Muskrat Falls and our high-risk future

Multiple Interlocking Delusions at work

Sometimes, there is cold comfort in getting it right.

AllNL reported last week on the latest letter from NALCOR-Lite, currently doing business as the Hydro Group of Companies or NL Hydro, to the Public Utilities Board on the rate mitigation scheme for Muskrat Falls.

A superficial reading might mislead you into thinking that the annual cost of the project will go down over time. There’s a couple of charts in the NALCOR-Lite letter that show the money needed for mitigation dropping from now until 2030. Not so. That declining amount assumes an annual increase in electricity rates and what it shows it what NALCOR-Lite assumes it will have to divert from other sources to help pay for Muskrat.

The reality is that the repayment schedule for the project increases the amount owed every year. At the back end, what is now somewhere around $800 million a year will grow to a couple of billion or so each year. And the mitigation scheme announced several times since 2021 turned out in its final version to work only until 2030. The provincial government diverted money from Ottawa to pay for Muskrat Falls into other things and is making up the difference by shifting money it and NALCOR-Lite counted on as revenue into paying for the Falls fiasco. But only until 2030. The little bit of federal cash available actually runs out in 2029. After 2030, no one knows how the thing will work or if it will work.

We also don’t know how it will work if the Public Utilities Board doesn’t jack up electricity rates on the island every year like clockwork by at least the amount needed by NALCOR-Lite to cover the costs of the project and everything else it must carry related to Muskrat Falls.

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Regular readers know all of this, even if they’ve forgotten. That’s part of the cold comfort thing about being right. Another part of it is the implication that by diverting what GNL - Government of Newfoundland and Labrador - had counted on as revenue it could spend on other things to paying for MF instead, that in effect shifts the debt for MF subtly but directly onto the provincial books. So much of the MF scheme was a scam built on multiple, interlocking, untested, and unsustainable assumptions about cash flows, it staggers the mind.

MF was built so much on silliness there was even an legal attempt to prevent people from holding taxpayers liable for what ratepayers owed - even though they are pretty much all the same people - but that really never survived reality. Sure it says on the books that Muskrat Falls companies are not agents of the Crown but given that its parent in the finally approved legal re-organization - mislabeled a merger by NALCOR-Lite and its government shareholder - is an agent of the Crown, it would be very hard to imagine that in a bankruptcy or insolvency the people wearing their taxpayers hat would not have to cover themselves for things they did while wearing their ratepayers hat.

Just like it never survived reality to assume that a place with an average household income of $70,000 a year and maybe a couple of hundred thousand households on the hook as ratepayers could actually cover off a billion or so a year in higher electricity rates to pay for Muskrat Falls *plus* an additional annual dividend to government on top of its artificially inflated rate of return for all the borrowing GNL did to cover the cost over-runs on the project.

To give credit where due, Wade Locke actually pointed out public relatively early on - like 2012 early - that the project was not really sustainable once you got a total cost above $8.0 billion using the scheme where only the locals would pay. That was the first time Locke went beyond just regurgitating NALCOR’s own internal assumptions. Incidentally, that point about just recycling NALCOR assumptions is made in that 2012 column and it was something Locke ‘fessed up to at the LeBlanc inquiry. By the time Kathy Dunderdale and her merry band of MFers closed the financing deal with Ottawa in late 2013, the project was hitting $8.0 billion just for the dam and line to the island and as we all know, it kept going to almost double that. The current, honestly tallied cost, all-up, including the new debt incurred as part of the mitigation deal, would be closer than not to $16 billion. Locke was right. We had plenty of time to stop it. Not only did no one listen, the fools behind the mess purposefully attacked anyone who tried to stop their scam.

Even as NACLOR-Lite struggles to get the thing working, the real problem with MF remains how to pay for it. The current “rate mitigation” scheme isn’t a solution and it isn’t sustainable. It is a half-assed temporary fix. The reason is the same as it was in April 2010 when NALCOR cooked up the scheme and The Danny signed off on the idea of putting the full cost plus profits for funders and NALCOR and GNL onto the backs of those handful of homes with a relatively low annual income. The May 2024 version of the payment scheme has all the same flaws but only works because there is some federal cash involved on top of a temporary redirection of NALCOR-Lite and GNL revenue. But the fed cash stops five years from now. There are no projections beyond 2030 because without extra cash, the scheme is unworkable.

The other reason the scheme never works is the way the Liberals took the bad idea and made it worse rather than scrap it altogether in 2015 and start from scratch, if they needed to at all. Actually, the best option was shutting the whole thing down in 2015 but that wasn’t a thought anyone in government would entertain for mostly specious reasons. The Liberal twist on the insane scheme was to fixate on the front end price to consumers. It was a short-sighted reaction to everyone’s shock at the idea electricity prices would double. Again, regular readers knew that from 2010 onwards but the rest of the world could ignore it until Stan Marshall’s bombshell admission landed in 2016.

Dwight Ball and the Liberals made different promises none of which they could keep but the idea of lowering the front end cost was one they thought could fool other people as much as it fooled them. That’s why you’ll hear Premier Andrew Furey or finance minister Siobhan Coady talk about how your electricity prices won’t double. That’s a lie by omission.

What they leave out is time. They imply the rates won’t double ever when what they really mean is they won’t double right away. As with Stan’s explanation, this project *always* relied on some version of backloading repayment of some costs, which inevitably made the annual cash required higher from one year to the next. Your costs will double. They will just double later than first expected. And in fact they will do more than double by the end. Thank you, Andrew and Siobhan.

What none of these paper schemes looked at was the impact of rates elsewhere. That’s another flaw in the schemy scam. Economically and politically, rates in Newfoundland and Labrador are fine not only if the locals can pay them but also only so long as people are willing to pay local rates that look acceptable compared to elsewhere. People can see what other provinces pay. As MF slowly increases costs *beyond* rates in other provinces, people will be less inclined to pay.

This is not a matter of if this will happen but inevitably when it will happen. It is only a question of when and that’s when the problem arises. Again, as I have noted before with Dwight Ball’s idea of a guaranteed price of 13 or 17 cents, public demand will get in the way once rates climb behind what people assume is fair based on a comparison with other provinces.

Muskrat Falls isn’t the only cost borne by electricity rates as Newfoundland Power found this year when it walked face-first into the freight train of consumer push-back on rates when it honestly went looking for rate hikes above 10 percent this year and next year. That’s the thing about rates: MF isn’t the only cost involved. Anticipated major overhauls, system improvements, upgrades, and other new projects will all drive rates as hard or harder than Muskrat Falls. That means the political push-back on rates when they exceed comparable rates elsewhere will be triggered way earlier than the MFers assume from just the forecast hikes from Muskrat Falls. Again, regular readers have heard this before and it remains an unresolved and potentially politically fatal issue for the suckers in office when it happens.

Newfoundland Power had a very uncomfortable summer and the cheesy, old-fashioned marketing ploy covered by all local media without question a few weeks ago will not do a thing to overcome public anger and outright hostility if the politically-connected Newfoundland Power keeps looking for legitimate and honest but politically unacceptable rate hikes. All of this will inevitably increase pressure on the provincial government to subsidize not just MF rates but *all* rate increases in order to hold them down to levels the public will demand.

Since GNL is not equipped bureaucratically or politically to develop the sort of big-picture restructuring that is needed to deal decisively with this situation, it will try to bluff through with a little bit here and little bit there. All that will do is let the problem fester and increase the amount the provincial government will have to spend on keeping electricity rates down to what consumers will accept as sensible levels. It is an inevitable crisis that will come.

Now add the hydrogen boondoggle projects to that mix. NALCOR-Lite has already committed to replacing Holyrood with a new thermal generating plant by the early ‘30s *and* powering it with locally produced hydrogen. They bought into that last bit despite it being a highly risky fuel source. They bought the idea because it came from the Premier’s fishing buddy, John Risley, and Risley’s partner from NALCOR gone to the private sector. They’d already bamboozled the gullible and naive Team Furey into backing his scheme, including both implicit and explicit subsidies. Now Risley isn’t going to make hydrogen but since he is not the only grant-vampire in the mix, there are at least five other projects, all as ludicrously large and ludicrously non-viable as Risley’s initial version. They’d all be ready to take Risley’s place as the preferred supplier to NALCOR-Lite.

In that respect, if you want to know what comes next, don’t watch the projects. Watch the people involved. Dwight Ball is face and eyes into two of the schemes, one of which includes his former chief of staff, too. The other project to watch involves the former deputy minister of natural resources and Andrew Furey’s former chief of staff, both of whom are working in apparent violation of the Conflict of Interest Act with the Premier’s implicit or explicit approval. If the Liberals are re-elected, that makes it all the more likely that one or more of those projects can count on a NALCOR-Lite contract for hydrogen to help them get started. The provincial government may get suckered into doing more than buy a contract. Desperate and incompetent governments do desperate and incompetent things, as Muskrat Falls shows. Frankly, even if the Liberals aren’t re-elected, the bureaucratic and political pressure on a Tony Wiseman administration would make it very hard for him to stop either boondoggle from getting generous provincial government cash to keep going. This is an old story in Newfoundland and Labrador.

Now add all that to your electricity rates.

You see the problem.

Well, it’s a problem for you if you are an ordinary ratepayer.

The Others, that is the ones behind Muskrat Falls including the current Liberal crowd in charge, see exactly the same situation. They just don’t see it as a problem since they can force you to pay for it all just like they did before.

And you will let them.

Just like you did before.

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