11 February 2020

Interesting news, buried under bull #nlpoli

There are two aspects to Monday’s announcement about Muskrat Falls and electricity rates:  political and practical items related to Muskrat Falls.  

Another set of decisions are actually related to the provincial government’s non-Muskrat Falls finances.

And then there’s a little tidbit about how far behind Muskrat Falls is.

Political - If this is how Dwight treats his friends…

Monday’s announcement was a political stunt pulled purely for the province's benefit apparently to cover over the fact that there was no agreement as Dwight Ball had promised before Christmas.

The announcement came front-end-loaded with the sort of ego stroking and puffery that is not merely unnecessary but tends to turn off audiences listening for a major announcement about arguably the most pressing public issue.

The gratuitous attacks on the opposition, a recitation of the well-known history of the project, and the lie about Dwight Ball’s opposition to the project were tedious.

The entire effect was akin to the 2016 budget where people wanted answers and instead got worn out political bumpf.

That sort of bullshit may make Dwight Ball feel good, but these announcements aren’t about his ego.  They don’t do anything positive for anyone else – Liberals and non-Liberals alike – and may merely reinforce the view of people who find Ball annoying, at the very least.  That would be the majority of people in the province according to most polls taken since the 2015 general election.

More significantly, the relentless portrayal of Muskrat Falls as a hideous blight on the face of humanity hampers efforts at turning the project around and making it work.  After all, the federal government supported the project before 2015 and the Liberals under Justin Trudeau have no committed twice to help the people of Newfoundland and Labrador deal with this problem and turn a pig of a project into some kind of bacon.

It is a testament to Seamus O’Regan’s good nature that he didn’t text Dwight “STFU” as soon as he started in one awfulness of Muskrat Falls.  Monday was supposed to be a positive announcement – some good news in the bleakness of winter – but instead the room was sombre, according to media reports.  That downbeat tone was all the more striking given the characterization of the audience as mostly being Liberal political staffers and other potential supporters.

These attacks make it harder for the federal government to justify *any* investment in the project.  Every time Dwight Ball shits on Muskrat Falls, he gives the Bloc Quebecois and others - like federal bureaucrats - a turd to hurl at Dwight’s supposed friends on whom we are dependent for significant financial help.  Making it harder for the federal government to deliver what the people of the province needs is not a good idea.  

Danny Williams endless fights were a similar example of how ego stroking can trump the public good of mature, professional relationships with companies and other governments.  Dwight Ball’s masturbatory speaking notes and news releases – especially the stuff from Siobhan Coady on Monday - are a no less counter-productive example of the harm of political onanism.

The provincial government would be far better served in the future if talking points switched to the potential for Muskrat Falls to contribute to the federal government’s green agenda and to displacing coal and thermal generation in the Maritimes.  They need to act and talk as though they have already turned the corner rather than complain endlessly about what a terrible thing Muskrat Falls is.


Most people in the province don’t care about Dwight Ball or his ego but they do care about the prospect their electricity rates will double.

Sadly, the good news in the announcement was obscured by an obnoxious, dense cloud of political flatulence.

But there was good news even if it was hard to see.

You can find it in the letter federal finance minister Bill Morneau sent to Ball last week.  There are also a couple of clues in the slide deck provincial officials used to brief reporters.

Ditching the Rates Approach:  There are many problems with trying to pay for Muskrat Falls through electricity rates, aside from the fact it’s impossible to make such a small market bear such an immense cost.  You can see a few of those in the SRBP proposal for mitigation from April last year.
It seems as though federal officials have proposed shifting away from that approach, even if the provincial news conference on Monday still talked in terms of electricity rates.

You can see this in one of the slides from the media briefing deck that shows the amount needed each year for the next half century as a pretty flat line.  If it was actually cost-of-service as presented, then the costs would be front-loaded:  more at the front than the back.  The rate shock from that approach is why Nalcor opted in 2010 – yes, right from the beginning – to go with an approach that backloaded repayment of capital costs for the dam portion to the future.

That arrangement created big problems for the provincial government’s scheme of trying to redirect revenues from other sources to pay for Muskrat Falls.  They could get some money today, but they would never more and more into the future.  That problem is in the slides. But the flat line suggests the feds want to pay this off by calculating the amount needed each year for 50 years to pay back the amount borrowed and the interest.  It’s still a big bite – something like $800 million a year – but it is easier than what you’d get by repaying the whole thing through electric rates using cost-of-service pricing.

This is something the government needs to clarify but there’s a clear contradiction between the description of cost-of-service as a flat line now when the whole rationale for the backloading of the power purchase agreement was to avoid the rate shock that results from cost-of-service given the cost of the project even in 2010-2011.  There’s even a slide in the 2011 PUB review that shows the different amounts required to paydown the Labrador-Island Link using cost-of-service pricing versus the dam and Labrador transmission using the back-loaded approach.  Neither was a flat line.

Breaking up the Amount/Delaying the Hidden Tax:  The Ball/Crosbie approach started by taking amount supplied by Nalcor and then trying to add up enough money to match the number.
The problem with this approach is that the amount required was determined by the provincial government.  It included money to cover:
  • Bond costs plus interest,
  • Provincial “equity” borrowing plus interest,
  • Profit for Nalcor and Emera (rate of return),
  • Operating and maintenance costs, and
  • Dividend for the provincial government.

The way to restructure financing for the project – as SRBP suggested last April – would be to figure out what amounts you didn’t have to pay at all or could lower through negotiations.

One of the obvious ones was the provincial dividend, essentially a form of tax, built into the project from the start.  Low and behold the provincial government announced today it would axe that tax – but only for 10 years. 

They also described it really oddly In the Premier’s Twitter feed as “equity returns from Nalcor” that supposedly result from ditching the back-end-loaded payment. That looks to be a misreading of Morneau’s letter. It shows up clearly in the slide deck as “reduction in return to GNL” or Government of Newfoundland and Labrador.

No Muskrat in the rates… except for the Muskrat in the rates:  In 2018, Dwight Ball made a stupid promise that no one in the province would pay for Muskrat Falls.  When everyone burst out laughing at the idea, he modified it to no one would pay through electricity rates. 
And that’s the on he is sticking with in his remarks today and on Twitter.

It’s stupid because it is dishonest.

If the provincial government allows the Public Utilities Board to set rates properly – another of the SRBP proposals – then future electricity rates in the province should and would include some electricity and the cost of transmission from Labrador.  It’s possible that the amount would be covered by the amount currently going to pay for fuel for Holyrood but it’s still there.

And frankly, we should pay for what we actually use. The problem with the original payment scheme from 2010 – the one Dwight Ball endorsed along with the project in 2012 – is that people of the province paid for everything, including stuff they didn’t use. Others got it for free or for way less than cost and that was patently unfair.

So, it’s legitimate for some of your electricity rates to cover some of Muskrat Falls and the transmission line.  It’s not legit for us to cover it all while people in Nova Scotia pay zip for it.  And it’s really not legit to imagine we can use Muskrat Falls, as we inevitably will, and not pay for it.

Cash up front: “Monetizing” assets sounds ominous but from both the Morneau letter and the provincial slide deck this appears to refer to an option whereby the federal government would provide cash up front in exchange for repayment through future dividends from the transmission link. The value on this could be the $240 million a year, on average, the provincial government needs over the next decade to pay for the project.

It's actually the only federal cash that could potentially come from the agreement.  The biggest federal involvement is restructuring the financing.

Short-Term Items 

As part of the ongoing discussions with the provincial government over Muskrat Falls, the federal government has decided to waive two options that had potential cash significance for the provincial government in the near term.

The provincial government (through Nalcor) doesn’t have to contribute to sinking funds that would help pay off the loans.  This is worth about $150 million a year.  As well, the province doesn’t have to set aside money to cover cost over-runs.  That means the government doesn’t have to borrow upwards of a half billion this year to cover potential over-runs.

Project Delay

As recently as last December, the provincial government accepted Nalcor’s plan that the date for commissioning of the power plant and transmission line from Labrador was September 2020.
The Morneau letter gives the two governments until the end of 2021 or commissioning, which is first, as the date by which to have an agreement and the sate at which the relief rom the short-term initiatives ends.

That confirms the suspicion that this project is now upwards of 18 months behind schedule.