Million dollar baby #nlpoli

The provincial government has paid more than $830,000 to Wade Locke and companies with which he is associated since 2003, according to information released under the provincial access to information law. The information covers 22 contracts and contract renewals for the natural resources and finance departments as well as the provincial energy corporation.

More than $75,000 of that total has come since the Liberals took office in December 2015. Nalcor hired Locke in mid-2015 to provide the company with an assessment of the economic impact in the province of the company's operations.  The initial contract, started in June 2015, was valued at $87, 891. Nalcor renewed the contract in August and December 2015 and again in July 2016.   The total value of the four contracts is $176, 791.

The blindingly obvious #nlpoli

After all this time, it remains an enduring mystery how a guy who held himself out to be the great seer of oil prices still gets quoted on oil prices despite the number times he has fundamentally gotten it wrong.

Some local reporters still use Wade Locke as the go to guy on oil.

Here's a sample of what passes for insight in Newfoundland and labrador these days.  These quotes are from a recent piece at CBC by Terry Roberts:

"It's always been the case that at some point, demand would start to swamp supply."

And

"At some point in time demand will significantly exceed supply and prices will have to rise well beyond $50 as well. But again that's only a matter of time, and a matter of exactly when."

Just as there is a 50/50 chance of anything occurring - it either will or it won't - so too is it likely that, over time,  the demand for any commodity will swamp supply.  The result - inevitably - would be that prices would rise.

This is Economics 1001 kinda-stuff.

It's only a matter of time.

It is only a matter of when.

When could be tomorrow.

Or it could be a decade from now.
The thing for folks in government, having some idea about where prices are going can mean the difference between a massive surplus or, as in the more recent times, massive deficits.

Having insisted shale was nonsense and that oil was about to skyrocket any day now,  Wade is a wee bit more shy these days since those other predictions didn't pan out.

"I was one of the guys suggesting to government a couple of years ago use $105 (a barrel in preparing a budget), " Locke told Roberts.

"I don't have any pretension that anything I say with respect to oil prices has much in the way of precision."

Wade never actually had much precision, but at least now the old boy has given up the pretense.

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The inexplicable persistence of nonsense #nlpoli

“There was a very good job done … of boxing this province out [of the Equalization program] a few years ago,”

That was Premier Dwight Ball talking to reporters on Tuesday after the Throne Speech that set the agenda for his new administration. He was talking about the prospect that he might get some cash from Ottawa to cover the province’s massive deficit.

What Ball said isn’t true.

It’s hard to know why the false version of events lives on, but it does. All sorts of intelligent people continue to believe – and repeat – the story that Equalization reforms made in 2007 were designed to screw Newfoundland and Labrador.

But it is most emphatically not true.

The Uri Geller of MUN Economics Strikes Again #nlpoli

Does anyone really take Wade Locke seriously anymore?

Really?

Do they?

Seriously.

Go back to last October to see why.

The next time reporters have Wade on camera, give him a spoon to bend with his psychic ability.

Wade might just be able to do it.  God knows he sure can’t figure out energy pricing and sound economic policy.. 

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Ethnic identity economics #nlpoli

Wade Locke and Don Mills are two of the faces most associated with the current Conservative administration in Newfoundland and Labrador, aside from the politicians, that is.

Mills played a key role in Danny Williams administration.  Mills polling firm provided government with quarterly surveys.  Williams also tried to manipulate Mills’ survey results for questions on local politics that Mills used to market his research company.

The quarterly polling was key to Williams efforts to silence dissent and maximize his own freedom of political action.  The more popular Williams became, the less likely were any opposition politicians or news media to question his decisions. 

And for everyone else, the Conservative message was that any dissidents were out of step with the majority of Newfoundlanders and Labradorians.  Mills’ polling purportedly showed that Williams and his party were popular to an unheard of degree.  “He’s right because he’s popular and he’s popular because he is right,”  was a common Conservative talking point.

That’s why it has been so interesting the past few months that Mills has been criticising the provincial Conservatives in Newfoundland and Labrador.

Soothsayer #nlpoli

Wade Locke has had a profound impact on public policy in this province like no academic since Parzival Copes.

Locke has been intimately involved with Conservative policy since 2003.  He has provided advice to both the oil industry and to the provincial government and its energy company Nalcor.  He’s also acted as a public commentator on economic issues, often simultaneously and without having the conflict of interest inherent in such a position identified for the audience.

If you aren't on holiday somewhere,  take a look at this interview  Wade Locke did with Roger Bill of BellAliant’s community channel.  Wade’s comments will tie into a couple of posts coming later this week.

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The Elephant in the Room, the Astigmatic Seer, and other horrifying budget tales #nlpoli

Has anyone noticed a small problem in all the discussions about next year’s budget?

On Point’s David Cochrane had both NAPE’s Carol Furlong and the Conservative’s pet economist Wade Locke on the show to talk about the next budget.  Carol was warning against cuts.  Locke was talking about a request by Tom Marshall last year to reform the provincial income tax system. Locke and his students – are busily working them up, in close co-operation with the provincial finance department.

Can you see the elephant in the room?

Take a closer look #nlpoli

Premier Paul Davis hasn’t delivered any speeches, issued any news releases, or done anything else to explain who he is and what he wants to accomplish as Premier.

The guy has the job.

But he hasn’t told anyone anything about his plans.

On Wednesday, Davis had the perfect chance.  He delivered a luncheon speech to a few hundred people at the St. John’s Board of Trade.  

“Between now and next spring we’ll let our plans be known,” Davis told reporters after the speech.  “We’re planning as we’re moving along,” he added,  sounding suspiciously like an admission that they are making it up as they go along.

So what did he talk about in the speech?

Double-down Locke #nlpoli

“I didn’t see this coming,”  Memorial University economist Wade Locke told the Telegram’s James McLeod the other day. Locke was talking about the dramatic drop in oil prices over the past week and a half.

The day before, Locke was on VOCM’s morning talk show dismissing this low oil price stuff as just a passing thing.  No biggie.  And while everyone else is figuring the government is headed farther up a financial shit creek of Amazon proportions, Locke was absolutely confident that prices would go back up and all would be right. 

Sure, government might have to do some trimming, Wade offered, but they should do it gradually over time.  Like losing weight, he said.  If I told you that you had to lose 10 pounds, it would be hard to do it quickly.  But over time, much easier to do.

There’s something truly laughable about Locke’s metaphor because basically Wade is to sound management of public money what a Double-Down from KFC is to heart-smart nutrition.

Political Mummers’ Parade on Monday #nlpoli

Finance minister Tom Marshall will present his mid-year financial update on Monday.  It is supposed to be a way of bringing everyone up to date on how the annual budget is going. It’s an accountability thing.

Since the government’s fiscal year starts in April, the middle of the year was September.  So December is well past the mid-year.  As we all know, December is the last month of the calendar year so this mid-year report is a bit late there, too.  The only calendar that puts December in the middle of some year or other seems to be the provincial Conservative one.

The whole idea of a mid-year financial up-date winds up being a bit of a farce, then.  It’s much like having a consultation about what to put in the budget after the cabinet has already decided on the budget in secret beforehand.

Farce is not a word you associate with good government.  It’s more the type of word you’ll find to describe something like the annual  Mummer’s Parade.  For those who don’t know, mummering is a bit of Christmas entertainment when people pretend to be something they are not. Mummering is foolishness in a good sense of the word.  In politics these days, as with the Mummers’ Parade,  it seems that foolish is the new normal.

And that is not good.

Just when we needed new ideas… #nlpoli

There’s no small laugh to be had listening to Wade Locke, the government’s favourite economist.

He was all over the media on Monday talking about fiscal responsibility, cutting spending and all that sort of stuff.  You can find a tidy summary from the Telegram.

A couple of decades ago, Locke was advising the public sector unions.  Back then he was all in favour of borrowing and spending and spending and borrowing despite the crushing public debt and the most severe economic downturn since the Great Depression. Fast forward and Wade’s singing a different tune.

The laughs Locke can generate get much bigger when you look at the rest of what he had to say to reporters.

Managing Electricity Demand #nlpoli

Nalcor’s forecast for electricity demand on the island of Newfoundland doesn’t really show a massive increase over the next couple of decades.

Earlier this year, Memorial University economist Jim Feehan suggested that one alternative to Muskrat Falls was demand management.  That is, he suggested that Nalcor try some ways of getting people to use less electricity.

Wade Locke, Feehan’s colleague, and staunch supporter of Muskrat Falls, laced into Feehan. He dismissed Feehan at the time and, by extension, the role conservation might have as part of a comprehensive energy policy in the province.  Locke did change his mind.

Equally dismissive of demand management, Nalcor boss Ed Martin tried on some pretty vicious rhetoric about old people and freezing in response to Feehan.

Dunderdale rejects Locke’s advice on Muskrat #nlpoli

Sometimes you agree with people.  Sometimes you don’t.

All it means is that you agree sometimes and disagree at others.

Premier Kathy Dunderdale didn’t seem to understand that point when she spoke to the St. John’s Board of Trade back in January:

Memorial University economist Dr. Wade Locke, has concluded Muskrat Falls is the least-cost option by a factor of 2.2 billion dollars.  

It is interesting to me that the most vocal and ever predictable critics of the Muskrat Falls development were quick in their attempts to disparage the work of Dr. Locke – something they had not done previously when Dr. Locke has presented on, for example, the province’s financial position.

The Premier liked what Wade had to say because it matched what she wanted.  Well, these days, Kathy is in the same spot as the unnamed “most vocal and predictable critics” she found interesting six months ago.

Wading through Locke on Muskrat (Part 3) #nlpoli #cdnpoli

[continued from Part 2]

Debt

One of the issues Wade Locke set out to address was the impact Muskrat Falls would have on public debt. For some other information on Muskrat Falls and public debt, check this earlier post.

Slide 43 is a table of debt servicing amounts based on the amount borrowed and the rate of interest amortized over a 30 year time.  For example, $3.0 billion at 5% would cost $195 million in annual payments to pay the principle and interest. on the opposite end of Locke’s scale, $8.0 billion at 10% would cost $849 million each year.

Earlier in his presentation, Locke asserted that the provincial government can currently borrow money at 5% while Nalcor can borrow money at 7.5%.

The money to meet those payments would come from only one source:  electricity rates.  As noted right at the beginning of the presentation, the entire project is proposed based on having the ratepayers of Newfoundland and Labrador carry 100% of the cost.

This money would be in addition to other Nalcor costs for producing electricity in the province. The public utilities board is responsible for setting electricity rates in the province. The board must allow Nalcor to recover its costs plus provide a rate of return – essentially a profit – on its operations.  The board will also add an amount for Newfoundland Power, the electricity distributor on the island to determine the rate paid by residential and industrial consumers.

One of the important pieces of information needed to determine the impact on the public debt and rates would be the amount of money, if any, that Nalcor would raise or how it would raise the money.  Equity investors,  borrowing or subsidy from the provincial government all carry different implications for public debt.

There are different possibilities. Locke did not discuss them.  Instead he relied on other information as he presented on Slide 44. Locke did not indicate in the slides or his presentation where he got the information.

According to Locke (Slide 44), Nalcor would generate $550 million from its proposed rate (7.5 cents per kilowatt hour).  This would allow Nalcor to cover a loan of $8 billion at 5% with $100 million left for “other expenditures”., according to Locke. 

He also claims that revenue from “residual power” would generate up to $60 million.  This “residual power” is the power other than that designated for use in Newfoundland and Labrador or the portion shipped free to Nova Scotia. 

As a result, Locke concludes, the extra debt won’t be a problem for the provincial government or Nalcor.  Locke has not explained how he reaches this conclusion other than by the circular logic that since Nalcor has provided enough theoretical money in its estimates to cover the payments, the payments will be covered and therefore there is no problem.

Since Locke does not explore other possible financing options, he has no basis to offer any assessment of how those financing options might affect public debt and public spending.

For example, the provincial government might opt to give borrow money at its lower rate of interest and give it to Nalcor as a gift. That may not be the current plan but it is one way of handling unanticipated massive cost over-runs.  That would affect the amount Nalcor could charge in rates and it also changes the amount taxpayers would have to divert from other expenditures to service the larger, direct public.

There are other curious points in Locke’s slides.  He does not explain why the residual power would net slightly more than 10% of the revenue generated within Newfoundland and Labrador for the same amount of electricity.

Most significantly, though, Locke does not explain where this power would be sold.  There are no current sales for it, nor are there any likely sales given the state of markets in nearby states or provinces.  in other words, Locke is just speculating and his amounts for “residual power” are fictitious.

Financing such a large project has significant implications for public finance in the province.  Locke disposes of the issue in two slides.  They appear to be based on a series of unsubstantiated assumptions or claims such as Locke’s assertion that Nalcor’s proposed rates would definitely give money “left over to retire other provincial debt, to fund other public services or to reduce taxes.” 

At best, those are policy decisions not taken, yet Locke pushes them out there as if they were real benefits.  The assumed benefits are based on other apparently untested assumptions, including the one that Nalcor’s calculations are right.

Assuming the can opener

Locke’s last series of slides (45 and 46) cap off a series of unsubstantiated claims with a flourish of more.

For example, on Slide 45, Locke claims that a connection to the ‘North American grid” would allow other energy developments including onshore wind potential on the island and Labrador or “stranded” natural gas. 

The province is already connected to the North American grid from Labrador.  We do not need Muskrat Falls to facilitate the development of wind energy in Labrador. 

An interconnection to Nova Scotia would allow Nalcor and others to develop wind potential on the island.  We don’t need Muskrat falls to do that.

As for exports, Locke failed to examine any potential export markets.  There are none, especially for very expensive power at Muskrat Falls that grows even more expensive when transported the long distances from Labrador or the island to market. 

Locke does not seem to recognise the logical problem in his claim about gas.  If gas is too expensive to produce electricity to beat Muskrat Falls electricity, then it is highly unlikely that natural gas could make electricity in Newfoundland and Labrador that could be cost competitive in markets where even Muskrat Falls is too expensive to penetrate successfully.

Recall that, as Jim Feehan noted, US producers are making electricity from natural gas next to the market that costs no more than four cents per kilowatt hour to produce and very little to transport.  If Muskrat Falls electricity will cost at least 14.3 cents per kilowatt hour in St. John’s, imagine what it would cost to shop the same electricity to Ontario? No wonder Nalcor can’t sell the power outside the province and could only give it away free to Nova Scotia.

Locke’s Conclusion

Locke’s conclusion essentially repeats the untested assumptions/assertions  of his presentation.

He does add a new one:

Without the extra energy made available by Muskrat Falls, there is serious questions whether or not the mining projects expected in Labrador within the next 10 years can proceed. Currently, we do not have sufficient recall power. If all these projects proceed as expected, we may need another 400 to 500 MW of power. This may require the development of additional resources on the island (hydro, wind, etc.)

His claim that “we do not have sufficient recall power” is simply not true.  In the same way that Locke ignored surplus electricity on the island , he also ignores the 5800 megawatts of electricity available in Labrador for future development.

Churchill Falls electricity is available under  the right circumstances, including a use of the Electrical Power Control Act’s provisions on electricity control and availability within the province.

The rest is just grasping. Labrador also offers other hydro-electric and wind resources that could meet an industrial need.  What’s more, Muskrat Falls could supply a Labrador contingency on its own without an interconnection to the island.  After all, if the island and Nova Scotia would need 60% of Muskrat Falls electricity, the remainder would be insufficient to meet an industrial development of the size Locke suggests.  It would be far cheaper and easier to meet Labrador needs with Labrador power rather than develop “additional resources on the island” that Locke and Nalcor have already insisted either don’t exist or are too expensive to develop.

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Wading through Locke on Muskrat (Part 1) #nlpoli #cdnpoli

An hour-long presentation, 48 slides and an interview with David Cochrane.

For all that, some apparent confusion lingers about what Memorial University economist Wade Locke included in his presentation and what he didn’t.

Let’s see if we can pick our way through the entire thing and assess Locke’s comments in detail.

The Topic

“Muskrat Falls:  The Best Option?”.  That was the title of the presentation on January 17.

The advance publicity included these questions, suggesting that the talk would cover the topics they mention.

“Is this the best option for meeting the province’s need for energy? Will we be paying too much to generate electricity? Are there other technologies which will provide lower cost energy and still meet the expected demand? Are the costs of the project, the estimated cost of oil and other important factors realistic? Will the province be burdened with unmanageable debt?”

The poster for the event contained fewer questions but the general sense remains of what the presentation would contain.

The Slides and the Video

In keeping with its usual practice, the Harris Centre broadcast the presentation via the Internet and made both the slides and the video available online the day after the session.

Locke also appeared on CBC’s On Point on Saturday. 

What follows, as far as Locke’s comments are concerned, is all taken  from those sources.

Locke and Muskrat Falls

Slide 2 is Locke’s outline for the presentation.  His outline included these points:

• Introduction
• Why get involved?
• How did NALCOR Derive the Price?
• Island Load Forecast Production Mix
• Can we price ourselves out?
• C.D. Howe Study
• Cost Comparison of Alternatives
• Calculating the Supply Price
• Oil and Gas Prices
• Lower Fuel Cost – A Viable Alternative
• Is Natural Gas an Alternative?
• LNG
• NL Electric Bills
• Shale Gas
• Debt Burden
• Conclusion

Slide 3 is the Introduction.  Locke notes that "he has been “on the record as supporting the Muskrat Falls Development as a good for the province” but that David Vardy’s assessment caused Locke “to look more closely at the issues.”

On slides 4 and 5 Locke deals with some of the public comments made online about him and his relationship to Nalcor and the provincial government.  Locke states that he is “not under contract to NALCOR or the provincial government for anything pertaining to Muskrat Falls.” [Emphasis added]

On Slide 6, Locke gives the three questions that he believes needs to be answered.  Even with the introduction, this suggests that Locke’s presentation will address these questions:

• Do we need the power?
• Can we avoid the need?
• What is the least cost alternative?

Deriving the Price

Slides 7 and 8 describe the process by which Locke suggests that Nalcor derives what Locke terms as the “price associated with Muskrat Falls.” Locke doesn’t make clear what price he is referring to. He also doesn’t give any firm indication where he gets the information.   The use of wording such as “would have” makes the whole thing appear highly speculative and uncertain.

The most significant comment in this pair of slides, though, is Locke’s reference that the cost of the project “is 100% equity financed (NL Gov.) and that the required rate of return would be 12%.”  This appears to come from PUB Exhibit 15.

There are very few public comments about how Nalcor and the provincial government propose to structure the corporate ownership of the project. We’ll take a deeper look at this as we progress through the slides and in a future SRBP post on project financing.

The second most significant comment is this one:

Eight, this gives them a revenue flow that ignores initially the potential revenue from the residual energy and the Nova Scotia 20% commitment…”.

This confirms that the financial model for the entire project, including a guaranteed profit for an equity interest holders, is based entirely on the sale of power within Newfoundland and Labrador.  There are no export sales at all.

Locke does hint at the potential for other sales in the last bullet on Slide 8.  What he doesn’t do here or anywhere else is examine the potential export market, the cost implications of the proposed routing, or the physical capacity on the proposed line to Nova scotia that would limit the export potential of that line.

In other words, Locke holds out a prospect here of export sales without assessing – at any point – if this prospect is real or entirely theoretical.  That’s a major shortcoming of his presentation.

The Need

Slide 9 is a graphical representation of the forecast demand on the island for 2010 to 2067.

This is not new information. You can find details in the joint environmental assessment panel documents and the public utilities board documents. 

Locke’s comment on the bottom seems to be a defence of the people who made the forecast: “ I have no reason to believe that they are motivated by anything other than to do their job as best they
can.”  Locke offers no assessment beyond stating that he thinks the forecast is “reasonable.” He does not explain why he thinks this or how he came to the conclusion.

Note, however, that except for the arrival of Long Harbour in about 2016 and two other years where annual growth is forecast to be above 1.0%, growth is consistently less than one percent.

Note as well, that demand isn;t forecast to exceed 10,000 gigawatt hours until about 2036, i.e. five years before the end of the 1969 Hydro-Quebec contract for Churchill Falls power.

This information appears to come from PUB Exhibit 16.  This is a document Kathy Dunderdale has erroneously called a strategy.  Exhibit 16 is a planning document.  It describes the demand forecasts, generation capacity and planning assumption that Nalcor uses to manage the island electricity system using two scenarios.

Comparison of Total Production Mix;  Isolated Island versus Infeed

In Slide 10, Locke presents what is essentially the stock Nalcor comparison. It matches PUB Exhibit 99.  On the left, the generating requirement after 2036 is met by an increased thermal output from what appears to be a thermal generator replacement for Holyrood that burns Bunker C, like Holyrood.

Blow the slide up, if you need to and see if you can find any amount of wind energy.  Essentially, there isn’t any beyond the modest amount already in place. In the “Infeed” scenario, wind appears to vanish as a power source.

“Infeed” means Muskrat Falls.

The Feehan Straw Man

Locke devotes six slides (Slides 11 to 16) to deal with the approach proposed by Memorial University economist Jim Feehan in a paper released on January 11, 2012. That’s about 14% off Locke’s presentation not including the title slide and the introduction and conclusion.

Locke misrepresents Feehan’s paper, particularly on slide 15 when he refers to jacking up prices by 80% above current levels. Feehan did not suggest price changes as a way of avoiding increased generation by wiping out the demand need. 

Feehan suggested using a different pricing approach to induce a change in how demand grows.  A change in the pricing approach would also reduce the difference between what it costs Nalcor to run Holyrood – when it does – and what Nalcor recovers from the current electricity rate on the island.

When Locke notes in red that on slide 13 that “It does not appear that NL is highly subsidized relative to other jurisdictions” there is no information in the presentation to back that up.  Slides 13 and 14 only show the cost per kilowatt hour for electricity paid by consumers in Canada compared to an average.  It does not give any information on the difference between what the electricity costs to produce and what consumers pay.

Slide 16 contains incorrect information.  Locke claims that “In July 1, 2011, rates rose by 7% because fuel costs increased from $84/bbl to $103/bbl. That is, prices are going up anyway in the presence of higher oil prices.”  Prices may move up and down based on several factors including oil prices and the amount of oil used by Nalcor to generate electricity. This is an important distinction.

Supply Price

This slide (17) is a bit of a head scratcher and Locke did not explain what all the lines meant.  The slide excludes significant information and anyone reading this slide who wasn’t familiar with the issues could be easily mislead as a result.  The “supply price” is the assumed cost of generating electricity at Muskrat Falls.  The figure is given as a cost per megawatt hour.

Problem:  this slide excludes transportation and other costs that would added to give a final cost to the consumer.

Locke did not indicate what “energy adj. [usted?] for inflation” means.

Slide 17 repeats the supply price information. It also omits crucial information to determine the cost per kilowatt hour for consumers.  As such, the slide lowballs the costs and also gives a false comparison were someone to compare this cost to the ones presented on slides 13 and 14, for example.

This slide also contains the claim that:

The higher the required return, the higher the monthly electricity cost to the ratepayer and the larger will be the dividend to the shareholders and the better off are taxpayers (more expenditures, lower taxes or reduced public debt).

Nothing in the presentation deals with those concepts. Locke doesn’t give any clue as to where he got these ideas from.

Certainly, logic suggests that a higher rate of return would require a higher cost to the consumer.  A higher rate of return does not necessarily mean that the dividend would be greater for the shareholders of the public and private sector companies involved in a project.

Another Unsubstantiated Claim

And on the last claim, Locke has absolutely no information to support his contention that taxpayers would be “better” off paying a higher profit margin and consequent higher unit price to companies in the public sector or private sector.  Each of the three benefits Locke claims would flow are all matters to be decided by a future provincial government at a future time based on factors Locke doesn’t consider in this presentation or anywhere else.

[In Part 2, SRBP will start at Slide 20]

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Locke admits assessment was “probably not” fair #nlpoli #cdnpoli

In an interview with the Telegram that appeared in Thursday’s edition, Memorial University economist Wade Locke admitted that his assessment of Muskrat Falls probably offered an unfair comparison with alternatives.

When asked by The Telegram, “If that doesn’t include transmission, is that a fair comparison?”
Locke answered, “Probably not. You’d want to include transmission as well.”

The impact of Locke’s omission was to hide almost 50% of the estimated cost per kilowatt hour for the project. As SRBP noted on Wednesday, that rendered his comparisons useless.

It also meant his conclusion – that Muskrat Falls was the cheapest solution – had nothing to support it.  “Unfounded” would be the polite word for it.

No word on whether Locke will get a do-over.

No word either on whether or not the Western Star editorial team will retract their Thursday editorial in light of Locke’s admission.

Under a headline “A trusted opinion”, the crowd on the west coast called Locke’s voice “independent and dependable”.  The editorial said that Locke’s opinion “will almost certainly carry more weight than many other opinions.”

D’oh!

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Locke and Muskrat Falls: some quick points #nlpoli #cdnpoli

Memorial University economist Wade Locke delivered a presentation on Tuesday night about Muskrat Falls, a project he had already endorsed publicly.

The Harris Centre at Memorial University, the Atlantic Provinces Economic Council and the MUN economics department’s Applied Economics Research Initiative sponsored the talk.

The pdf of Locke’s slides should be available from the Harris Centre website along with the video of the presentation plus the question and answer session that followed.

You can tell the topic is hot for two reasons.

First, they packed the main hall plus a couple of fair-sized rooms in which people could watch via the Internet.

Second, Locke started out his talk with a pre-emptive declaration that he was doing the talk on his own, that he wasn’t sponsored by anybody, under contract to anybody and that he valued his professional reputation above all else.  Locke insisted he believed everything he was saying, which should be pretty much a given.

Here are some quick observations:

You will pay for it all, plus profit.  Right up front, Locke pointed out the most obvious thing of all, namely that taxpayers in this province will pay for the entire project, plus a rate of return of as much as 12%.  Now Locke never said it straight out.  In fact, Locke never made it plain at any point during his talk who actually was paying the bill.

But it was there, just as your humble e-scribbler noted in October 2010.  That’s not clairvoyance.  That’s just what comes from research.

Toward the end of his presentation, Locke blew off any concern about the debt since that would all be recovered from the rates, no matter what.

Wade just never noted that the people in the room would be covering the entire shot.

Plus profit.

When an online question asked about Nova Scotians getting the electricity cheaper than the people who own the dam, Locke blew it off as an irrelevant consideration from an economic standpoint.

Situating the Estimate.  That’s what they call it in staff college.  You present the information that fits your pre-conceived solution.

And having already endorsed Muskrat Falls, presumably before he really knew anything about it, Locke basically recited the reasons why his initial conclusion was right and everyone else is wrong.

Locke started by torquing his description of the cost of the project.  A mere 7.5 cents per kilowatt hour.  As Jim Feehan pointed out in the Q and A, Locke had lowballed the number.  The cost of delivered Muskrat electricity would be 14.3 cents per kilowatt hour based on current estimates.

At least.

And that of course made all Locke’s subsequent comparisons useless.

They were useless because they effectively compared a misleading – bordering on the false – Muskrat cost to a cost for some alternatives.

Once you realise that Locke torqued the cost, you’d have to be suspicious of the basis on which he presented the costs of other projects.

Did he highball them?

Maybe. 

Problem is we don’t know.  People would have a right to be suspicious because Locke didn’t make it clear how he got either his Muskrat figures or his other cost figures for projects he contended were more costly.
Locke blew his own credibility, at least among people who actually knew what he had done.  Expect to hear more about that in the days ahead as word spreads.

Burn, Straw Man, Burn.  Early on the presentation, Locke savaged colleague Jim Feehan with a caricatured presentation of Feehan’s paper for the C.D. Howe Institute.  Locke presented Feehan’s argument [as] though Feehan believed government could use pricing to wipe out demand such that Muskrat wouldn’t be necessary.*

Feehan didn’t say anything close to that. 

Locke even trotted out the melodramatic – and ultimately childish -  line Ed Martin tried on about old people in the winter.

Feehan sorted Locke out at the end but Locke’s comments about Feehan were insulting to Feehan professionally and to the audience’s intelligence.  For a guy who defensively moaned about his own professional reputation at the front end of the talk, Locke had no trouble tearing into a colleague based on what was utter crap.

Controlling the Escalation.  As much as Locke got weepy over old people and high electricity prices and for all his teary comments about the impact of policy ideas on real people, Wade didn’t give a toss about Muskrat Falls and the impact its high prices would have on the same people he supposedly wanted to defend.

Locke referred to Muskrat Falls as giving government the ability to control price escalation.  The alternative – a completely false one – was to be at the mercy of fluctuating oil prices. 

Muskrat Falls will take care of the potential hike in electricity because of oil prices by guaranteeing the prices will shoot up regardless of what oil does.  And if oil goes down in price, local consumers will be stuck paying for Muskrat.

Former PUB consumer advocate Dennis Browne noted during the Q and A that Locke’s assumption of escalating electricity prices due to oil was false.  Electricity prices don’t jump up every year, like clockwork, and they sure don’t jump every time oil prices go up. 

Locke didn’t really answer Browne’s point.

Humour High Point:  Moderating the Q and A, Harris Centre director Dr. Rob Greenwood said that the Harris Centre was a spin free zone.  Evidently, Locke’s presentation  - after the price bullshit alone – wasn’t covered by the anti-spin rule or Rob didn’t pick up on the heavily torqued comments by the presenter.  Either way it was about the funniest thing that happened during the evening.

What debt problem?  There isn’t one according to Locke.  He flashed a slide that showed annual costs Nalcor would pay for given amounts based on certain interest rates. 

Worst case scenario, as your humble e-scribbler would put it: the gross public debt would show up as close to $20 billion (the current $12 billion-ish plus an additional eight billion in borrowing from Locke’s slide).

That would add annual debt servicing costs of $800 million for Nalcor.

That would show up on the annual public accounts, incidentally.

The debt would be funded, of course, because local ratepayers would be forced to pay the full amount need to pay the loans plus deliver a guaranteed profit.   But…

Locke didn’t do any calculation of the wider implication of any of that.  He just said any added debt would be no problem since there’d be revenue to cover it.

Yep.

All those old people on fixed incomes would be paying the guaranteed high prices Locke ranted against at one point and ignored at another.

What the Harris Centre should do next:  Locke’s presentation was weak.  All his pre-emptive apologies at the front end couldn’t cover over the flaws.

Locke’s analysis was far from complete and he torqued too many details for it to meet the standards people should be getting on such an important subject from the Harris Centre.

Aside from apologising to Jim Feehan for Locke’s remarks, the Harris Centre should organize a series of talks on Muskrat Falls.  The public would definitely profit from a better presentation on behalf of the project proponents as well as a fair presentation of arguments by Feehan and David Vardy.

40 slides too many:  Opponents of Muskrat Falls can explain in a few minutes why they have doubts about the project.

Simple.

Clean.

Factual.

Give a  knowledgeable supporter of the current administration and Nalcor, one hour of uninterrupted time, 48 slides densely packed with verbiage, and an attentive audience and he still can’t  explain why Muskrat Falls makes sense.

That should tell you all you need to know.

- srbp -

*  [word in square brackets added to earlier version for clarity]

Fooled him, too, did they? #nlpoli

Celebrity economist Wade Locke thinks it’s just great that the provincial government is going to use any surplus on its current budget to pay down debt.

As he told the Telegram:

Putting it towards debt was the best thing, I think, you could do.

Too bad for Wade that he is praising them for something they aren’t doing.

Wade did have some comment about spending the cash:

Spending it would be wrong and it would create more problems in the future.

Wow.

Two for two in one quote.

Wade’s on a roll.

Hang on.  Wade did the hat trick:

“You still have to, when you’re doing your budgetary stuff, think about what is the long-term focus you want to have. What are your priorities?” Locke said Thursday. “We haven’t had that discussion, and I don’t think the government has had that discussion either.”

Of course, they’ve had the discussion, Wade, old man.

They had and then they had their decision ratified in the recent election, or so they thought.

Their priority is Muskrat Falls.

Wade can’t comment on that, though just like he wouldn’t comment on it when he made his earlier comments about the coming debt crisis.

Wade, you see, has done some consulting work on the project. That’s why he left it out of his debt analysis.

Maybe you should read Wade’s comments again about what a good idea it is to pay down debt.

But this time take an extra pinch of salt beforehand.

- srbp -

Hibernia benefits overestimated: economics prof

“The oil industry success we enjoy today is not what many expected… many people could not believe in the vision of Newfoundland and Labrador as a successful oil producing province.”

Whoever wrote those words for Kathy Dunderdale to read at the re-announcement of the Hibernia South project could hardly know the truth of them.

Nor could the writer likely understand how close to home some of those negative nellies were.

As managing editor of the Telegram in 1992, Bill Callahan believed the project was best scrapped since it represented “large-scale exploitation of non-renewable petroleum resources without adequate or perhaps any return.”

Then there was Peter Fenwick. The former New Democratic Party leader lambasted Hibernia in 1992 as a “give away”:

The money we taxpayers are throwing away on Hibernia is equal to a hundred Sprung greenhouses.  In future, Brian Peckford, Clyde Wells and Rex Gibbons will be vilified by generations of Newfoundlanders for the enormous waste of taxpayers’ money.  Unfortunately we, and the rest of Canada will be stuck with paying for it with our tax dollars.

None, though, could match the pessimism, negativity and sheer crap about Hibernia coming from none other than Wade Locke. 

Yes, that’s right:  Wade Locke,  the same Memorial University economist who is the darling of the current provincial government administration and who was, it should be said, looked on rather favourably by their Tory forefathers in their day too.

As Locke told The Telegram’s Pat Doyle in September 1990, only a few days before Wells, Gibbons, John Crosbie and others signed the final agreements in St. John’s that started the Hibernia project rolling:

"While it may be true that the sun will shine one day, it does not appear that 'have-not' will be no more because of Hiber­nia."

Those words by Wade Locke, an assistant professor of economics at Memorial University, appear to sum up the realistic view now held by experienced observers on the potential benefits of the large offshore project.

But that wasn’t all. 

Locke was extremely pessimistic about the revenue likely to come from the project:

"That is, each dollar of offshore oil revenue going to the provincial trea­sury will result in an increase in the province's ability to spend by two to three cents," Mr. Locke said.

Provincial government estimates suggest the equalization payments would fall by somewhere in the range of 90 to 95 cents.

Mr. Locke said using his calcula­tions, if the project were to generate 13.8 billion In direct revenue for the treasury, for example, after adjust­ing for equalization losses and equali­zation offset grants, the province's net fiscal position would have changed between 176 million and $114 million over the life of the project or an average of $3 million to $4 million in net revenue a year over the 26-year project.

To put that in perspective, Mr. Locke noted the province expects to spend $3.3 billion In the current fiscal year.

“This means that the average net revenue from Hibernia is equivalent to about one tenth of one per cent of the 1990 projected government expen­diture,” said [Locke in] the paper [printed in the Newfoundland Quarterly.]

"Thus, one should not expect that the provincial government will, as a result of Hibernia, have an enhanced ability to improve our road system, education services, health services or any other government services that are of primary concern to the aver­age Newfoundlander."

Yes, when you read stuff like that you just have to chuckle at all the Kreskins who took turns peeing all over the Hibernia project. Heck even Dunderdale and her boss used to refer to it as a massive give-away.  Used to, that is, until they used the deal as the basis for their own negotiations over the extension project.  The old Hibernia deal actually delivers the largest bulk of the cash they claim will come from the extension.  Honesty would prevent Dunderdale and her crowd from doing anything but acknowledging the old deal for its value.

Meanwhile Locke now gets invited to speak in glowing terms about the great offshore oil industry at an event marking the 25th anniversary of the deal on which it is all based:  the 1985 Atlantic Accord.

And that original Hibernia deal they all loved to hate? 

Well, based on the same numbers used by the provincial government and quoted by CBC in the supper-hour news tonight, that 1990 deal will produce more money for the people of Newfoundland and Labrador than Hebron, the White Rose extension and Hibernia South combined.

And it exists today, unlike the Lower Churchill dams or mythical aluminum smelters drawing power from them.

The billions coming from Hibernia will continue for more than another decade to pay for road improvements, education services, health services and any other government services that are of primary concerns to ordinary Newfoundlanders and Labradorians. 

The money from Hibernia has helped wean Newfoundland and Labrador from its financial dependence on hand-outs from Ottawa. The dignity and self-respect that comes from that accomplishment alone was worth the gamble. The only people who seem to lament that fundamental change in the province and its people are those who never did  - deep in their hearts - look forward to the day when the hand-outs stopped. How laughable that some of those people get credit for a change they fought against.

The creation of a new industry and the transformation of a people.

That’s not too bad for a project whose benefits an expert told us were overestimated.

-srbp-

Equalization flips, flops and fumbles

Danny Williams once scorned the O’Brien formula that counted only 50% of the province’s oil and mineral revenues saying that the concept had “Ralph Goodale’s fingerprints” all over it.

Premier Danny Williams called the report "some kind of joke - otherwise it was just a bad dream."

He said the idea unfairly penalizes Newfoundland and Labrador, and is essentially the same plan that led him to storm out of first ministers' meetings in the fall of 2004.

"It's got (former Liberal finance minister) Ralph Goodale written all over it," Williams told reporters at Confederation Building.  [Rob Antle and Jamie Baker, “Report would erase Accord gains”, Telegram, 6 June 2006]

Instead, Williams wanted a formula that didn’t count any of the province’s non-renewable resource revenues.  Danny Williams wanted that 100% exclusion so badly he went to war with Stephen Harper hurling every name imaginable at the Conservative leader for not living up to the campaign promise in two elections.

Never mind that in letters to the federal party leaders in December 2005 Williams stated that the provincial government wanted to see the 100% inclusion of non-renewable resource revenues.

Now, that 100% exclusion isn’t the good deal after all.

Now the one with Ralph’s fingerprints all over it is the right one.

And Danny Williams wants it.

The fingerprints one.

Not the no-greater-shame-than-a-promise-unkept one.

He wants it so badly he’s prepared to go to war to undo a slight targeted directly and deliberately at Newfoundland and Labrador.

Well, maybe not war, exactly he said a couple of days after launching the latest Equalization jihad.

Maybe a one year delay.

Still keeping track?

The tale of Danny Williams’ positions on Equalization since 2003 has more twists and turns in it than a road along Newfoundland’s rugged coastline, and the feisty Premier has followed every one doubling back on himself countless times in five short years.

Actually, the O’Brien 50% formula is good this time only because it apparently allows the 1985 Atlantic Accord – the real Atlantic Accord – to unlock more cash for the provincial coffers.

But Danny wasn’t always in love with the 1985 Accord.

Shortly after coming to office, Danny Williams launched the first of his now trademark hyperbolic assaults on a deal he said was robbing Newfoundland and Labrador of its offshore oil revenues and sending them off to Ottawa.

Nothing could have been further from the truth and those of us who dared say so publicly at the time suffered either scorn or curious pity for daring to doubt the Premier’s judgment.

When Williams snagged a $2.0 billion cheque from Paul Martin and Ralph Goodale in January 2005 as part of a new offshore transfer deal, the first thing he had to admit was that nothing had been further from the truth than the line he’d been spinning:

Newfoundland and Labrador already receives and will continue to receive 100 per cent of offshore resource revenues as if these resources were on land…

What’s more, a Telegram story from late January 2005 by Rob Antle contained this nugget of truth:

Because of quirks in the system - Accord offsets are tied to previous-year equalization drops - Newfoundland actually got back slightly more than 100 per cent between 1999 and March 2004.

The province took in $429 million in offshore revenues, a senior federal official said, while receiving total offset payments of $466 million.

Senior provincial officials had no beef with those figures, acknowledging that contention sounded accurate.

In effect, up to March 2004, the so-called clawback had no claws.

It never did.

And that 2005 deal?

Well, the public heard all sorts of predictions  - at the time - that the deal was worth $2.6 billion up front (even though the cheque was for $2.0 billion) and maybe even more later on.

Jack Harris, then the provincial New Democratic Party leader predicted $4.9 billion.  Wade Locke, destined to become the Premier’s favourite economist, predicted $5.2 billion over the first eight years of the deal.

Of course, at the time, projections (including one by Wade Locke) had the province going off Equalization within five years – just as it did – even without the insanely high oil prices that turned up.  The odds of getting more cash was in doubt from the beginning.

Nonetheless they persisted.

In fact, at least one of them got annoyed when someone point out that his math skills were suspect.

As it turned out, the deal was never worth more than the first cheque.

The provincial government doesn’t qualify for Equalization any more and as such can’t earn any more credits against the cash advance.  There is more than $1.1 billion sitting  in the credit column, according to the latest audited public accounts for the province  and odds are it will never be drawn down let alone generate double as the politicians originally predicted.

This pattern of flips, flops and alarums on the big issues isn’t the only aspect of the annual Equalization tirade.

In December 2007, former finance minister Tom Marshall announcing the government had opted for the O’Brien formula in late 2007, kicking the crap out of the 1985 Accord offset formula and former premier Brian Peckford along the way.  Four months later, Marshall announced the provincial government would be sticking with the old Equalization formula and the 1985 offset in his spring budget.  All the while, Marshall fell over himself trying to explain offsets and the virtues of O’Brien versus 1985.

Note at the time that Marshall indicated sticking with the old formula would offer the best cash return over the following five years.

Then there was the Great Cap. Wade Locke’s initial assessment [full article here] of the 2007 federal budget led him to recommend switch to O’Brien/50% in 2009 to maximize revenues.  He then sparked a controversy when he discovered caps on the province’s offset deals the feds hadn’t previously disclosed.  Locke’s analysis served as fuel for the provincial government’s attack on the federal government.  It produced no assessments of its own but relied exclusively on Locke’s public analysis.

Locke then produced a new analysis that still excluded an assessment of 100% exclusion but which found that  - get this -  the old fixed formula delivered a better deal than O’Brien/50%.

Incidentally, Danny Williams told a CBC Radio audience on March 26, 2007 that the provincial government planned to flip to O’Brien in 2009 to maximize its cash take.

Then, most recently, Wade Locke told NTV News on January 28 that the net loss to the province would be $500 million or less from the most recent federal budget.  Less than a day later, he revised his projections after speaking with provincial finance officials.

A proviso on his estimate prepared for the Atlantic Provinces Economic Council  released January 29  suggests more information is needed.   Nevertheless, Locke’s new assessment – prepared and released less than a day after his first assessment  - now backs the provincial version.

Oddly, Locke’s new observations do not appear to include an assessment of O’Brien/100%. It’s even more odd considering that his 2007 analysis suggested 100% exclusion was the best.  Now it is supposedly not good at all.

Confused?

That’s not surprising.

Confusion appears to be the order of the day when it comes to Newfoundland and Labrador and fiscal issues.

Makes you wonder, though, with all this flipping, flopping and general policy confusion, why would anyone – including reporters and politicians  - accept anything these guys say without evidence.

-srbp-