, either
Some folks also think that there are sales to other places. Export sales. Well, no, not really. Muskrat Falls electricity is too expensive. No one will buy it at full price. The best estimate anyone can come up with is that Nalcor might make about $80 million from selling electricity on the spot market. Folks in Newfoundland and Labrador will pay at least five times that much.
So there you have it: Muskrat Falls = tax on Newfoundlanders and Labradorians to the tune of at least $400 million a year.
If you think all that is bad, hang on for a bit more.
It gets better.
The first payment on the money raised under the federal loan guarantee is due the year the project was supposed to generate first power. Delays in construction mean that we will actually have to start paying for Muskrat Falls before the thing is even finished. That could be one year, two years, or even three years of loan repayments without even the money coming from electricity rates needlessly doubled to pay for Muskrat Falls.
Feehan’s idea would have us impose this new tax, pay for construction, and then get rid of the new tax. Assuming that would even happen given the provincial government’s financial state, you would still wind up ending one tax as another tax – Muskrat Falls - replaces it. The whole notion is perverse, but then again, Muskrat Falls itself is a total perversion of provincial energy policy.