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.
-srbp-
- The 2004 war with Ottawa revisited
- From agreement to disagreement
- Mr. Williams goes to Hell
- Moral victory: saying "yes" to less