One of the potentially most valuable revenue sources would be a new tax on electricity production that could yield upwards of $450 million a year. The bulk of the tax would be paid by Emera and Hydro-Quebec, both of which currently profit from free or near-free electricity through two patently unfair agreements.
The basic problem of the Lower Churchill was always
how to pay for it.
Everyone who tried to build it before wanted people outside the province to use the electricity and pay for the whole project, with the profit flowing to the people of Newfoundland and Labrador. When they couldn't get that to work, they simply didn't pursue the project.
The politicians and bureaucrats behind what became Muskrat Falls were smarter. They decided in a meeting at The Rooms in April 2010 they would force the people of Newfoundland and Labrador to pay for the entire project through their electricity rates, even though they would use very little of it. The benefits would flow outside Newfoundland and Labrador.
The politicians and bureaucrats behind what became Muskrat Falls were smarter. They decided in a meeting at The Rooms in April 2010 they would force the people of Newfoundland and Labrador to pay for the entire project through their electricity rates, even though they would use very little of it. The benefits would flow outside Newfoundland and Labrador.
The Dwight Ball-Ches Crosbie rate mitigation scheme is
still about having Newfoundlanders and Labradorians alone pay for Muskrat Falls with others reaping the benefit. On top
of that, the Ball-Crosbie approach includes money that doesn’t exist. Their scheme
also doesn’t address other problems with Muskrat Falls that are as troublesome
as the problem of the government’s proposed scheme to have only one small group
of people bear the whole cost. So, it won't work.
A comprehensive mitigation plan
Restoring Power describes a broad approach to mitigating the impacts of Muskrat Falls on Newfoundland and Labrador. SRBP published the proposed approach to Muskrat Falls mitigation in April 2019. It describes a new way of setting electricity
rates, a different way to pay for Muskrat Falls, and a change to the relationship
between Nalcor and the provincial government.
To pay for Muskrat Falls, Nalcor and the provincial government would first assess the financial requirements, eliminate unnecessary costs, and reduce what can be reduced before developing a payment plan. Consumers would pay only for the portions of the Muskrat Falls project that supplies electricity to them in rates set by the ERA. The provincial government would pay for the “equity” portions of the Muskrat Falls debt through general revenues, possibly following a third federal loan guarantee that reduced the interest costs of the debt. Operations and maintenance costs of Muskrat Falls would be apportioned between rates, as described above, and Nalcor’s own revenues.
The balance owed would come from Nalcor and the provincial government. One of the potentially most valuable revenue sources would be a new tax on electricity production that could yield upwards of $450 million a year. The bulk of the tax would be paid by Emera and Hydro-Quebec, both of which currently profit from free or near-free electricity through two patently unfair agreements. Federal assistance in the form of moral suasion may be required to ensure that the two companies assist the people of Newfoundland and Labrador in a fashion that is modest compared to the financial windfalls they have reaped through Churchill Falls and Muskrat Falls.
Restoring
Power didn’t give
any details of how that new tax might work. But the topic came up recently in a
news story on 09 July 2019 from allNewfoundlandlandLabrador.com. That piece didn’t explain the tax concept
very well. It also included quotes from
both Dwight Ball and Ches Crosbie that make it clear the provincial government
had not looked at the potential at all. Ball and Crosbie dismissed an idea Crosbie
proposed because it would lead to costly court challenges. Crosbie said his
idea was to use the threat of a tax as one way to deal with the ongoing dispute
over the 1969 power contract.
Their comments are based on assumptions. In dismissing the tax idea, Ball
and Crosbie simply confirmed the extent to which the government and opposition
remain locked on the original 2010 course, based on an obsession with the 1969
power contract. They have not looked at
ways to get out of the trap they and other Muskrat Falls supporters have pulled the rest of us into. Their mitigation schemes, based
on imaginary money, simply will not relieve taxpayers of the burden that comes out
of the insane Muskrat Falls project. The
result is that the provincial government will struggle to keep its head
above water financially for decades to come.
The only way
to mitigate Muskrat Falls is to take a broader approach of the kind outlined in
Restoring Power. Read the whole Restoring Power proposal, if you haven't already, but in the meantime let’s look more
closely at the concept of a new tax.
The
Resource Amendment to the Constitution
The constitutional power to
impose a tax on electricity production in Newfoundland and Labrador, payed by
the end-users outside the province, comes from the so-called Resource Amendment to the constitution
in 1982. Section 92A of
the Constitution Act, 1982 gives provincial governments the exclusive
power over non-renewable resources, forest resources, and electricity. or
export to another province. This includes the power to tax those resources or
product by any means. The only
restriction – contained in subsection (2) - is that the province may not
discriminate against another province in applying a new tax.
The new
section came out of bitter federal-provincial fights in the
1970s over jurisdiction over natural resources.
While the fight at the time was chiefly about oil and gas in western
Canada, the resource amendment specifically covers oil and gas, forest
resources, and electricity.
Subsection (4) is the one that sets out the power of
taxation. It states that:
In each
province, the legislature may make laws in relation to the raising of money by
any mode or system of taxation in respect of
(a) non-renewable
natural resources and forestry resources in the province and the primary
production therefrom, and
(b) sites
and facilities in the province for the generation of electrical energy and the
production therefrom,
whether or
not such production is exported in whole or in part from the province, but such
laws may not authorize or provide for taxation that differentiates between
production exported to another part of Canada and production not exported from
the province.
Electricity
Production in Newfoundland and Labrador
Consumers
and industry in Newfoundland and Labrador consume about seven terawatt hours of
electricity annually. All of it is
produced in the province. There’s
another 32 TWh generated annually in Labrador, all of it for export. Those numbers are based on
National Energy Board figures for 2017 and estimates used by the Public
Utilities Board.
Muskrat
Falls will produce between 4.5 and 4.9 TWh a year. This assumes that Hydro-Quebec’s operational
control of Churchill Falls does not impact Muskrat Falls as Nalcor predicted in
2009 at the Public Utilities Board hearings on a water management agreement for
the Churchill River. Muskrat Falls will add to total production either by the net of taking Holyrood out or it will go in on top of Holyrood (or a Holyrood replacement). That gives us a range of production between 39 TWh and about 44 TWH, if
we assume the upper end of the estimate for Muskrat Falls output.
That’s the
basis for the
estimate that a one cent per kilowatt hour tax on electricity produced in
Newfoundland and Labrador would generate between $390 million and $440 million
in new revenue for the provincial government. It would produce roughly half the money needed
to pay for Muskrat Falls based on the Crosbie-Ball mitigation approach or more
than half using the approach contained in Restoring Power.
The 92A
option
Until recently, the provincial government only looked on the Resource
Amendment as a way of redressing the imbalances in the Churchill Falls power contract. The provincial government considered and and rejected the use of the Resource Amendment as a way of recalling additional
electricity from Churchill Falls. This is
described in a 2012
document released during the sanction debate. Now that the 1969 power contract's tax exemptions have expired, the idea of a new tax is back in play.
One of the
problems with earlier considerations of taxation was that the Resource Amendment option was always
cast as a means of getting revenge for the 1969 Power Contract between
Hydro-Quebec and the Churchill Falls (Labrador) Corporation. This same attitude, inherent in Ches Crosbie’s
comments, would doom such an effort to failure before it started for the same
reason that the 1980 Water Rights Reversion Act was struck down by the
Supreme Court of Canada. You can also see echoes of this revanchist
mindset in Dwight Ball’s comment to allNewfoundlandLabrador.com that one
of the drawbacks to the tax idea is that it would have to be applied to
everyone, not just Quebec.
A tax on
electricity production proposed in Restoring Power would be simply a means to
generate revenue for the provincial government. It has nothing to do with the
assorted aggressive and sometimes underhanded efforts by the Government of
Newfoundland and Labrador in the 1980s and early 2000s to circumvent the 1969
contract and punish Quebec.
That obsession with the 1969 power contract evident in both Crosbie's and Ball's comments are a reminder that we need to change our way of thinking about electricity. Restoring
Power reflects that. A crucial part of the Restoring
Power solution to the current mess is destroying the unhealthy relationship
between the provincial government and Nalcor/NL Hydro that created the disaster
in the first place. Putting Nalcor at
arms length from the provincial government would reinforce the message that the
new tax is different; it is not merely the same poisonous old wine from
Newfoundland in new skins.
It is
possible that provinces would object to a tax for other reasons, although it is
hard to see why. A successful argument
against a legitimate taxation measure of the kind expressly covered by the
Resource Amendment would rebound against all other provinces, Quebec included. The
water rights reversion case and other Churchill Falls cases were specific to
the 1969 power contract and efforts by Newfoundland to deal only with Quebec on
it. A challenge against a section 92A tax would be different. Provinces that might have an
interest in taxation on natural resources – that is, all of them – have an interest
in preserving their own powers and abilities. That's why fighting the tax on the principle of it would be cutting off a provincial nose to spite its face. Provinces interested in going to court would have to come up with a new argument.
Crosbie’s main objection – that the tax would lead to lengthy court battles - comes from several baseless assumptions. One of the key ones is that the province would impose the tax and then wait to see if there was any reaction. This was a crucial error Newfoundland and Labrador made with the Water Rights Reversion Act.
Crosbie’s main objection – that the tax would lead to lengthy court battles - comes from several baseless assumptions. One of the key ones is that the province would impose the tax and then wait to see if there was any reaction. This was a crucial error Newfoundland and Labrador made with the Water Rights Reversion Act.
Well, a sound political
strategy – as opposed to a legal one – would engage both Emera and Hydro-Quebec
in the same sorts of discussions the province frequently has with companies in
key sectors of the economy before making a major policy change. These
discussions could identify any concerns or issues and address them before implementing
the tax. The provincial government would
also have to deal with both the Nova Scotia and Quebec governments as well. Since those are the two governments most likely to take a tax in Newfoundland and Labrador to court - British Columbia wouldn't be liable to pay it most likely - getting those provinces to agree would be crucial. And while they might have objections not anticipated here, discussions in advance could address those concerns before the government imposed the tax.
While the two
companies and two provincial governments have an interest in keeping their
current sweetheart deals intact, they are not led by idiots. They should have an interest in working co-operatively with Newfoundland and Labrador on a fairly obvious problem that will affect them all. The provincial governments, in particular, are acutely aware that continued financial
problems in Newfoundland and Labrador can have repercussions on their provinces. It isn't in anyone's interest to have Newfoundland and Labrador struggle under the
strain of Muskrat Falls and the crippling public sector debt built up
especially in the last decade and a half. A modest intervention now could prevent a much more expensive intervention in the future.
A default,
which is a possibility for both Nalcor and Newfoundland and Labrador within the
next 10 to 15 years, would adversely affect the partners in Labrador
hydro-projects and the provincial governments. A federal government that is spending money to prop up Newfoundland and Labrador would have less money available for other provinces. A default by the province would affect the pool of capital available to other provinces. It would be in their interest to help
Newfoundland and Labrador make a sincere effort to manage its own affairs.
It’s not
like Hydro-Quebec hasn’t worked co-operatively with Newfoundland and Labrador
before. The Guaranteed Winter
Availability Contract (GWAC) as well as the recall agreement were efforts to
ensure CF(L)Co remained financially sound.
Hydro-Quebec did not act out of pure altruism but the agreements of the
late 1990s remain an example of how it is possible to achieve much with a
co-operative approach based on mutual interests. The unmitigated disaster of the relentless
adversarial approach taken after 2003 is the alternative. Since we know that does not work, the provincial
government needs to try something new.
It’s
worth trying something new
There’s no
guarantee the taxation approach will work Simply because no one has tried. There's nothing to lose in trying. What we do know is hat the current approach – having taxpayers in
Newfoundland and Labrador cover all the costs – won’t work. It seems silly to continue with an unworkable course and dismiss out of hand something that could work but simply hasn't been tried.
We also know
that the Ball-Crosbie approach – staying the course from 2003 onward - won’t undo
all the damage that Muskrat Falls has done and will continue to do to politics
and the economy in our province. That’s why
a comprehensive approach is needed. That’s
what Restoring Power is about.
Restoring Power is also
about sparking an open, frank, public discussion of options to address Muskrat
Falls. That’s something we did not see between 2003 and 2015. Sadly, it is not
one we have seen since 2015, either. When it comes to the province’s future, more
of the political same is not a viable option.
We need to start talking about things differently and then start doing
things differently here if the people of Newfoundland and Labrador are to have
a brighter future.
-srbp-
