Monday, 18 August 2014

PPA: ABSOLUTE, UNCONDITIONAL AND IRREVOCABLE

The Power Purchase Agreement (PPA) is not a sexy subject though it is important; far more than suggested by the negligible attention it received two months ago.

The PPA defines the terms, conditions and amounts ratepayers are obligated to pay Muskrat Falls Incorporated, the Nalcor subsidiary holding the generating assets of Muskrat Falls.  A separate Agency was established for the purpose of holding and financing the Labrador Island (LIL).  It is not clear if the 51 years of “Base Block Payments”, rising from $148.5 million in year 2 to $933.3 million in year 50, include the transmission costs, too,  or whether we ought to expect a second PPA.

This PPA details, in 196 pages of legalese, a host of obligations on ratepayers via Newfoundland Hydro (NLH).  In typical Nalcor fashion, no details accompanied its release.

Your attention is drawn to Section 4.2(C) (d) (pp. 37-38) regarding “Base Block Payments” which the PPA calls an “Irrevocable Obligation”.  It states:

“Notwithstanding any other provision of this Agreement, including Section 15.1, until the date on which the Initial Power Purchase Agreement Page 33 of 76 Financing is Paid in Full, NLH’s obligations to make the Base Block Payments shall be absolute, unconditional and irrevocable, and shall not be subject to any reductions under any circumstances whatsoever.” (Emphasis added).

Fundamentally, that means Nalcor can lose the Water Management case now before the Quebec Superior Court, the turbines coming from China can seize up, the water can dry up but your obligation to pay is “absolute, unconditional and irrevocable…”

Just possibly, the Consumer Advocate might awaken from his blissful slumber and report to ratepayers, on the implications for them, of this and many other parts of the Agreement.
The PPA was released on June 26th, 2014 by Nalcor following months of demand by critics of the project, though it could have been made public seven months earlier on November 29, 2013, when Hydro and Muskrat Falls Inc. officials executed the Agreement.

The payment schedule shows just how seriously back-end loaded is the financing structure of the project. Not only will your children and grandchildren think you are fools, you can forget any notion that once Muskrat is paid off they will have any rights to cheap power. 

For those and other reasons, you ought to have been given the courtesy of a briefing as to the PPA's contents.

Alas, you were treated like dolts…again!  

The Telegram, like other media, noted CEO Ed Martin’s comment at the Nalcor AGM regarding its imminent release:

Said Martin: “There’s two or three more pieces I’d like to have, but I’m finding that it’s probably not material enough to wait on. We need to tell the people what’s happening. We need to get the facts out there". 

If you didn’t know better, you might think the Nalcor CEO was Saul, on the road to Damascus.


Ed Martin experienced no conversion from his secretive ways, however.  “Getting the facts out there”, for him, meant dropping a 196 page legal document on Nalcor’s web site, practically in the dead of night, without as much as a “Howdy Do!” to ratepayers.

A Press Release from Premier Tom Marshall’s office designed to provide cover for the latest cost overrun of $800 million added this single innocuous sentence:

“Also released today was the power purchase agreement between Hydro and Muskrat Falls Corporation available at https://muskratfalls.nalcorenergy.com/newsroom/reports/



That was it! There was no annotated document by Nalcor explaining key points in language that lay persons might understand; not even as much as a summary document for the Press, drawing attention to the key matters they or ratepayers might give close attention.
Not a single word was offered by the Premier, the man who loves to feign openness and transparency. 

 The public is implicitly told: ‘if you want to find out more, read this and figure it out for yourself’!

The whole media (all of them!) ignored the document.  The Opposition Leaders were equally disinterested.

To be fair, neither group was expected to parse every clause of such a complicated legal agreement.  But they can read. They can ask questions. They possess the ability and the stage from which to demand explanations and interpretations.  They have obligations: the Official Opposition by virtue of its constitutional role; the media less formal, but fully recognized and supported, too. 

Virtually two months have passed since the PPA was released; lazy scribes seem to have joined vacationing politicians.

Little wonder that Ed Martin and Tom Marshall feel impervious.    

It was no different with the Energy Access Agreement (EAA); this was the Agreement demanded by the Nova Scotia UARB, for virtually all of NL’s surplus power.  It was the ‘gun to Nalcor’s head’ condition for supporting the Maritime Link.  The UARB noted the first Agreement was deficient by $706 million to $1.422 billion. 

Though Nalcor quickly bellied up to the bar for a second time, nullifying the benefits of the Federal Loan Agreement, the decision received as much attention from the media and the Opposition as did the PPA.  

The fact that the PPA isn't written in baby talk may be why the public doesn’t get told “…low water runoff into the Churchill River...” (P.8) is a Force Majeure event under the PPA but such problems of hydrology must not be permitted to impact Nalcor’s commitments to Nova Scotia under the Energy Access Agreement.

With a Tory Leadership contest in play, what better time for both groups - the media and the Opposition - to test the three contenders and their knowledge of the contents of a document to which the Provincial Cabinet has given approval. 

As Cabinet Ministers, Steve Kent and Paul Davis should be eager to display their intellectual prowess and provide justification for the PPA’s construction.  As a former Chair of Newfoundland Hydro and a lawyer, John Ottenheimer would find the material familiar, too.   

Perhaps, all three Candidates might inform us why after the 50th debt payment of $933 million is made, Newfoundland Hydro is not afforded any rights to purchase Muskrat power and is free to cut a deal with a third Party (CLAUSE 13.3 page 56). 

The Clause states, in part, “Unless expressly provided in this Agreement, if no agreement is reached by Muskrat and NLH (for the purchase of power), this Agreement shall not be extended, other than as contemplated in Section 13.3(a) and the matter shall not be referred to resolution pursuant to the Dispute Resolution Procedure.”

That Clause, alone, invokes the possibility that Muskrat is a far worse deal than the Upper Churchill.  Then, too, Muskrat Falls Corporation is being financing separately AND faces the biggest overruns especially on the North Spur.  Someone does have a perverse idea of “risk” and “reward”!

One thing is abundantly clear, however. The construction of the PPA does not contemplate Muskrat remaining a state owned enterprise (SOE) for long.

There are other issues with the 196 page PPA, too.

Nalcor fails to offer proof as to how the “Base Block Payments” are generated or the capital amount which underpins those payments; nor does it provide a sensitivity analysis as to how cost overruns will impact the revenue stream demanded of NLH. In addition, as stated at he outset, it is not at all clear if this is the only PPA to be generated.

On the matter of cost overruns, Section 2 of Schedule 1 provides that “(t)he Base Block Capital Cost Recovery is recalculated on or about the Commissioning Date”.  That is a free-ride for Nalcor incompetence, for sure.

When Ed Martin disclosed that the most recent cost overruns had reached an additional $800 million, he suggested that the impact on ratepayers was another $8 per month. Given the PPA’s 196 pages of legalese it does not seem the Bondholders are putting much stock in Ed Martin’s word.  Ratepayers shouldn’t either. 

Indeed, we have no idea how annual inflation will impact the rates, changes in load forecasts, Nalcor’s demand for an 8.4% return on capital, or if “Base Block” numbers have been adjusted for anticipated export revenues, however miniscule. We have only Ed Martin's suggestion rates will increase 1-2% annually.

If the public were given proper transparency, it would not have to rely on Ed Martin’s “spin” to determine the impact of the next ‘overrun’ on power rates; the Power Purchase Agreement would show the method of calculation. 

But, the PPA is not about you; its purpose is simply to ensure that you pay the levy Nalcor demands.

‘No project has ever had as much transparency and accountability as Muskrat Falls’ was Kathy Dunderdale’s refrain; one now echoed by Tom Marshall. 

Such speak is a corruption of those very terms. Add the PPA to your list of examples.

And, when Ed Martin says "we need to get the facts out there"; you had better run for your legal dictionary. You'll get no help from him.

13 comments:

  1. One telling thing about the PPA is how it addresses the issue of Capacity. Capacity is the amount of MW we can get at any given time. Holyrood at a rating of 465 MW. This was dispatchable, meaning we could get access to it, when needed. Bay D' Espor is also dispatachable power. Muskrat Falls without an effective WMA is not. Although it has a rating of 824 MW, in periods of low flow it can generate 824MW for periods of only 6-8 hours, as it draws down its small resevoir. Nalcor is banking on taking capacity from the Upper Churchill, beyond the 300 MW recall provision. The most recent court case in Quebec addressed this issue in a omniious way "CFLCo are only entitled to 300 MW" Without getting more than 300 MW from the Upper Churchill the amount of energy generating from natural water flows could be as low as 167 MW at the Muskrat Falls plant.

    The PPA is not clear at all on the issue of Capacity. The directors of NLH were not doing their job, as independent directors, when agreeing to paying for the entire plant without any assurances as to the capacity which is required.

    We have a capacity issue in Newfoundland, during our cold winters. We dont need the energy in the summer.

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  2. Further to the previous comment, the lowest cost analysis supporting Muskrat Falls was based on 900 MW available on the Labrador Link. This was modelled as a thermal unit, meaning we could get 900 MW when we needed it, and as long as we needed it. It did not include the 167 MW being delivered to Nova Scotia in Peak Hours.

    What the directors of NLH signed up to is not what was presented to the PUB

    What the directors of NLH signed up to has never been established as the lowest cost alternative.

    Nalcor has never publically provided the LOLH reliability calculations for Muskrat Falls with the Emera delivery included, or as a sensitivity with a 300 MW limit on capacity from the Upper Churchill.

    What we are buying is uncertain. We are paying for the project, but the only party getting a garunteed amount of MW is Nova Scotia.

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  3. The following exerpt from the PPA clearly shows that this project has not been developed first and foremost for the benefit of Newfoundlanders and Labradorians. From Section 3.2 of the PPA:

    Restrictions on Forecasting & Scheduling - NLH shall only forecast and Schedule
    Energy and Capacity attributable to the MF Plant to serve NL Native Load in
    accordance with Good Utility Practice and subject to the following restrictions and
    limitations: (i) Contracted Commitments, (ii) Capacity of the MF Plant, (iii) WMA
    limitations, (iv) hydrological conditions, and (v) Forgivable Events.

    Basically NLH has signed an agreement without any real recourse for non delivery.

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  4. I anxiously await each piece of analysis and commentary here, being concerned about the risks of MF. However. given the the yearly payment starting at 148 million, and say 100 million reduction in oil expense for Holyrood and 50 million income from sales to Nova Scotia, this seems revenue neutral to big cost increases to the ratepayer here. And 930 million cost to Nfld Hydro in year 50 seems likely the effect of the inflation rate long term of 2 percent a year, meaning this cost to our grandchildren is the same as ourselves now in real terms. On this basis I fail to see why power rates should jump to 16.4 cents per kwh in 2018. Issues of reliability of MF may mean added cost keeping Holyrood on standby long term, meaning some additional rate increases. But the PPA figures seem not to suggest the sky is falling, or that it is a wonderful project. Am I missing something that a reader can comment on as to why rates are to rise 46 percent or more.

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  5. The 148 million in 2018 is for the generation only. The transmission costs for the LIL will be recovered on a Cost of Service basis, and will be hundreds of millions more. The Labrador Island Link costs will decrease each passing year, the MF generation cost escalates each year.

    Further reading can be provided on the following link. Page 6 Column 4

    http://www.pub.nl.ca/applications/MuskratFalls2011/files/rfi/CA-KPL-Nalcor-27-Rev1.pdf

    Back at DG2 the generation cost was initially 167 million, compared to the transmission cost of 267 million, for a total annual cost of 433 million. They are treated separately because the transmission must be recovered by a cost of service basis, with a linear depreciation over 30 years. We will pay a profit to emera, hence the normal COS recovery of the costs.

    For information with an increase of 433 million each year, this is almost a doubling of NLH annual cost to supply information.

    Nalcor's estimates of power rates are definitely a lower bound. They can only go up.

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    1. Thank you, it is as I thought likely that the figures did not include transmission costs, hence the need for power hikes in the range of 46 percent (Nalcor figures) to 80 percent or more (figures by Russell of the Tely, and JM analysis)
      I would think such increases (shock rates) will be unacceptable, and if so will result in serious reductions of electricity sales and customers will use more cost effective heating options. To avoid this, if rate increases are less severe, then hundreds of millions of shortfall will mean higher taxes for everyone. Compensation by using the revenue from Nova Scotia will make little difference. And yet politicans are silent on this, as is the main media.

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  6. The best real operational estimate that I can see is about $600 million per year. Nalcor may charge consumers more with their allowance for a return on equity. The numbers are based as follows:
    Current Capital estimate $7 B
    Contingency $700 M (it will be needed and spent and perhaps more)
    Interest during construction $800 M (my estimate using the loan guarantee financing)
    Total Capital for NL portion $8.5 B
    Mortgage of $5 B at 3.8% for 40 years $245 M (loan guarantee)
    Mortgage of $3.5 B at 5.8% for 40 years $227 M (province's cost of capital on a 40 year loan)
    Operation and Maintenance at 1.5% of capital average $127 M (there needs to be an allowance for replacement of capital, some years it will be worse with ice storms and some years better but the allowance is needed)
    Total operational cost is approximately $600 M

    Nalcor's current total sales are about $700 M of which about $140 M goes towards fuel at Holyrood which is supposed to be mothballed (assuming that Nalcor has rights to the water when needed otherwise this cannot be assumed to be saved).

    Total incremental revenues from current are:
    fuel savings - $140 M
    Vale smelter at 8 cents - $50 M
    incremental consumer demand - $70 M (this is based on 10 % increase there will probably be a decrease due elasticity of demand in response to rate hike and availability of alternate sources of heating (air source heat pumps and wood)
    Spill from island dams estimated at 700,000 MWH sold to NS at 5 cents - $35 M
    Surplus power sold to NS and US at 5 cents 2,000 GWH - $100 M
    Sub-total towards costs - $395 M

    Additional charges to consumers needed - Approximately $200 M per year
    There are 280,000 rate payers. If you back out the increase in consumer demand for the initial years because it is unlikely it will result in an increase of $800 to $1,000 average per rate payer per year(including all the small apartments so probably double that for a 2 story house). If the government in power chooses not to allocate the incremental NS sales to the rate payer then it will be about $500 per year extra per rate payer.
    If Nalcor loses the court battle for the water rights then there will be the same total energy output but it may not come when needed and much may have to be sold through Quebec or dumped because we can't handle 824 MWs extra power in summer. The link only holds 500 MW and we don't need the 324 MW other than some periodically for the 80 MW Vale smelter. The whole business plan becomes much more troublesome in that case.

    The mortage financing costs account for 78% of the costs. If the capital costs go up the increase will not be linear as incremental borrowing will become more costly than 5.8%. There will also be repercussions to the province's cost of capital to finance future deficits. If we get a few years of low oil prices, less oil output or a combination of both, the bond ratings will go much higher and the real cost of thing will sky rocket.

    The numbers are all above and open for interpretation.

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    1. Your figures seem reasonable, but I wonder about your number of 500.00 extra per ratepayer.
      A couple of years ago the number of Nfld Power residential customers was 159,000, with Nfld Hydro had some which I estimate at 10,000. And the average house size was 1150 sq ft, as most are old housing stock. The 280,000 ratepayers I assume include commerical but also but also cottages that are seasonally used and mostly in summer, and detached sheds which are metered separately. Cottages and sheds use much less energy and winter heat and are owned by the 169,000 homeowners. I figure about 169,000 homeowners and about 30,000 commercial for 200,000 effective ratepayers. This is about 29 percent less ratepayers and suggest a yearly increase of 700.00 instead of 500.00.
      Taking Nfld power figures of 15,000 kwh consumption per average electric heated house, at 11.1 cents per kwh = 1665.00. Using Nalcor's figures of 16.4 for 2018, = 2460.00, = 795.00 increase per average electric heated house. As some 20 percent of houses are not electric heated, the average ratepayer lowers the increase as compared to the average electric heated house.
      And as the average house size in the past 2 decades is more like 1500 sq feet instead of the total average of 1150 sq feet, that is 30 percent bigger, these electric heated houses can therefore expect about 20 percent higher bill than the 1150 sq ft house it seems (as heat is about 70 percent of the total) , and suggest to me that a typical 1500 sq ft house electric heated will see about 700 x 1.2 = 840 dollar increase based on a energy cost of 16.4 cents per kwh. Is this a fair estimate do you think?

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    2. The above , 3 rd last line should say: 795 x1.2 = 954 dollars increase ....for a 1500 sq ft electric heated house, based on Nalcor's rate of 16.4 cents per kwh

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    3. The post stated a rate increase of $800 - $1,000 per customer PLUS $500 (total $1,300 - $1,500) if the external sales are not given back to help finance the project as per Nalcor’s business plan of NL customers carrying the full burden. The Liberals are on record as saying they would allocate that money back to the customers. It is also not shared equally across all rate payers as it is based on usage so the average 1500 sq ft example would see a larger increase.

      The current rate is 10.8 cents (factoring in the discount for paying on time) so 16.4 cents is a 52% increase. Based on what I use, my expectation is that a 1500 sq ft house will currently use about $3,600 of electricity per year so we are looking at an increase of $1,800 per year. The rate will be 17.4 by 2020 so an additional $200 per year and increase at between 1 and 2% (inflation or close to it) thereafter. Look out for a big price shock if we lose the Water Management Agreement court case.

      Most of the costs associated with Muskrat Falls are fixed in the mortgages. The inflationary increases shouldn’t be needed if local demand increases and in fact the rates should be able to go down as subsidized Nova Scotia exports are sold at closer to cost within the province. But alas that doesn’t seem to be in the plan.

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    4. I misunderstood your original figure of average ratepayer increase of 800-1000 dollars plus 500 dollars more if external sales are not given back.
      My figures of 15000 kwh for 1150 sq ft may be for 1050 sq ft, as I use that from memory. When using for 1050 sq ft instead of 1150 for average house size , my figures then suggest a 1313 dollar increase for 1500 sq ft, whereas you suggest 1800 dollar increase. I guess it depends on insulation values and air leakage, as to heating needs. My figure of 1313 dollars don't allow for extra air leakage which should apply for a larger sq ft area, so likely to be closer to your estimate of 1800 dollars more. In any case, such increases are indeed extremely high, and I wonder about the sanity of our leaders to saddle us with such costs. Do the ratepayers realize this is the best we can expect, and if this project don't go as planned, it will be considerably worse. These figures are not what they suggest when they spin the numbers.

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  7. It's worse for Domestic Diesel Rate 1.2D, multiple life blocks.

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  8. Those assumptions above are sound imo, backing out fuel savings of holyrood mothball maybe optimistic though, particular with commitment to NS and uncertainty to PPA, thus to continue to operate holyrood fuel exp.and maintenance expense there, would add on those costs, ($140M-170M/annually) to Total.

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