Here’s some background on
the issue of Muskrat Falls and Public Utilities Board exemptions.
At the end you should know what an exemption
is all about, how the exemptions – there are more than one – came about – and what
that means for now and in the future as far as electricity rates go. We’ll deal with mitigation in another brief
post next week.
The information here is
based on material in the public record plus additional research and information
accumulated over 30 years working on public policy issues in the province. That
includes the 15 years of SRBP, much of which wound up being about the Lower
Churchill project.
Let’s start with what an
exemption is.
In 1994, every facility
for the production and distribution of electricity in Newfoundland and Labrador
fell under the power of the Public Utilities board for at least one of two
purposes.
The most obvious one is
that the Board could set rates for electricity used in the province. If a company wanted to build a power line or
a new generating plant for use inside the province, the company had to apply
for permission to the PUB. The reason is
simple enough: the cost of the plant
would have to come from rates and the PUB had the power -until December 2012 –
to set electricity rates according to the policy set out in Section 3 of the
Act. The proponent of the project had to
show the need for the project. The Board
would hold a public hearing and could approve or reject the proposal.
The other reason was to
ensure local supply under Part II of the EPCA, 1994. The House of Assembly approved a new section
to the EPCA in 1994 as part of a major overhaul of the old legislation. The new section allowed an operator in the
province – NL Hydro or Newfoundland Power - to apply to the board for more
electricity in the event the province needed more electricity and new
facilities couldn’t be built fast enough to meet it. That covered every facility, including Churchill
Falls even though all but a small part of its production goes outside the
province.
In 1998, NL Hydro started
talking to Hydro Quebec about developing the Lower Churchill at Gull Island. Most of the electricity was to go outside the
province but some would have flowed to the island via a transmission line built
to Soldier’s Pond. At the same time, Hydro was looking for new sources of power
on the island to meet anticipated demand.
It decided to go to the private sector to get the extra power and
eventually signed a series of agreements to buy electricity from a partnership
between Abitibi and Fortis on the Exploits and between Abitibi and an Italian
company called ENEL at a place called Star Lake.
In a 1999 amendment to the
EPCA, 1994, government got the power to exempt a project “from the
application of all or a portion of this Act where the public utility is engaged
in activities that in the opinion of the Lieutenant-Governor in Council as a
matter of public convenience or general policy are in the best interest of the
province, to the extent of its engagement in those activities.” (s. 5.2)
The government exercised the power in a string of
exemptions that covered the Exploits and Granite Canal projects as well as
anything and everything on the Churchill River. The Conservatives issued one in 2004 that
covered facilities in Stephenville then owned by Abitibi that is still on the
books. The exemptions are total – completely outside the Act – and they last as
long as the cabinet order making the exemption stays on the books. Any cabinet since 1999/2000 could have changed any
order it wanted to change.
The Lower
Churchill Project since November 2010
Nalcor and its predecessors always viewed the Lower Churchill project
as a project for export sales. The
domestic use of electricity from the project was secondary. More often than not, the Muskrat Falls output
was considered as a possible source for domestic electricity supply but only if
it was needed. In fact, until 2010,
Muskrat Falls was an add-on, at best.
Attention focused on Gull Island since it generated the most electricity
and was always considered the more cost-effective part of the Lower Churchill development.
By 2009-2010, however, Nalcor was in a bind. They had no markets for Gull Island, hence
they could not finance it. At the same time there was an unrelenting political
demand coupled with a corporate obsession within Nalcor of building the Lower Churchill. Out of that marriage of forces came the
scheme to build Muskrat Falls.
Supposedly it would be a substitute for Holyrood even though even
Muskrat Falls far outstripped the annual use of Holyrood and its cost. In the initial announcement, Muskrat Falls was
touted as merely the first stage of the complete Lower Churchill with its implicit
emphasis on export sales. Government and
Nalcor officials noted, when asked about the lack of export sales, that they
did not need any export sales as domestic sales would cover all costs.
The “domestic supply” excuse allowed Nalcor to justify compelling
domestic ratepayers to cover the full cost of construction, plus profit, and
the exemption order from 2000 would ensure the public utilities board could not
legally review the project, delay construction, and, in all likelihood, reject
the project as unnecessary. The joint review panel had already concluded
(January 2010) that Nalcor had not shown the Lower Churchill was necessary
either for domestic or export use.
The exemption order from 2000 made sense for a project that
was intended primarily for export. Any
domestic use of power would likely have been handled the same way that NL Hydro
had handled the series of purchases from Star Lake, Abitibi, and Kruger.
But Muskrat Falls was a completely different project compared
to Star Lake or Exploits for a completely different purpose than domestic
supply. Most of its electricity would be sold on export markets at market
prices far below the cost of production and made feasible only because domestic
users would foot the bill for construction.
The 2011
PUB Sideshow
As with all the reviews orchestrated by the provincial
government for Muskrat Falls, the 2011 PUB hearings were designed as a
political show. They had no legal
standing due to the exemption order. The provincial government asked
the PUB to review the project based on Nalcor’s concocted comparison, using
all of Nalcor’s assumptions and assertions as evidence. Had the Board done the
job of examining all options for domestic supply - something which Nalcor never
did - the board would have most likely found that Muskrat Falls was far from
the lowest cost option to meet anticipated needs. In fact, Muskrat Falls was arguably the most
expensive way to go.
The 2011 PUB review was not about oversight, as some have
claimed. It came only after public agitation
by critic. The terms of reference for
the PUB review clearly limit the scope of the review in such a way as to affirm
Nalcor’s already concocted conclusion in favour of Muskrat Falls.
In the end, the PUB determined that it could not answer the
question posed to it. But that too was a
decision driven as much as anything else by the ongoing squabbling between the
board and the provincial government over the project during the hearings.
The December
2012 Electricity Policy
While the public utilities board had no jurisdiction over the
construction of the Muskrat Falls project, the EPCA, 1994 still gave it
jurisdiction over rates. And while
Nalcor/NL Hydro had been able to incorporate smaller electricity projects into
its rate schemes, Muskrat Falls could only be financed by destroying the entire
system of rates and how they were set.
The initial scheme called for a doubling of rates as they were
in 2010. What’s more, even in 2011, Nalcor
and the provincial government understood that rate shock for consumers would be
so bad from Muskrat Falls that they had to introduce a new way of setting
rates. Rather than pay off the bulk of
the cost in the first years of operation, Nalcor officials tried to ease the
shock by pushing off repayment of the costs for the dam to the back of the
pay-off period. Lenders didn’t mind
since this put more interest in their pockets even as it drove the cost of the
project up for consumers.
On top of that, the board still retained jurisdiction over NL
Hydro for domestic rates. As a result, the
power purchase agreement between Nalcor subsidiaries NL Hydro and Muskrat Falls
would fall under the board’s scrutiny.
There was a danger the board would reject the purchase. The solution was to change the EPCA, 1994 and
the public utilities Act through Bill
61 (2012) so that – in effect - cabinet would set electricity rates in the
province. This is a crucial aspect of
the entire Muskrat falls scheme that proponents of the PUB option have thus far
ignored.
The
Federal Loan Guarantee
Cabinet cannot simply ignore the 2012 powers and let the PUB decide
on rates. Project financing, the
commitment to lenders, and the federal loan guarantee are all built on the
initial decision (circa 2010) to force domestic consumers to cover all costs plus
a new tax on domestic consumers for the provincial government.
The issues involved are far more complex than advocates of
this approach suggest. The advocates of
the PUB scheme leave out a great deal of crucial information when they talk
about the PUB as if it was some easy solution to a problem that is frightening
people across the province.
In the federal
loan guarantee signed on 29 November 2012, the provincial government – called the NL
Crown in the hastily written draft of the document – commits that, among other
things, the provincial government will:
Ensure that, upon MF [Muskrat Falls] achieving in-service, the
regulated rates for Newfoundland and Labrador Hydro (“NLH”) will allow it to
collect sufficient revenue in each year to enable NLH to recover those amounts
incurred for the purchase and delivery of energy from MF, including those costs
incurred by NLH pursuant to any applicable power purchase agreement (“PPA”) [dated
29 November 2013] between NLH and the relevant Nalcor subsidiary or entity
controlled by Nalcor that will provide for a recovery of costs over the term of
the PPA signed and relate to:
a) initial and sustaining capital costs and related financing
costs (on both debt and equity), including all debt service costs and a defined
internal rate of return on equity over the term of the PPA;
b) operating and maintenance costs, including those costs
associated with transmission service for delivery of MF power over the LTA (as
described further in 5 below);
c) applicable taxes and fees;
d) payments pursuant to any applicable Impact & Benefit
agreements;
e) payments pursuant to the water lease and water management
agreements; and
f) extraordinary or emergency repairs.
The only way the provincial
government can fulfill its commitment in the FLG is to maintain its power under
the December 2012 legislative changes to the EPCA, 1994 and the Public
Utilities Act to have cabinet set electricity rates.
Conclusion
It is possible to change the
Muskrat Falls financing arrangements, but this will take:
a realisation that this is where the problem lays,
a willingness to discuss a complex re-working of
the project, and,
a viable plan that will not explode electricity rates in the province while ensuring that the creditors get
paid and the federal loan guarantee is not triggered.
None of the schemes currently
discussed in public will meet those criteria. As the
talk of the PUB indicates, political manoeuvring and scoring cheap points is
still uppermost in political minds. On
the media side, there is some effort at discussing the issue but there is
nothing that fills in the massive gaps in basic information left by the
politicians and project critics.
In other words, nothing has
changed since Danny Williams announced the Lower Churchill go-it-alone-with-partners
scheme in 2006.