27 December 2016

Policy is people #nlpoli

Kim Keating is a member of the newly-appointed council to advise the provincial government on oil and gas issues.

She's a professional engineer,  a senior official with a local company in the oil and gas business, and in the recent past she was the president of the St. John's Board of Trade the year that the Board wholeheartedly endorsed Muskrat Falls.

That's important because the Board not only endorsed Muskrat Falls for all the benefits that flowed to companies like the one Keating works for, but also because the Board was willing to trade away free enterprise in order to get those juicy business goodies. A key element of making Muskrat Falls work was the creation of a monopoly for Nalcor so that the company could force local consumers - and local businesses - to pay whatever it would take to satisfy Nalcor's creditors.

In other words, no matter how high the price for the project went,  local consumers would be stuck with the costs. Keating and her associates were okay with that.

But there's more to the issue than that.

You see, as we have noted around these parts since 2010,  the entire premise of Muskrat Falls was to double domestic electricity prices.  That wasn't something that happened later.  All the folks behind Muskrat Falls knew from the outset that the provincial government would have to double local electricity prices in order to pay for Muskrat Falls.

All the folks behind Muskrat Falls also knew they had no export customers for the electricity. Not a one. In fact, in order to lure Emera into the deal,  Danny Williams and Ed Martin gave the company 35 years of electricity for no charge whatsoever.  No customers in 2010.  No customers in 2012 when the Board of trade publicly endorsed it.

This is a really fundamental bit of strategic thinking here and, as experience has shown,  the folks behind Muskrat Falls got it very badly wrong. They also got it very obviously wrong, from the outset. Next week, we are going to start running a series of posts, one from each year of SRBP.  The 2005 post notes that the provincial government had started to make some really bad strategic choices by spending way more than we could afford.

The strategic calculation all these very bright folks made was that oil prices would only go one way:  higher. There was never any sound historical basis for thinking such a thing. To the contrary, any well-rounded assessment should have pointed out just how patently idiotic such an idea was. Even a cursory review of oil price trends would have shown they have gone down and gone up.

Muskrat Falls was really nutty idea just on this oil price thing alone. That's before anyone got to the impact that doubling electricity prices would have on industries such as the only oil refinery in the province.  It runs on electricity supplied by Nalcor rather than on natural gas, as most other refineries do.  That cost of electricity - no longer two mils as it was in the 1970s - is a crucial part of the profit the refinery can make.  In the refining business, they call it the margin.  Anything that eats into that margin is bad, like say doubling the cost of electricity needed to run the refinery.

The folks who backed the project will quickly come back to a criticism like that with the counterclaim that at high oil prices,  Muskrat Falls would deliver stable, predictable costs.  That is certainly true. The price for Muskrat Falls will also be predictable at low oil prices.  The problem is they will be unbearably high.  What's worse, while Muskrat Falls is a theoretical benefit at high oil prices, it is a guaranteed pain at low ones.

And that's where the strategic folly of Muskrat Falls is really obvious to see.  Something like an energy strategy should work across a range of situations. The old provincial energy policy told Newfoundland and Labrador Hydro they had to meet domestic needs at the lowest cost and at the same time set up the public utilities board to keep an eye on that to make sure it happened.  All that changed in December 2012.

Since the new Liberal administration took over in 2015,  they have been scrupulous about not changing either the strategic trajectory for the province set by the Conservatives over a decade ago. They have also been scrupulous about making the most minute of changes in the senior ranks of the public sector. With a few exceptions, they still listen to all the same people the Conservatives listened to.

The new oil and gas advisory council does both of those strategic things in spades.  It continues the pseudo-corporatist practice of taking advice about an industry sector from the businesses in that sector. You aren't likely to get any fundamentally new ideas that way, nor are you likely to get ones that put the public interest ahead of the corporate interest when the two things diverge.

In fact, the whole scheme is based on the idea that whatever benefits business is automatically in the public interest.  Always. Period. The government simply hasn't bothered to create any way of taking information from anyone but people in the industry.  The new advisory council not only follows the practice of listening to the same interests but also of listening to the same people.

Ultimately, policy comes from people and if you want new ideas or new directions you will seek out and listen to new people. When you keep listening to the same people, well..., you can figure it out.