Monday, 22 July 2013

LOOSE JUICE - NALCOR'S INCONSISTENT TRUTH

"Nav, I am nearly finished 'Why Nations Fail' and I suggest that you take it with you when you leave here this evening.  But do you fancy something a little stronger than a coffee?" 

The old man's grin clearly communicated that this was a question of a rhetorical nature.  We began the walk to Erin's, one of Uncle Gnarley's preferred watering holes. 

"What is peculiar about Nalcor, Uncle Gnarley continued, is that they put ‘on airs’ about being an open and transparent company.  They produce an annual transparency report, hold public meetings and they even have an annual general meeting for their shareholders".

"Uncle Gnarley what is peculiar about that?"

"Nalcor have created the illusion of transparency, but once you scratch the surface they spew an awful lot of baffelgab.  Combined with their subsidiary, known to most as the Premier’s office, they have worked to undermine the pre-existing democratic institutions such as the Public Tendering Act, the Public Utilities Board, and also the fiscal governance responsibilities of the House of Assembly.
The maturation of Nalcor is nothing more than the development of state socialism.  It has quietly happened under our noses, because it is being presented to the public as a great capitalistic venture, with Ed Martin branded as the captain of industry. ”   

It was clear that the summer weather had removed the last drop of wetness from the old economist. 

"Ed Martin will talk about how the balance sheet, the cash flow and the debt to equity ratios have improved.  To the casual observer this is all true, but once you scratch the surface and review the annual reports, you realise that the picture is not as rosy as we are lead to believe.”

 “Uncle Gnarley you must explain this; you must remember I am not an economist”

“Nav, you can rest assured that my dissertation has been built on this elementary assumption. 

“Ed Martin was appointed as the head of Nalcor in 2005.  Since that time the people of Newfoundland and Labrador have given Nalcor over 1 billion dollars in the form of equity investments or deferred earnings.   We are also about to give them a whole lot more equity for the Muskrat Falls and Hebron investments.  All in, the Newfoundland taxpayer will have invested some 3 billion dollars in Nalcor. 

“Therefore, when Ed Martin promotes the improved debt to equity ratio for the company, it is because of the largesse of the provincial taxpayer, and not the improved financial performance of Nalcor. 

“The same can be said about the profitability.  Despite these great investments the annual earnings are essentially unchanged.  When you look at the earnings results for the past 10 years, adjusted for inflation, they are not substantially better than what they were in 2004.  To make matters worse Nav, their return on equity has degraded substantially over the past decade.”

With that Uncle Gnarley reached for his tablet, and pulled up a graphic for me to view.  “Nav, once you go over the past 10 years of annual reports you can get a long term view on company performance.  That performance is not as robust as what Ed Martin would want us to believe”.

 

Not only is Nalcor’s financial performance only marginally better than what it was 10 years ago, there is no indication as to when they will ever pay back, to the people of the Province, this 3 billion dollar investment”.   

“Nav, this takes me back to our book ‘Why Nations Fail’, it is clear that Government and Nalcor are working to a plan.  And that plan may have some merit.  However, they are not communicating the required detail for what should be demanded in a democracy, especially when public funds are being employed.  The level of public governance is simply not there.  We must have a blind faith in government and Nalcor.  And blind faith is not where I want to be, when it comes to a 7 billion dollar undertaking”.    

“I agree Uncle Gnarley.  You may call Nalcor state socialism, others may call it an epic example of a make work project.  But to be clear, any business availing on tax payer funds through ACOA, or other government agency, would have to present a long term business plan.  Well, why is Nalcor any different?  To use a political phrase, where is the due diligence?”

“Nav, Ed Martin did qualitatively discuss this long term business plan during the 2013 AGM.  He discussed 5 phases of development for Nalcor, with plans stretching out to 2030.  It really was a memorable speech, for which unfortunately there is no written record.  He presented his vision of using the revenue from Muskrat Falls, and other regulated activities, to fund the growth of Nalcor in areas such as Gull Island, and other oil and gas opportunities”.

“Uncle Gnarley, that is quite at odds from the messaging of Nalcor and the provincial government leading up to the sanctioning of Muskrat Falls, last Fall.  At that time they were talking about the annual $400 million dollar return to the provincial government”.

“Well Nav, it seems as if Ed Martin is now planning to spend that money.  It is exactly the point I am trying to make.  Where is the public debate on this evolving strategy.   Most importantly, where are the numbers?  What will it cost, who will pay, and what are the real returns?  These are all valid questions for a crown corporation, whose growth plans to date have been entirely subsidized by the taxpayer!” 

Uncle Gnarley had built up a great head of steam.   It was clear that although the project was sanctioned, Uncle Gnarley was not ready to forget about Nalcor. 

“Uncle Gnarley, I would expect that the Annual General Meeting is an opportunity to review the results, and provides the stakeholders an opportunity to challenge the leadership on these types of questions.” 

Nav, remember that the provincial government withheld the annual report until a mere 6 days before the AGM.  This was hardly enough time for any concerned shareholder to review the results and to grade the performance of the company.   

"But, Uncle Gnarley, I watched the video of the AGM.  There were many of the known critics at the event, who really challenged Ed Martin." 

"Yes Nav, there were many questions asked of Mr. Martin, but there was not always answers.  This was correctly identified by the High Chieftain of the Known Critics himself.

 “But Nav, non-answers are one thing; incorrect answers are even more troubling.”

 Uncle Gnarley reached for his drink, clearly disturbed by the words he was about to utter. 

“Well, Nav, I was at the Nalcor AGM several weeks back.  An old fishing buddy of mine, Jim Morgan, was on a real interrogation of Ed Martin.  Believe you me, Jim Morgan is no pushover.  His first lot of questioning was on that Quebec Company, SNC Lavalin, which seems to be making a good lot of money from this project.   

“Then he asked  a very straight forward question.  He asked if Emera were looking for more than 167 MW of power, as was being suggested from the UARB hearings in Nova Scotia”? (Footnote 1) 

“Uncle Gnarley, that is indeed a very straight forward question.  It is well known to anyone who was watching the UARB hearings that the consumer advocate John Merrick has been pretty keen at trying to get confirmation that all this cheap surplus power, that Emera are promoting, will be available. 

“Emera has been stating that the availability of very cheap surplus power is what will bring the blended cost of Muskrat power, to where it is the lowest cost option.  But as the consumer advocate has correctly identified there are no assurances, from Nalcor, that this power will be available”.

 

“Yes Nav, to anyone following the UARB hearings in Nova Scotia, the issue of surplus power has been the lightning rod of the proceedings.  Emera are selling the loose juice, which Nalcor will not commit as to being available.  Emera were very clear during the UARB hearings that they had engaged Nalcor about the possibility of a firm contract for more power from Muskrat Falls, beyond the 20% currently under the Nova Scotia block.

 “This is what is most troubling, because when Jim Morgan asked whether Emera have approached Nalcor about getting more than 167 MW, Ed Martin responded:

 “I have not been approached by Emera with respect to that.  With respect to more power.  I believe that we have a great product, and I am sure they would like to have more power.  No need to consider it as I have not been asked1

Now, Nav, the most surprising thing was that a mere 21 days earlier Mr. Martin sent a letter to Emera on the very same subject.  A letter regarding the availability of surplus power, which was tabled in the UARB hearings”.

 


“Now Nav, Mr. Martin’s messaging in this letter, and the transcripts from the UARB hearings, do not appear to correlate with what was told to the shareholders as part of the 2013 AGM.  Maybe it was nothing more than a simple mistake.  Maybe it was tailoring the messaging to suite the audience.  But one thing is clear, it is not a consistent message when it comes to surplus power.”
“What are we to believe Uncle Gnarley?  This is certainly not the first example of this type of inconsistency coming from Nalcor and/or the provincial government on the Muskrat Falls Project.  Whether it was the availability of gas from the Grand Banks2,  the availability of Upper Churchill power in 20413, the amount of power available to Labrador mining4, or the final cost of power to the residents of Newfoundland5, there has been many inconsistent messages”.
 
“Uncle Gnarley, it is no wonder that people are so confused about this project.  But are we expected to support the project based upon blind faith only?  Should we be content with living in state sponsored ignorance?” 

“One day, Nav, we shall find the head waters of truth when it comes to Muskrat Falls.  Lake Michikamau or bust6

“Uncle Gnarley I suspect that the UARB decision coming this week may be the first crack in the dam.”
__________________________________
Editor's Note: This Post was written by "JM", the anonymous researcher, writer and
presenter, to the PUB and in local Blogs, on the Muskrat Falls Project. JM has written a
number of Uncle Gnarley pieces, most recently, Why Projects Fail. He has also written  Gnarley's Theory of Political Devolution,
 Annus Orndatra and The Quest for McLeod's Deep Throat, as well as others. His latest Paper is entitled: Muskrat Falls Revenue Stream: Fact or Fiction. 

Footnotes

1)      Go to 1 hr. 23 minutes into the Q and A session of Nalcor’s 2013 AGM.  Jim Morgan asks the question about Emera and surplus power.
 
    2)     During an interview with Dave Vardy in preparation for his Action Canada paper, Ed              Martin indicated that all the natural gas presently produced on the Grand Banks is used for either reservoir maintenance or power on the facilities.  The use of natural gas for power generation was said to be taking away from the economics of oil production.  See page 13 of Vardy's Paper.  
  This is not correct as the White Rose field, for which Nalcor are a partner, are presently re-injecting gas for storage only, and has no impact on production. 
 

3)      Minister Kennedy has on several occasions indicated that there are no assurances that Upper Churchill power would be available for use in Newfoundland in 2041.  Yet in the UARB hearings Emera were very clear that the Upper Churchill power could be used for Nova Scotia's (Page 34 of the Emera application ) post 2041.
 


 
5)      The final rate to the Newfoundland consumer has always been a difficult question to answer.  When Nalcor did provide a rate calculator for the DG3 decision (Power in Our Hands website) there was no backup to the numbers.  However within the PUB hearings, Nalcor did not provide guidance on the blended rate within PUB-Nalcor 5 and on a stand alone basis within RFI-KPL-Nalcor-27.    For both of these the rates appear to be based on the increased demand all being residential.  But in fact about 40% of the immediate requirements for Muskrat Falls (about 700 GWhr) is required for the Vale facility, and not for residential use.  Power will be sold to Vale at industrial, and not residential rates.  It therefore appears as if the final rate to the consumer will be ~2 cents/kwhr more than previously advised by Nalcor.  It is impossible for the public to verify this, as insufficient data has been released.  It should be confirmed with Nalcor.  

6)      Reference to “Lure of Labrador Wild” which was the rallying call for Hubbard, Wallace and Elson in the search for Lake Michikamau.  This great lake was latter absorbed into the Smallwood Reservoir as part of the Upper Churchill development.   

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