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15 July 2019

Restoring Power: The Section 92A Option #nlpoli

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 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.

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-