The Muskrat's claws sink deep

New MF deal hikes rates every year for 50 years. We don't know by how much.

There are some basic truths about Muskrat Falls.  Here are three big ones.

Basic Truth:  The only people who will pay for it are the electricity rate payers in Newfoundland and Labrador.

That’s still true after the deal announced at the end of July with the federal government.

Basic Truth:  Your electricity rates will rise far higher than they needed to – in this case 23 cents a kilowatt hour – and they will continue to rise for 50 years.

That’s still true.  The only difference is when they will hit 23 cents.

Basic Truth:  The politicians and bureaucrats behind the project cannot tell a simple, straight story.  The current crowd are no better than the ones before them back to the beginning with Danny Williams.

The Muskrat is off our backs.

Seriously.  

That’s the best line they could come up with.

Jesus is all out of tears at this point.

The Muskrat is not off our collective back, folks, and this column will hopefully go a long way to explaining how that is so.  While the government briefing a week and a half ago should have explained this,  it has taken your humble e-scribbler that long to gather up the bits and pieces of it from a bunch of places to do the job.

The big pieces of information are the federal Agreement-in-Principle, quietly released three whole days *after* the Big Announcement, the technical briefing – not released by the provincial government but delivered via an out-of-province contact- and from the February 2020 update Dwight Ball handed out when the serious mitigation talks started.

There are a few other documents that give background or supporting information.  There are links to those as we go.

To get the story, we’ll start with a brief run through all the rate mitigation schemes since the beginning.  That will help you see where the current one fits in.  Then we’ll talk about how this scheme will work.  We’ll round out this discussion with some of the major issues or questions that are still hanging out there.  The Innu are a big issue but that’s one to leave for another day.  The issues for today are about the deal itself.

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Muskrat Falls was never about delivering electricity to Newfoundlanders and Labradorians at the lowest cost.  It was about ego.  Danny Williams set his mind to building the Lower Churchill long before he took office.  And when it was obvious that Gull Island was too expensive, Williams and his accomplices cooked up a scheme to build Muskrat Falls and force local ratepayers to cover the entire cost, plus profit for the companies involved and for the government.

Before Danny Williams and his crew, the Lower Churchill was about export.  The idea was to build Gull Island. It produced the largest amount of electricity and therefore made the most economic sense.  Since BRINCO first looked at the Lower Churchill, Muskrat Falls was always a project that was nice to do if needed, but not essential.  No one ever seriously looked at Muskrat Falls alone because it was too small and the cost of it and the line to the island were just ridiculously expensive for the local market.

In the 1960s, BRINCO looked on the Lower Churchill as a logical extension of Churchill Falls.  In the 1970s, the wave of Newfoundland nationalism attached a revanchist tinge to Gull Island. Newfoundland would sell the power in the United States, just like Hydro Quebec does. That’s the thread Williams picked up on in 2005 and pushed hard through paranoid delusion and revenge fantasy. 

The only problem for Williams is that by 2009, it was obvious to everyone involved – and a handful of us outside it – that Gull was just too damned expensive for the market.  Every effort to flog the project to Rhode Island, Ontario, or New Brunswick failed on cost alone.  NALCOR was talking about a cost of 17 cents a kilowatt hour to New Brunswick.  That province’s energy minister in 2009 said at the time that 17 cents would never be cheap wholesale electricity in New Brunswick.

So NALCOR started working on a scheme to build Muskrat Falls.  The project had never been thoroughly mapped out – unlike Gull – so there were plenty of holes in the idea.  All the same,  Danny Williams, Kathy Dunderdale, Ed Martin and a raft of the most senior government officials met at the Rooms in April 2010.

They made two fateful decisions:

  1. Build Muskrat Falls.

  2. Make domestic ratepayers cover the full cost even though they would only use a fraction of the output.

By the fall, when Danny Williams announced his retirement and his political monument in two dog and pony shows, the cost of the project at Muskrat Falls was as expensive as Gull Island alone. News media slobbered over Williams, praising him for doing what no one else had managed, They recited Williams’ lie  - without hesitation or question - that Muskrat broke the Quebec stranglehold even though that had recited the same line not 18 months earlier on another deal to sell Churchill Falls electricity to Emera in New York through Quebec.

Kathy Dunderdale told reporters there were no American markets for power from Newfoundland and Labrador.  Yet everyone kept talking about Muskrat falls as if it was Gull Island, complete with a “revenue stream” that justified it.  Dunderdale said NALCOR – which was always the same as the provincial government - estimated the cost of electricity including Muskrat would be upwards of 16 cents a kilowatt hour in Newfoundland and Labrador. That was roughly double the rate at the time and the new public debt from Muskrat Falls was roughly double the province’s net debt at the time.  By 2012,  the estimates for the cost of Muskrat Falls power hit 21 cents per kilowatt hour, by the way.

A month after Dunderdale was sworn in as Premier, she was telling reporters that electricity costs from Muskrat Falls were an issue for consumers and a political issue for her.  She said a federal loan guarantee would help keep the project costs down, which would help keep rates down.

But in the background, NALCOR officials did two other things as they looked at electricity rates from Muskrat Falls.  First, they extended the period to pay off the loans from the usual 35 years to 50 years.  That made the payments lower, but it also increased the cost by adding interest.

Second, they backloaded the repayment of the dam portion.  They costed the Labrador-Island Link using the cost-of-servicing model that the public utilities board used.  They did that because the LIL was part of the transmission system that American officials would use to judge whether Newfoundland and Labrador met its rules for any Canadian company selling electricity into the United States.  

But for the dam and the transmission lines back to Churchill Falls, they worked out a scheme to delay paying the principal on borrowings.  That lowered the front-end payments, but it drove up the cost of the project.  The longer it took to repay the principal – the key feature of the backloading scheme - the more interest investors earned. 

There was another catch to backloading.  NACLOR and the politicians justified the high front-end cost of Muskrat Falls publicly with the claim that oil prices for Holyrood would drive up electricity rates anyway.  But at the same time, they claimed rates wouldn’t go up as much afterward because oil would disappear from the rates. Muskrat would stabilize rates, so they said repeatedly.

The catch is that wasn’t true. Cost-of-service pricing works with rates that deliver pretty much the same money every year. There might be a big jump at the front, but  over time, the amount needed each year should go down. But when the bureaucrats and politicians pushed Muskrat Falls they didn’t explain that with backloading, rates *had* to rise ever single year for 50 years.  That didn’t include whatever rate hikes Newfoundland Power or Newfoundland and Labrador Hydro needed for all the non-Muskrat expenses.

You can see how this works in this slide from the February 2020 mitigation update. As Muskrat Falls’ costs grew,  the starting price using the backloading scheme was almost as high as using a cost-of-service model.  By 2015, though Muskrat Falls’ costs were so high, the thing would hit consumers with rate shock either way.

Bear in mind that no one in the provincial government or NALCOR ever considered whether or not the local economy could bear the full cost of Muskrat Falls.  In 2012,  Wade Locke delivered what we now know was a presentation put together by folks at NALCOR. It talked about a revenue requirement to pay for Muskrat falls of about $800 million a year.  He didn’t ask whether that was possible, either, given what we know about the provincial economy and all the assumptions – like $200 a barrel oil – that went with the pro-Muskrat claims. They didn’t do it in 2010 and they haven’t done it since, as near as anyone can tell.  The politicians and bureaucrats just took it (take it) for granted they could get what they wanted no matter how high the cost.

Bear in mind as well that those same politicians and bureaucrats didn’t care about ballooning project costs because the government made more money the higher costs went.  The two companies in the project – NALCOR and EMERA – and would earn an 8.5 percent rate of return on the equity they invested in the project every year until the end of the repayment period (50 years). 

So would the provincial government.  Since the interest the government paid on the loans to make up the equity was way below 8.5% even without a federal loan guarantee, the equity partners in the project stood to make a lot of money. With the loan guarantee – which lowered borrowing costs – the government made more money in the long run through this payment for equity. 

What was even sweeter was that the provincial government dictated the rate of return to the public utilities board.  They could also order the public utilities board how to set rates.  So that just reinforced the idea that the cost to consumers didn’t matter.  The bureaucrats and politicians just fiddled around with the front end costs to find a price for electricity people would accept. But they kept the backloading scheme and all its assumptions largely because government made more money from the whole scheme.

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Now you understand why Muskrat Falls was *never* about delivering electricity at the lowest cost consistent with reliable service.  When the Liberals came to power in 2015, they promised to do something about electricity rates once Muskrat Falls came online but until Stan Marshall talked about the boondoggle, the Liberals ignored the issue as surely as the Pea Seas had done before them. The reason was largely because of the financial implications at the back end.  The government stood to make a lot of money and on some level the politicians and bureaucrats wanted the new taxes from Muskrat Falls to fund the overspending the politicians wouldn’t change.

That explains why Ball and his fellow Liberals didn’t do anything to stop the project.  It also explains why, when the public complained about rates, the politicians and bureaucrats avoided restructuring the project’s finances from the ground up.

To be sure, Dwight Ball asked the public utilities board for suggestions about how to fix rates, so Muskrat Falls didn’t come out of everyone’s pocket.  The PUB looked at fundamental changes to the project’s finances.  They had ideas that would have made a difference.  But what Ball started and Andrew Furey delivered keeps the basics as they were.  The reason is that the government wants the money from the hidden taxes Muskrat Falls brings.

This slide  shows the revised cost-of-service model version of the project ($40 billion) and then the new mitigation scheme ($44 billion).  All the key features of the original scheme stay in place:  Taxpayers are on the hook.  There’s still a built-in tax for the provincial government.  Rates start off higher than they are now and grow every year for 50 years.

What the federal and provincial government have done is found a way to subsidize the front-end rates. The table below shows some of the key elements of the agreement-in-principle. The figures here are based on the technical briefing and the assumptions behind them. The difference between this table and the technical briefing is that this version puts a dollar value on the money coming from ratepayers. 

Here’s the slide that describes the key points. The AIP delivers roughly the $5.0 billion shown in that slide. It’s the amount to subsidize rates.

Take a look now at the table below. You don’t have to be a genius to realize that the amounts in the AIP run out within 20 years.  In some cases, the amounts don’t last to the end of the current decade.  The part no one talked about a week and a half ago is the same thing no one talked about before. Rates have to go up every year high enough to give NALCOR – soon doing business as NL Hydro - 2.25% more money each year. 

That doesn’t mean a rate increase of that much, although in the technical briefing someone tied this to inflation.  It isn’t.  The whole scheme from the AIP works only if ratepayers pay more every year until their rates hit the magic number of 23 cents in 2041. Then rates keep going up enough to deliver 2.25% more each year on top of any other increases that might come.

The Muskrat is not off anyone’s back.

Far from it.

Some people might call that continuous rate increase the biggest problem or issue with this agreement.

Fair enough.  Add to it the fact the politicians try to pass off the continuing rate hikes as just an inflationary increase when it isn’t.  The whole thing forms a nice package of deliberate political misinformation that is just typical of everything connected to Muskrat Falls. What Furey did a couple of weeks ago is what Danny and Dunderdale and their bunch did before. No change.

There are other issues every bit as big. Some of you will notice that the total cost of the project shot up by $1.03 billion.  That’s the result of the third federal loan guarantee.  A billion dollars at three percent interest to pay off some of the principal from that comes due in the first 20 years.  

The total cost of Muskrat Falls right now is at least $14.13 billion. That’s the $13.1 billion Stan Marshall copped to last September plus the new $1.03 billion.

There’s more.  Flag that new equity interest the federal government will take in the LIL as a possible warning of more cost increases to come. The risk for more cost over-runs is all in the connection from Labrador to the island. There’s likely no accident the feds took a share of the part with the risk of added cost in it.  The equity interest puts the feds at risk of putting more money into this project.

As you digest all that, consider that the figures we got a couple of weeks ago don’t include all the money NALCOR needs to come from rates. The total in the AIP is $631 million.  The public utilities board got roughly that figure from NALCOR when they started their mitigation review *before* the federal and provincial governments got into their detailed talks and revamped the numbers. 

The problem is there are other amounts. The PUB report noted that rates would have to cover $726 million a year without resolving the discrepancy. The April 2019 provincial government scheme used the same figure although it also included $200 million more that would have to come from Ottawa.  

As the PUB report notes, NALCOR estimates of revenue requirements are sometimes higher again.  “Hydro’s total Island Interconnected revenue requirement, including the Muskrat Falls Project, is forecast to be $1.1 billion in 2021, without export sales and assuming the de-commissioning of the Holyrood Plant.”  That’s consistent with figures from 2015  and 2017 that NALCOR released through access to information requests.  

There might be an explanation for that difference.  But it is interesting to note there isn’t a consistency in these and other forecasts of revenue requirements.  One of the variations is in equity on the power plant and the connection to Churchill Falls.

Let’s look at the rate implications of that. At the very least, we are looking at about another $100 million NALCOR needs but that wasn’t included in the AIP.  That’s roughly another 1.5 cents a kilowatt hour, assuming each cent is worth $65 million.  Even if we use the way the provincial government and NALCOR talk about rates, that would make the initial rate not 14.7 cents but more like 16.2 cents.  You will recognize that number as the rate Kathy Dunderdale talked about in 2010. It’s also pretty close to the rate Dwight Ball talked about in 2017.

Whether we use the NALCOR way of talking about rates or look at the Energy Charge on your monthly bill, it would be a 21% or 22% rate hike in a single year.  Andrew Furey knows what that means.  He already talked to NTV about how a 10% rate hike is the most folks can supposedly take before something called rate shock cuts in.  That’s when they start looking for some other way to heat their homes.  The less electricity people consume, the higher rates have to go. The higher the rates go the more people ditch electricity and on and on it goes.

 And that’s a problem because – in every version of Muskrat Falls from Danny to Andrew - the only people paying for it are local ratepayers.

This brings us to a last big issue.  The public utilities board review, the 2019 provincial government mitigation scheme, and even the provincial Pea Sea scheme  - which only looked for $575 million - listed a raft of ideas that could have reduced the total cost of Muskrat Falls by hundreds of millions a year for the 50 years it will take to pay off the project. The provincial scheme alone found enough money to cover off $726 million.  That’s more than 11 cents per kilowatt hour if the ideas are real.

Since Dwight Ball is gone, Andrew Furey could explain why he and his friend Brendan “Nalcor Jersey” Paddick decided to ignore all those other ideas.  People deserve to know why Furey and Paddick kept the original Danny Williams plan to force local ratepayers to cover the full cost of Muskrat Falls, less about 10%. 

This is not a minor issue.  As the SRBP mitigation paper noted, Danny Williams and the crew that delivered Muskrat Falls over every administration since corrupted the way the provincial government sets electricity rates and what those rates pay for. It is one of the ongoing consequences of Muskrat Falls that we, as a society, ought to mitigate.

This corruption of rates and rate setting is a basic issue of democratic accountability. That’s a significant political issue on its own but given the questions Furey has already faced about accountability and disclosure, its significance grows.  By the way, the word accountability doesn’t appear in the 2021 Liberal platform.  There’s nothing about political reform, integrity, or accountability.  In hindsight, the omission leaps out.

Furey and Paddick had a choice.  They could have mitigated Muskrat Falls’ impact on electricity rates.  Instead, they left the Muskrat’s claws firmly and deeply embedded in the backs of ordinary Newfoundlanders and Labradorians as Danny Williams intended.

People deserve to know how much they are on the hook for and why.