Andrew Furey's Equalization Law Suit
Predictable own goals in weak case
By his own admission, Premier Andrew Furey wasn’t fighting about Equalization very hard with his friend Prime Minister Justin Trudeau even though Newfoundland and Labrador was supposedly losing money badly enough that Furey has now launched a law suit to get the courts to fix whatever problem there is.
Furey kept quiet about Equalization because he didn’t want to bugger any chance to get Ottawa’s help to pay for Muskrat Falls. In the event, Furey took a huge chunk of the cash Ottawa forked over to pay for the fiasco on the Lower Churchill and directed instead to continued government overspending. And on top of that diverted rate money, this year, Furey’s government will borrow $2.0 billion more to cover record spending.
Then a couple of weeks ago, Furey said he isn’t interested in winning in court. He just wants to cut a deal politically. That further weakens an already weak position and the statement of claim, filed on Friday June 21 by the provincial government’s lawyers - released publicly five days later - only weakens the weak case even further.
Talking about your strategy publicly is dumb. Always. Furey has basically scuttled his project before it really got started. Worse, talking so that the punters know you aren’t serious also destroys any political value from even posing as a person who will fight against evil Ottawa for something.
In that sense, Andrew Furey’s buddy-buddy appearance with Danny Williams last week - *that* announcement is something for Wednesday’s column - also gave those of us watching Furey a convenient link to another failed fake fight with Ottawa, namely the one Danny fought at the start of his term as Premier.
What Danny Williams got in the Equalization offsets war with Ottawa in January 2005 was precisely what he rejected in May 2004: a fixed amount of money over a short period. That’s all. What’s worse, in the details the deal he signed in January was worse than the deal he performatively rejected on October 2004 in one crucial respect.
The October deal was guaranteed to renew beyond the initial four years. That’s because to stop the money, Newfoundland and Labrador had to hit two targets, one of which - a debt ratio - was one it would not be able to reach in four years. The other one - being a have province - was guaranteed to happen based on known trends at the time. But in January, after three months of posing and flag posturing by Williams, all that Newfoundland and Labrador had to do to stop the money was hit the one target everyobe knew was guaranteed. The January deal only appeared to be worth more than the October deal because for the news release, both governments assumed a higher average price per barrel of oil in January than they’d used in February. The guts of the deal were the same as May 2004 and the details worked against what Newfoundland and Labrador supposedly wanted, which was a permanent Equalization payment equal in value to oil revenue.
Williams failed in 2004 because neither he nor his political advisors understood either federal-provincial politics or federal-provincial fiscal relations. What they did know how to do really well was baffle the punters, many of whom still believe Williams delivered a miracle despite the evidence in front of their eyes he didn’t. After all, if Williams delivered what he'd wanted, Furey wouldn't be fighting what amounts to the same battle again.
The statement of claim follows the predictable arguments discussed here last week. There’s nothing new at all. We just have some details and sad to say those details tend to blow up the provincial government’s claim. Let’s look at some of the bigger examples.
For starters, the amount we are talking about is, at the low end, a mere $100 million a year on average since 2018 and that’s due entirely to the workings of a cap on payments to ensure recipient provinces cannot get a higher per person income than non-recipient provinces. That’s it. $600 million in total. The government has borrowed upwards of two and a half times that in a single year just to balance the books due to overspending.
This is chump-change and even if, by some miracle, the federal government managed to fall for this convoluted mess of an argument, the provincial government would still be racking up debt each year at levels that are staggering.
The upper end of the amount the provincial government has supposedly lost, we are looking at about $7.0 billion. That’s what the statement of claim gives as the amount of Equalization the provincial government should have gotten if it had been able to hide all its oil revenues from Equalization. At the same time, the claim also mentions a perverse incentive not to develop resources since the government cannot claim its development expenses on resources as a credit to let it get more from the Equalization pool.
That marries up the familiar western Canada welfare bums argument with a new twist that conflates hydro-electric development at something like Muskrat Falls with offshore oil. The offshore royalty regime lets developers claim credit against royalty payments for development costs until the company recovers those costs through sales.
In this part of the claim, the provincial government is its own argument *against* the claim itself. To make Equalization a disincentive to resource development, Equalization must be worth more than resources.
The claim gives a figure of about $7.0 billion as the total in lost Equalization since 2009, the year the provincial government stopped getting Equalization payments. In that same time - 2009 to 2024 - the provincial government collected more than three times that much in oil royalties alone (~$ 22.5 billion). It's cost to develop the resources was zero. If you add in the indirect benefits of job creation, salaries, and related taxes, the government haul from offshore oil would be five or six times larger than the lost equalization payments or more.
The perverse incentive argument is also weak because in this province’s case it puts together both oil and gas, each of which really makes a self-defeating contrast. There is oil, deliberately developed by the provincial government in the private sector and with royalties set solely by the provincial government. It has been a breath-taking success in every respect.
Contrast that with Muskrat Falls, developed by the public sector and an unmitigated disaster that in itself, will cost taxpayers close to $60 billion over roughly 60 years. That is triple the oil royalties since 2009 and 8.5 times the supposed loss in Equalization.
No one forced the government to develop an obviously bad project and no one forced Newfoundland and Labrador to develop the resource itself. It's absurd to even talk about Equalization in this context.
Now look at the idea that the provincial government is supposedly hard-done-by since it cannot claim development costs for Muskrat Falls in order to qualify for Equalization. This is a fraud as much as it is ludicrous..
First, there is the private versus public choice. No one forced the provincial government ever to develop hydro resources through the public sector. This was a choice. No one forced it to keep doing so. That too was a choice made solely by the provincial government. There is an obvious contrast with oil. There is nothing stopping the provincial government from switching hydro to the same model as oil, with comparable benefits but since it has chosen to go the poorer of the two routes, then the government must bear the consequences. Rewarding it for bad choices by giving the government Equalization would itself be the perverse incentive, the encouragement to keep making bad choices without consequences.
More importantly, though there is within the Newfoundland and Labrador experience an example that shows the fraud in suggesting that there is some similarlity between Equalization and the duty of a developer to pay a resource owner fairly and properly for developing the resources like oil or anything else.
At Bay d’Espoir, the Newfoundland and Labrador government developed the plant on its own, effectively wrote off its own the costs, and did so because it wanted to use cheap electricity to spur economic development and give consumers a break on heating bills. This was a policy choice. It also collected Equalization, by the way.
By contrast at Muskrat Falls, the government did the opposite. It decided not only to recover all its development costs by raising electricity prices on domestic users as much as possible and keep them climbing, but also to give itself a bonus payment on top also coming only from ratepayers - the return on equity - which is a new form of taxation, in effect. Others will get the benefit of cheap electricity, not ratepayers. Again this was a choice and with the obvious fraud this time of trying now to have taxpayers at home pay for Muskrat Falls and at the same time also have taxpayers - this time across Canada - pay off Muskrat Falls again through some credit scheme for Equalization.
A quick review turned up these easy and fundamental criticisms of the provincial government’s claim about Equalization. Imagine what will happen when a gaggle of lawyers, many of them collecting big billable hourly rates have a go at this tripe. This is the equivalent of the claim about the 1969 power contract that it was simply unfair. The lawyers in that case fell to pieces in front of court, with some claim that the plant was a co-venture today and therefore that must be read into the agreement by a different company in a different situation.
This was especially painful in front of the Supreme Court of Canada when one justice asked the lawyer for the Newfoundland government company simply to read the words at the top of 1969 agreement. “Agreement of Purchase and Sale,” came the meek reply. And the lawyer had no explanation for why the court should treat a sales agreement as anything but what it was, plainly understood as such then and now.
In Ottawa, the bureaucrats are rolling their eyes up in their heads. Here we go again. The lawyers in St. John’s, Ottawa, and Montreal are already planning their dream vacations, or fattening their pensions, or upscaling the American universities they can send their kids to thanks to yet another bogus lawsuit by the Newfies.
Frankly, none can blame them for taking advantage of people who do the same things over and over and expect a different result. This is out beyond the world of inbred hill-billies blowing themselves up with moonshine stills. Morons only beat their heads against stone walls because it feels good when they stop. There ain’t no such quit in Newfoundland and Labrador politicians. And so we are suing Ottawa and arguing against ourselves in the same case.
Can we get Equalization credit for blowing ourselves up?