New Muskrat Falls cost still short
Same project. New faces. Same problems.
When it comes to Muskrat Falls, NALCOR-Hydro has a chronic problem with three things:
forecasting costs, and
telling people accurately and truthfully what is going on.
Last Friday’s newser was a good example. Let’s take a look at the latest Muskrat Falls news by going back in time a bit.
28 September 2020.
NALCOR-Hydro officially sets the cost of Muskrat Falls at $13.1 billion, up from the $12.7 billion cost set in 2017. That was the same time Stan Marshall confirmed that electricity rates would double at the front end of the project.
They will still double – by the way – just not right at the start. And rather than stay relatively flat afterward, under the new scheme to pay for Muskrat Falls, Andrew Furey will increase your rates at the start and keep them going up by a minimum of 2.25% every year for 50 years. It’s crazy but it is *exactly* the same scheme Danny Williams set in 2010 when he announced the insanely stupid project that no one else has wanted to stop.
Anyway, here’s the NTV version of the $13.1 billion cost announcement. It also included a mention that NALCOR-Hydro had pushed the completion date off to the end of 2021. “We are very close to the end,” then chief executive Stan Marshall said.
Saltwire covered it as well. Construction delays and increased interest charges pushed the total bill up, but Marshall was confident the project would be done very soon.
The project’s schedule for full power has also been updated, as a result. It was previously expected the project would be fully operational by November 2020. Now, it’s estimated to be fully functioning by September 2021.
That $13.1 billion was made up of about $10 billion in capital costs and another $3 billion in interest charges and other liabilities. Most of the added cost in 2020 was interest charges caused by delays in finishing the project.
How much interest?
CBC chases after the interest costs, once NALCOR-Hydro blew through the September 2021 completion date with no end in sight.
$1.0 million a day for NALCOR-Hydro, plus another $300,000 a day for the provincial government on the money it borrowed to cover cost over-runs.
$1.3 million a day in total.
Let’s do some math.
There are 627 between 28 September 2022 and 17 June 2022.
At $1.3 million a day, that adds another $815 million to the bill, just for interest alone.
If we just look at the NALCOR-Hydro portion of that, the added cost would be $627 million.
Either way, NALCOR-Hydro blew past the paltry few hundred million officially added last week a long time before that.
The difference is due to the Danny Williams/Andrew Furey scheme to force local ratepayers to cover the full cost of the boondoggle plus profits and new taxes for the provincial government (officially called a return on equity) even though they will use relatively little of the electricity.
To keep the front-end rates at a level that won’t make ratepayers scream too loudly, two things will happen that affect the NALCOR-Hydro calculation. First, the provincial government will take a lower return on equity at the front end of the project. Second, NALCOR-Hydro will refinance some of the provincial debt using the federal government’s borrowing cost (roughly 3%) compared to what the provincial government pays to borrow money.
We don’t know how NALCOR-Hydro came up with this figure because they never bothered to explain the simple math to anyone publicly.
But since they are reporting the impact of the new rate scheme, they left out something.
Under the new deal the federal government will put in about $1.0 billion that will have to be repaid. That’s new debt, which will have to be recovered through rates, plus interest.
Again, there’s no accounting publicly by NALCOR-Hydro for that money in the cost estimate.
In late 2020, Jennifer Williams acknowledged to reporters that the delays in finishing Muskrat Falls will drive up the cost of the project. “I don’t expect it to be material,” she said. That means it won’t make much difference to the overall cost.
Well, if you are racking up interest at $1.0 million a day and the delays are now measure not in a handful of days but a handful of years, you are driving up the overall project cost by $365 million a year.
That doesn’t include the extra billion dollars in *new* debt and interest the feds will drop on local rate payers due to the latest version of the rate scheme that was already in public when Williams said the only people paying for this mess – that is, you and me - wouldn’t be materially affected by the delays.
In 2021, Williams talked about a contingency fund NALCOR-Hydro had for problems that might crop up.
Well, that’s an old story from NALCOR-Hydro that disappeared a dozen years ago.
Muskrat Falls started in November 2010.
Not 2012 when news media count things from.
Two full years earlier.
Back then, the official cost for the dam, power plant, the line to Churchill Falls, and the line to Soldier’s Pond would be $5.0 billion, not including interest. That number included a contingency of about $300 million to hedge against cost over-runs.
By the time we got to project sanction in late 2012, the estimated capital cost for just the Newfoundland and Labrador bits was $6.2 billion. That was the original cost of the whole thing, including the Nova Scotia line that local ratepayers weren’t paying for at all. In other words, the new cost included a cost increase that was four times the over-run contingency. That’s pretty wide of the original mark and that was just for capital costs. No interest.
Y’all can believe that the $13.4 billion announced on Friday is a real number.
The real cost of the project is likely at least $1.0 billion *more* than that just including the new federal cash that has to be repaid with interest. More delays will add more interest, guaranteed. By the time we get to this fall or next fall – Williams’ forecasts from last Friday for when the project might be done - we could easily be looking at a project cost that is realistically $14.5 to $15 billion.
And none of this estimate includes what would happen if GE cannot get its software working and NALCOR-Hydro has to bring in the back-up team from Siemens.
A dozen years after Danny Williams started us down the road to hell at Muskrat Falls, NALCOR-Hydro still cannot hit deadlines, get estimates right, or tell people accurately what is going on.
And the Premier’s Office is still spitting out falsehood after falsehood about Muskrat Falls.
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