03 January 2019

Mitigating Muskrat Falls: Ron, Harry, and Hermione are still baffled #nlpoli

Mitigating the impacts Muskrat Falls will have on taxpayers of Newfoundland and Labrador remains the single biggest unanswered question in the province nine years after the project started and the politicians first started talking about how they might do it.

To mark the 14th anniversary of The Sir Robert Bond Papers,  here's the tale from 2010 to now.

Most people in Newfoundland and Labrador finally noticed the impact Muskrat Falls would have on electricity prices when Nalcor chief executive Stan Marshall confirmed that Muskrat Falls would double electricity prices in the province once it was finished in 2021. 

That was the middle of 2017.

The word “mitigates” - to make less severe or painful - became popular overnight.  Since Marshall’s comments, just about all that anyone in Newfoundland and Labrador has fretted about is how the government will make electricity prices not double because of Muskrat Falls.

But here’s the thing:  Muskrat Falls was always supposed to double your electricity prices. Right from the start – November 2010 – the provincial government talked about electricity prices of between 14 and 16 cents wholesale, which would have made the retail cost in this province about double what it was at the time.  No worries, people like Kathy Dunderdale said.  Oil prices will be so high and electricity prices will be so high by 2017, anyway, that you will never notice Muskrat Falls except that it will stop prices from climbing higher.

In 2011, the people of Newfoundland and Labrador found out that Nalcor and the politicians behind Muskrat Falls were so concerned about the impact Muskrat Falls would have on rates - and therefore public support for the project - that they wanted to make them less severe.  Nalcor decided to price the transmission line the same as every other project of its kind:  pay off the principal on the loans at the front and then watch costs tail off as you paid off the loans.  Over on the dam part of the project, though, they decided to pay less of the principal off at the front to keep initial electricity rates lower.
Problem: back-loading repayments lowered the price at the start, but it meant the overall cost of the project went up thanks to all the extra interest the lenders collected on the unpaid principal. Back-loading also meant that while the prices in the early days might be relatively low they had to climb every year after, not even counting inflation and other spending needs.  

Second problem: Nalcor didn’t just back-load the principal repayment to make the initial prices less severe. They also stretched out the amount of time to pay back the loans, from 35 years to 50 years for Muskrat Falls. That also increased the cost of the backloaded scheme since the principal would be earning interest for the lenders over an extra 15 years.

As the cost of the project climbed due to project management problems, by 2012, people like Dwight Ball talked about using export sales of electricity to subsidize power rates for local consumers.  That sounded like a good idea but neither Ball nor anyone else who liked this idea explained how it would work. 

Those who did understand the way Nalcor and the provincial government planned to pay for Muskrat Falls worked could not see how export sales that were subsidized by domestic ratepayers in the first place could wind up subsidizing the ratepayers’ rates in the first place as well.

You see, the whole reason Nalcor could sell electricity anywhere outside Newfoundland and Labrador is because the plan from November 2010 onward was to force taxpayers/ratepayers to cover the entire cost of the project with their electricity rates regardless of how much of the electricity from Muskrat Falls they actually used.  Electricity in north eastern North America is selling for way less than it costs to make electricity at Muskrat Falls.  If you tried to pay off your Muskrat debt just by export sales, you’d never bring in enough cash to cover the cost of making it.  At current rates, in fact, you could sell every kilowatt hour of Muskrat Falls on the export market and only get back about half the total you would need to cover the first year’s loan repayments, dividends, operations costs, and all the rest that Nalcor will need to cover Muskrat Falls’ costs.  So, no… export sales are not going to do the job.

Dwight Ball stuck with the promise of mitigating rates and did make his idea a little clearer in 2017.  In an interview, Ball talked about a goal he’d given a group of officials from government and Nalcor who were working on mitigation. They were supposed to keep the initial rates once Muskrat Falls came online about the same as rates in the Maritimes, that is, between 13 and 17 cents per kilowatt hour in 2021.  He still couldn’t say how they’d do it, which is, of course, the part of the problem that is keeping people up at night today.  

At least, we had some sort of goal, though. If the folks at Nalcor could deliver a plan that no one has actually discussed publicly, electricity rates on the island would go up by 50% instead of 100%.  Going up about six cents was better than almost 12 cents in one shot but by 2018 even that idea was freaking ratepayers out.  Meanwhile, the 2017 goal of 17 cents per kilowatt hour had jumped to 18 cents.

Lately, Conservative party leader Ches Crosbie and former public utilities board chair Dave Vardy have suggested letting the PUB set electricity prices.  There are a few gigantic holes in this idea beyond the fact that they – like Ball and the provincial government – haven’t told us how they’d make their scheme work and what electricity prices would be.

For starters, neither Vardy nor Crosbie address the changes made in December 2012 to how electricity prices are set these days.  The PUB doesn’t set electricity prices any more. Cabinet does.  What’s more, the pricing scheme introduced by government in December 2012 is intimately tied to the federal loan guarantee and, therefore, to the assurances given lenders that they will get their money plus interest for helping build Muskrat Falls.

If you monkey with the pricing scheme, both the federal government and the lenders might take the provincial government and Nalcor to court to protect their rights under the loan agreements.  The last time lenders took the government’s energy company to court over just that sort of fiddling – in 1984’s water rights reversion case – the lenders won handily and scuttled a simple but poorly-thought-out scheme.
And even if all that weren’t true, the people suggesting the PUB option may hope that rates will be lower due to the PUB decision, but there is no guarantee.  You see, Nalcor doesn’t have to supply electricity to Nova Scotia from Muskrat Falls.  In fact, it’s technically simpler for Nalcor to feed Nova Scotia its free block and its discounted block of electricity from Bay d’Espoir and central Newfoundland generation.  Meanwhile, the island needs would be met using Muskrat Falls.  That would mean island ratepayers would be using Muskrat Falls anyway and the PUB would logically insist that ratepayers cover the cost of the electricity they are using.   

Of course, if the PUB did set rates as low as Crosbie and Vardy hope, the people of Newfoundland and Labrador would still be legally on the hook for the cost of Muskrat Falls anyway. We’d have to find all the cash somehow.  Maybe they think the government could default and trigger the federal guarantee. That might work but defaulting on the payments would surely destroy the province’s credit rating.  That collapse of the province’s credit rating would trigger another financial crisis, this time in the delivery of health care and the other essential services the government can’t afford right now without massive amounts of borrowing. 

Vardy and Crosbie might hope the federal government would step in and pick up the pieces either through the loan guarantee or just because they could not afford to let the province fail financially.  That might happen.  Might.  But it would inevitably come at a cost that could well be equal to or worse than the collapse of self-government in 1934.

In the Windsor Lake by-election last fall, the provincial government did two things that added more confusion to the rate mitigation issue.  For starters, the Premier and the Liberal candidate both promised that taxpayers – who are also rate payers – that they wouldn’t have to pay for Muskrat Falls.  Neither could explain how that would work.  The reason is simple enough.  They had no idea if it was even possible, let alone that it would work.  It was just a claim they made during the election and the premier kept repeating in his year-end interviews.

Then the Premier added more confusion by asking the Public Utilities Board to look at mitigation and see if it – actually a bunch of consultants the PUB hired – could come up with any ideas on how to keep electricity rates from skyrocketing.  This wasn't what Dave Vardy and a few others had in mind but it was the best the government was prepared to do in a pinch. The PUB released two of the consultant’s preliminary reports on Wednesday.  Basically, the consultants scoped out some possible issues to look at in more detail later on.

The preliminary reports are not promising.  They don’t include any information that we don’t already know. They also leave out some aspects of the existing scheme that - if changed – would produce cascading problems for the provincial government and its finances. That’s not really the consultant’s fault:  it goes back to the government’s request to the PUB.  The government didn’t ask for a working plan.  They just asked for ideas.  And again, to be fair to the PUB, it really has neither the mandate nor the competence to advise on how the provincial government manages its finances, regulates the electricity business, and runs it Crown corporations.

The one thing the consultants did do, though, is to confirm observations made by your humble e-scribbler since 2017.  Even if they worked and even in the most optimistic scenarios, all the ideas that the consultants could come up with wouldn’t produce enough cash to cover the Muskrat Falls costs in Year 1.  And the cash requirements from Muskrat Falls go up every year after the first one.  So basically, at the end of the PUB process, we may not be any closer to a solution to the Muskrat Falls rate problem as we are today. 

Not to be outdone, the provincial Conservatives under new leader Ches Crosbie also promised that they would find all the cash needed to solve all the government’s problems by beating it out of the federal government.  In a year-end interview, Crosbie even invoked the spirit of Old Twitchy Shoulder Hisself, to claim that it would be possible.

Crosbie is just repeating the same promise Dwight Ball shortly after he took office and, as regular readers of this corner know already, there simply isn’t any money in Ottawa to bail the provincial government out of the mess it created by the blinding incompetence of Crosbie’s predecessors.  And to be blunt about it, even if there was cash potentially available in Ottawa, Ches Crosbie is no Danny Williams.  Heck, even Danny Williams was not Danny Williams.  The Galway Grappler went to Ottawa in 2004 demanding a permanent handout from Ottawa equal to and on top of the provincial government’s oil revenues.  It was a demand worth tens of billions of dollars over decades.  Williams walked away with one cheque worth less than 10 percent of what he and his successors blew through up to 2015. That’s not the story Williams and his Fan Club believe but it is true [links below]. 

In that respect, as we enter 2019, the Ball and Crosbie ideas are the same:  both are some form of magical thinking.  Neither can explain how they would mitigate the impact of Muskrat Falls on taxpayers in Newfoundland and Labrador.  They just have a line for the media and hope that something will appear out of thin air.

That leaves the people of Newfoundland and Labrador with the PUB. And that means that the public still has no idea how the provincial government or any of the other political and opinion leaders in the province think they can deal with the financial crisis from Muskrat Falls without driving electricity prices to ridiculously high levels or bankrupting the government for the second time in less than one hundred years.  

If someone out there has a workable answer to a question that is weighing heavily on everyone in Newfoundland and Labrador, now is the time to speak up.