16 April 2019

A CHEAP Framework - the PC and Liberal Muskrat Falls plans #nlpoli

The Conservative and Liberal Muskrat Falls rate mitigation plans are the same.  Both include magical assumptions of revenue.  Both omit crucial details.
Note: Some people asked on Monday for comment or analysis of the two plans to mitigate Muskrat Falls' impact on provincial electricity rates.  
This is an abbreviated summary of the two plans and some issues flowing from it. A more substantive analysis will come on Monday 22 April 2019 with the publication here of the SRBP rate mitigation proposal  called "Restoring Power."


The Conservative and Liberal rate mitigation plans are the same idea. 

This is not surprising since the Conservatives copied the Liberal approach and used the same information from the Public Utilities Board review as the basis for the plan details.

The Liberal and Conservative plan uses the following approach:
  1.  Pick a Number
  2. Subtract other Numbers
  3. Use Magic
  4. Hit zero

Pick a Number. 

Both plans pick a starting number using information supplied to the Public Utilities Board by Nalcor.  This is odd since the provincial government has had a team working internally on rate mitigation since 2016.  They have access to more, current information than the Public Utilities Board. 

Neither the Conservative nor Liberal documents clearly explain how they arrived at the starting number selected. 

Neither the Conservative nor Liberal number matches information available from Nalcor ATIPPA responses (among other information) that indicates the provincial government's revenue requirement from Nalcor amounts to about $844 million in the first year and climbs annually.  There are actually several different Nalcor numbers on how much money it would require based on what elements you include in the definition of the final amount. 

The Liberal/Government figure appears to be two years out of date.  It does not reflect current project cost estimates that are at least $400 million higher than the figures used in 2017.

Subtract Other Numbers

Both the Liberal and Conservative plans deduct numbers that come from anticipated revenue sources or cost-saving measures. 

The Conservatives assume export sales will be less lucrative ($41 million) than the Liberals do ($49 million).

The Liberal plan assumes $200 million from unspecified Nalcor sources based on a 2018 commitment.  The 2016 commitment was higher, at $240 million. The Liberal 2016 number appears to be a combination of oil royalties (net expenses),  export sales of surplus electricity, and some other unspecified sources.  The 2019 figure breaks out the sales but does not clearly indicate the source of the other Nalcor cash.

The Conservative plan gives a higher value to oil royalties ($231 million) and identifies a separate amount as a Nalcor dividend ($123 million).

Accio Argentum or Accio Pecunia

The Liberal and Conservative plans both rely on federal cash to reduce the starting number to zero.  This is the magical component of both plans akin to a Summoning Charm from Harry Potter.  In this case, it would be a money-summoning charm

The Conservatives believe there is money unpaid from the 2005 arrangement.  There is none.

The Liberals claim that the federal government commitment to help will add up to $200 million annually over the 50 years needed to pay off Muskrat Falls. This would be in addition to the Hibernia Dividend-Backed Annuity Agreement.

The federal government has made no  commitment to provide cash and certainly hasn't acknowledged its willingness to pay $200  million over 50 years ($10 billion). 

The Liberal plan also includes projected sales of electricity from business that do not currently exist or projected revenue from converting oil-fired generation to electricity.

Missing Elements/Explanations

How would it work?  Neither the Liberal nor Conservative plans explains how it would work in practice. Identifying sources of cash and savings is one thing.  Actually changing the existing plan to collect needed revenue from electricity rates could require renegotiation of the federal loan guarantees, negotiation with the creditors,  a reworking of the power purchase agreement between Nalcor and NL Hydro, or  a system of consumer credits. These are potentially complicated actions that might not work out as planned.

Holyrood Savings. Both plans include estimated savings from fuel at Holyrood. What neither plan explains is that this money actually comes from existing electricity rates. In other words, both the Conservative and Liberal plans keep the current fuel charge within rates to help pay for Muskrat Falls. 

Holyrood Replacement. Both plans also assume there will not be a Holyrood replacement of some size to act as an emergency generator in the event the Labrador line failed.  The 2011 PUB review also disclosed that Nalcor planned to add new thermal generation in addition to Muskrat Falls to meet future needs.  These costs would have to be factored in to a mitigation scheme of the type proposed by the Conservatives and Liberals.  This would also increase the amount needed for mitigation both to recover capital costs and to reflect the loss of the fuel displacement charge.

Diesel Conversions.  Replacement of the diesel generators in the Liberal plan as well as the conversion of existing thermal heat units in government buildings are based on the unproven assumption that these are cost-effective or operationally reliable.

Equity Repayment.  Nalcor is currently required to replay the $4 billion equity provided by the provincial government and the associated interest. This should be included in the amount needed by Nalcor.  Will Nalcor still be doing this or has the provincial government decided to deal with this through general revenues like other government borrowing? 

Arbitrary Base Rates.  The Conservatives used Nalcor's forecast 2021 rate as their baseline.  The Liberals arbitrarily chose a different number that appears to have no basis other than the fact it is lower than the Conservative one.  Both rates are higher than the current rate.

Knock-on Budget Impacts.  Both the Conservative and Liberal plans call for the diversion of at least $250 million annually from the provincial treasury to Nalcor.  This will have impacts on current budget forecasts that have not been explained.