Liberals ditch Muskrat promise with federal deal
Higher electricity costs plus more unanswered questions
Updated: 29 Jul 21 (see footnotes)
In the House of Assembly, Premier Andrew Furey repeated his party’s commitment to a 13.5 cent a kilowatt hour cap on electricity prices.
“We've been tasked with cleaning up [Muskrat Falls] and we will. However, with respect to the specific electricity rates, it was promised to be approximately 13.5 cents at commission. We're still heading towards commission. After that, the PUB sets electricity rates. We've been tasked with – and will – mitigate those rates, despite the irresponsible decisions by the government at the time.”
Opposition leader David Brazil accused Furey of backpedalling on the commitment of 13.5 cents.
“We're not backpedalling,” Furey insisted.
Three months later, the deal Furey reached with the federal government will jack rates from the current 12.52 cents per kilowatt hour set on July 1 this year to nearly 15 cents per kwh next year. That’s a jump of over 17% in one pop. On top of that, rather than have the public utilities board set rates, the deal announced with the federal government includes a mandatory escalation for inflation of 2.25% a year. That means that between 2022 and 2030 rates will rise at least another 19 percent.
That’s more than just changing the cap or coming close to the original Liberal commitment of 13.5 cents per kwh.
That’s changing how the PUB sets rates. Right now, the PUB doesn’t use inflation as a factor in setting rates.
But, coming out of a technical briefing on Wednesday afternoon, reporters noted that, as CBC put it, government “officials anticipate further rate increases of about 2.25 per cent a year [due to inflation].” That number isn’t an accident. It’s an annual rate hike that has to come in order to make the starting rate of 14.7 cents work for the rest of the agreement’s life span.
That annual rate increase would be a guaranteed minimum. In some years the public utilities board may have to raise rates by more than that to cover costs for new equipment and planned maintenance.
Can Ottawa give the province the same Hibernia dollars twice? (See footnote)
The federal government will put cash on the table as part of the deal. There’s $3.2 billion related to Hibernia. The official news release described it as the Net Profit Interest (NPI) and Incidental Net Profit Interest (INPI)1 from federal shares in Hibernia over the rest of the project’s expected life.
In 2019, the federal government agreed to give Newfoundland and Labrador the same money – its earnings from an interest in Hibernia – according to an agreed schedule of payments that ran from 2019 to 2056. The agreement at the time valued the Hibernia interest at $3.3 billion, roughly the same amount contained in the Wednesday deal.
It isn’t clear what this new agreement means. The new cash could be $3.2 billion on top of the other $3.3 billion. It could be the actual earnings from Hibernia less the transfer under the 2019 deal. The earlier deal was based on an estimate of earnings not the actual numbers.
We also don’t know if the cash will arrive in a lump or if it will come annually as with the Hibernia Asset-Backed Annuity Agreement. If it comes in a lump, the provincial government could earn interest on the money, a nice bonus. If it comes annually, there could be issues of covering rates and then collecting the federal cash afterward once it is earned.
We also don’t know how the governments will use the Hibernia cash to lower rates. In the past, any suggestion that the government would pay directly for Muskrat Falls threatened to shift the project from NALCOR’s books to make it a direct debt of government. That would impact the province’s credit rating.
These are all details that no one reported on Wednesday likely because officials simply don’t know. They will sort out those and many other details in negotiations that will last at least until December.
Will the feds earn a return on their billion in LIL equity?
According to CBC’s Peter Cowan, the federal government will also spend $150 million a year to a maximum of $1.0 billion for preferred shares in the Labrador-Island Link. The federal government will collect the investment in 2042 plus a rate of return equal to its borrowing cost.
The $1.0 billion is less than a third of the current project cost of $3.7 billion. It’s also not clear why the federal government is taking this equity position. It may mean the federal government will share the cost of any further cost increases in the project due to ongoing problems with both the transmission lines and the software to control transmission.
Speaking of return on equity…
One of the reasons the provincial government didn’t bat an eye about cost over-runs on Muskrat Falls was that it guaranteed itself an 8.5% return on equity. The cost of borrowing the money was less than 8.5% so the provincial government would make a tidy profit – effectively a new tax – through electricity rates. Since the provincial government could control how the PUB set rates, including setting the return on equity, it was a tidy scam. The ordinary people of Newfoundland and Labrador were supposed to pay for the whole thing through rates.
Under this agreement with the federal government, the provincial government will cut its rate of return to three percent to lower the share paid by ordinary people. No other investors are apparently taking a cut in their rate of return, including NALCOR/Hydro.
The Public Utilities Board review of mitigation options identified the corporate rate of return – specifically for NALCOR and NL Hydro - as an issue. The current rate was dictated by the provincial government in 2009. Before that, the PUB rejected efforts earlier by NALCOR/Hydro to raise the return on equity rate above 3%.
Loan Guarantee 3
That drop in the rate of return for the province works because the federal government is offering a third loan guarantee to let the provincial government borrow more cash to finish the project and to refinance its existing borrowings not covered by earlier loan guarantees. The official value of this third loan guarantee is $1.0 billion.
2021 mirrors 2010
NALCOR worked through the night in November 2010 to get an agreement in principle ready to sign with Emera to launch Muskrat Falls. This latest agreement came about the same way. In 2010, Danny Williams pushed the date of the agreement because he was planning to quit politics a few days later. Changes to the 2010 agreement in principle during the detailed talks worked against Newfoundland and Labrador.
History could be repeating itself. There’s no explanation of why the provincial government pushed to have this agreement finished now instead of waiting until it had finalized key details. But there’s no doubt provincial Liberals were keen to get it done: Premier Andrew Furey was giddy with excitement at Wednesday’s mid-day media stand-up while the Prime Minister seemed to treat it as a minor thing in his mid-day media availability.
As it is, detailed talks will take another six months. The current deadline to finish the deal is January. That could take longer if the Labrador-Island Link remains unfinished. Add the haste to cut a deal to the list of questions that the agreement raises.
Officials apparently spent a good deal of time on Wednesday comparing the new rate scheme to the earlier one. For example, they said that the 14.7 starting point for new rate increases is less than the earlier projections.
That’s true but basically, Wednesdays deal ditches the Liberal promise to remove Muskrat Falls from rate calculations. Instead, it sets a new base rate and delivers guaranteed annual increases as government rate calculations have always done for Muskrat Falls. Those increases come higher than anything previously forecast.
For example, Stan Marshall’s 2017 project update – the one that revealed the project would double rates – indicated the rate expected in one 2012 projection was 15.1 cents per kwh in 2021. It would climb after that. Marshall’s other Muskrat falls-related rates all showed increases even though the PUB doesn’t raise rates every year.
When you look at the September 2020 update Marshall delivered – the picture is at the top of this column – you can see more interesting things. NALCOR expected rates with Muskrat Falls included would only increase by less than 8% from 2022 to 2030. Rates under the Wednesday deal will increase by 19% in the same time. By comparison, earlier NALCOR forecasts expected rates to increase 18% in the 14 years between 2016 (Muskrat Falls’ original finish date) and 2030.
Wednesday’s deal shows rates will go up at more than double the earlier estimates and in almost half the time. Muskrat Falls was supposed to bring stability to rates, not increases like that. Plus, we have to realise that the guaranteed 2.25% increase in Wednesday’s deal is the minimum jump. In some years, electricity rates will have to rise by more than that to cover capital costs
The Liberals promised their deal would take Muskrat falls out of electricity rates. Dwight Ball originally promised to cap the project’s impact at a maximum of 17 cents. He later lowered it to 13.5 cents, which was supposed to eliminate Muskrat Falls from rates.
Andrew Furey repeated the promise after taking office and, more importantly, failed to tell people clearly that he had something else in mind.
What Furey delivered on Wednesday will produce a guaranteed hike of 17% followed by a guaranteed increase in rates over the next eight years totaling another 19%, minimum.
Muskrat Falls always caused financial problems, which produced political problems. Nothing has changed with Wednesday’s deal. That deal will cause the government political problems. The Innu Nation – also concerned about their part of the project’s cash benefits – may cause more political problems.
The Muskrat isn’t off our backs.
Wednesday’s deal may have dropped a political ferret down Andrew Furey’s pants to go with it.
We’ll turn our attention to the political impacts of this deal another time.
Update: The Hibernia Net Profits Interest and Incidental Net Profits Interest are different from the money earned from the 8.5 percent operating interest. The federal government cut a deal for the 8.5 percent in 2019. Now it is dealing with the other income stream.
As Moira Baird explained in the Telegram (2011), “Net Profits Interest entitles the federal government to 10 per cent of the oil companies’ profits over the life of the original Hibernia oilfield.” NRCAN started collecting it in 2009.
INPI is the same 10% interest in profits but from new Hibernia developments such as Hibernia South. Payments started in 2011. (NRCAN 2016 audit)