Monday, 29 February 2016

MUSKRAT TAX IDEA: WHAT WAS JIM FEEHAN THINKING?

I sat in the audience at St. John's Rotary Club, last week, as Memorial Economics Professor, Dr. Jim Feehan, explained how successive years of excessive spending and a precipitous decline in revenues, much of it anticipated, had given rise to the province’s current fiscal mess.  He took time to explain the limited options available to the government, quantified the savings associated with service and program cuts, and suggested possible new revenues, all in pursuit of self-rescue.

Lunch was already over before he launched into the proposal for a new “Muskrat Falls Financing Tax”.  Luckily, the normally thoughtful Professor was empathetic enough not to have subverted decent gastronomy before exposing the audience to the most recent innovation of the ‘dismal science’.

A “Muskrat Falls Financing Tax”, an economic concept? Not really; not in the way of Piketty or the Nobel winning Klugman. It was just an idea; perhaps, like hundreds of others. Except, this one had more implications, an unusual rationale; it was presumptuous, to say the least, even for an economist.

Ostensibly, it would help the government finance project cost overruns at a time when the debt markets, long term financing anyway, are virtually closed to the province. Feehan marketed the doubtful idea as pain, now, for less pain later.

Even though lunch was over, Feehan’s idea of a new tax practically caused me to retch.  Instinctively, my eyes, already exophthalmic, popped even further, each one shifting and exploring, furtively, like scud missiles, though with less control, in search of his colleague, Dr. Wade Locke. Only Wade, I thought, could have put Feehan up to this.

Locke was among the first to assure the whole province that Muskrat was economic. He even appeared on the public media, occasionally, to nod assurance that it was fine if cost overruns continued skyward.

Had he told us he was usually on the tab of the Department of Finance and of Nalcor, we might, at least, have feigned scepticism. But only a handful of “naysayers” refused fealty to his insistence the analysis was right. Anyway, it was plain enough to  the few the discipline and the disciple had become detached.

Could this have been a desperate attempt, by Feehan, to rescue Locke, I wondered? Surely, he must know a “Muskrat Falls Financing Tax”, a “Lockean” face-saver it was not.

There was no ‘social contract’ here, certainly not one devised as might Locke’s namesake. Locke, the liberal philosopher, saw the relationship to the state in the nature of a delegation of individual rights, in return for protection. This idea constituted little more than a licence to confiscate from everyone, including those of limited means.

Those finding this point moot will agree, however, that it did not invoke any sense of shared goals like those inspired, say, by Tommy Douglas.  

Even the political spin of Nalcor CEO Ed Martin was missing. No one, as Locke could tell Feehan, can sell any fanciful idea absent deference to the Pharaoh of the 100 year project, the Ozymandias of "quick clay" and "sunk cost", though one, admittedly, now enjoying a stature more akin to economic terrorist than King. 

Possibly, Feehan was trying to emulate the Auditor General's characteristic sobriety; but did he have to embrace the artlessness of the beancounter, too? 

I waited, anxiously for the economic ‘speak’, some expostulation of a higher purpose, an underlying and unifying social goal, one threatened, perhaps, by Putin, the shenanigans of international oil, or some specious geopolitical agenda, masterminded by the Saudis to undermine Iran. But there was no such theme of joint action, no demand on patriotism, no precondition that Martin's head should roll; not even an insistence on a Review competent enough to confirm the 'sinkhole' had a floor. There was only the unquantified suggestion it might be better to start paying now.

Had Feehan forgotten a “Muskrat Falls Financing Tax” would allow Nalcor to continue to build a megaproject which possesses less legitimacy than a coup d’etat?

Wasn’t Muskrat the very manifestation of simple economics perverted; a speculation dressed up as an investment, incompetent progenitors now hoist on their petard, the project already having crashed and burned; a fact afforded denial only by the Tories by a Liberal leadership long conflicted; one now, enfeebled by indecision and inexperience?

Dr. Feehan had warned Nalcor and his colleague, Locke, too. He had instructed the Economics Department Head on a concept, likely found in the first chapter of Economics 101, on the elasticity of demand. Sensitive to easily bruised egos, he had even cleverly disguised the message in a Paper entitled: “Newfoundland’s Electricity Options: Making the Right Choice Requires an Efficient Pricing Regime“, in 2012.

But Locke wasn’t listening. It was too late, anyway.

Locke had already experienced the good fortune of having been seated within ear shot of the “Oracle of Galway”. Danny Williams was not an economist. But that didn’t matter. The power of bombast, and of wishful thinking, had the same hyper-hypnotic effect as the rationality principle, didn’t it?

Alongside Williams, Locke must have felt as might a maĆ®tre d’ to Thomas Piketty. The international economist had written a best-seller, counselling governments to redistribute good fortune through a global tax on wealth. Except Feehan was now proposing the very reversal of the same idea. The perversion was obvious; it was a way to allow Dr. Locke to emerge from the shadows unembarrassed. Ed Martin would love it, too.  Reverse wealth redistribution would allow Nalcor’s entire management team to extend the lifespan of a project that had already served as the perfect golden handshake.

The Mayor of St. John’s, no economist to be sure, had already tried Feehan’s…well, possibly Locke’s idea; except his goal was to help only the one; that is one better connected than most. 

The Mayor was a disciple of the “Oracle of Galway”, too, offering, in return for Danny’s eternal gratitude, a one sided deal worth $8.5 million for 20 acres, most of which, as one City Councillor admitted, was mostly to be used for dumping snow. It was forward thinking insisted Doc O’Keefe, even as the citizenry rose against it; but unlike the Mayor, Locke knew all sorts of names for “pickpocket socialism”. The “Muskrat Falls Financing Tax” was ‘easy peasy’.

I thought of the ‘Oracle of Galway’, as Professor Feehan sat back down, his remarkable conclusion still reverberating in my ears. I remembered the lashing of critics, and the unwarranted claims, like this one, which Williams made in 2014.

“There is a group out there…pounding away at us just for the sake of pounding. Well I’m telling you, this was a good project when it was approved, it’s a good project now, it will be a great project in the future.”

It is difficult to square Williams’ version of the prophetic with a project on life-support.

Dr. Feehan deserves applause for his many contributions to public policy; but a “Muskrat Falls Financing Tax” is neither noble nor Nobel. The government has beggared itself. Even if it seems wistful, it should not be allowed to beggar the public, too.

8 comments:

  1. "Opinions ...that bite" --- for sure. But needed to be, and very well, said. Maurice Adams

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  2. On this one Des I must disagree. I think the idea of a Financing Tax, although as hard as it would be to swallow, is a necessary evil. It should be applied right on our electricity rates. We should be recovering for this debacle right now, taking advantage of the low oil prices, and cheap electricity from Holyrood. We should be putting another 2-3 cents on every KWHr now sold by NF Power, using it to finish the big white elephant in Labrador. The other benefit of this is that it will reduce the rate shock when the project is ultimately finished. 3 cents per KWhr would generate about 180 million a year. This is enough to pay for the interest on the borrowed equity.

    Muskrat Falls is a debacle starting to unfold. However, it can not be stopped. The Muskrat Falls financing tax is a bad idea, to mitigate the impacts of an even worse idea... Like a double negative, that makes it a sound idea!

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  3. Obviously, Feehan was/is opposed to Muskrat. But Ball et al are going ahead with it. Apart from cancelling Muskrat, Des, what do you propose we do ? Do you think that taxing this monstrosity before it comes on stream may make the conned consumer wake up and revolt now ? And, amazingly, lessening the ever increasing Muskrat debt NOW, instead of passing it along for 50+ years may be a tad bit - oh...I give up. You are still back in the 70s/80s with Moores and Peckford. You have to know when to hold 'em, know when to fold 'em, Uncle.

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    1. Government has an obligation to first conduct an analysis of the merits/costs/options related to continuing with or modifying the project and only after reaching such an informed judgement should government assess how best to finance the province's electricity needs -- Maurice Adams, Paradise

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  4. Feehan was the senior economics advisor to the Liberals for LEAP, whatever that was/is. He's hardly owing any cover to WL. He's more likely stalking horse for Liberal public policy to come.

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  5. Nfld Power`s current rate application shows about 2.8 million extra needed, which is just for loss of revenue expected( reduced sale of electricity) due to the 3.1 percent rate hike asked for. This reduced sale of electricity is from the `elasticity effect` which they use a factor of 0.2 for elasticity. So : raise electricity price, people cut back, less electricity sold, power assets must be paid for, but less electricity sold does not mean reduced revenue, as part of the overall rate increase is to cover what otherwise would be loss of revenue. Simple economics: the so called elasticity effect....and a major danger of steep rate increases....it reducesn electricity sales and then the rationale for Muskrat Falls disappears.
    Now Feehan proposes say a 3 cent hike on power rates, an immediate hike. This is 10 times the current hike Nfld Power seeks. It suggests an elasticity effect costing 28 million per year, on top of the 180 million he proposed to get with the power hike. And with cheaper alternatives to baseboard heating, the elasticity effect may rise much higher than the present 0.2. It may just to 0.5, so that the power companies will need to add much more than the 28 million for this effect. This should cause electricity sales to plummet, and have a long term negative growth in electricity sales. This is a great idea, and will, I expect meet aggressive opposition by Nfld Power.. maybe.But they are guaranteed a profit even with reduces sales. They just blame Nfld Hydro and Nalcor. But it will jump start a electric heating revolution here that may very well cause a stop to Muskrat Falls.... the sooner the better. So the naysayers (of which I am one) should praise this electricity tax. But a modest efficiency tax for efficient heating, which should have started years ago would have made much more sense. But I am only an engineer, not an economist, like Wade Locke or Mr Feehan. So lets proceed with Feehan`s idea and see what happens.
    Winston Adams

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  6. A tax on the MF tax to smooth the way for the stranded asset at MF!
    Look at the bright side, when the dam fails you will not help Emera build an empire paying them to transmit MF electrons.

    It is hard to believe Nalcor got hosed in their rush to move MF ahead at ANY cost. I wonder what would emerge if the contracts signed with SNC Lavalin and others, cloaked in secrecy, were made public. With even the CFIB stating that it is the best interest of all involved to make public the contracts, they remain hidden. With the fiscal crisis NL faces how can this be allowed to continue?

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    1. Danny wanted to retire on one last "big score" and Ed Martin wasn't going to say differently, far too meek and accommodating - along with Ed's complete lack of hydro and large scale construction experience, did anyone expect otherwise? Hydro Chairman should never have been merged with Nalcor CEO, a competent person with utility expertise was required to run Hydro. Nalcor's Board of Directors only had a handful of seats filled, how to get a pet project approved with minimal effort.

      Hebron negotiations were delayed because DW had to put his own touch on the deal (equity and super royalties) and now it looks to be the worst oil deal signed by NL, minimal short term revenue. $5 billion Hebron construction has ballooned to $14 billion, had DL not mucked around with the generic royalty regime NL wouldn't be on the hook for $100s of millions more.

      As for DL not being an economist, true, but he does have a political science and economics degree from MUN.

      Jim Feehan was unprofessionally attacked by Locke at the Harris Center presents a Nalcor slide show presentation.

      "If prices are raised by 80%, we probably will not need the Muskrat Falls infeed either. Problem gone!" page 15 https://www.mun.ca/harriscentre/policy/memorialpresents/2012a/lower_chuchill_jan_2012.pdf

      Feehan had suggested demand side management along with a price increase to reduce demand on-island, Wade interpreted this as Feehan wants an 80% kWh increase (ironically this 80% cost increase would have been lower V MF in its current state).

      2-3c kWh increase before MF was sanctioned to map out realistic demand projections or 6c kWh increase in a single year (MF DG2 #s) NF Power is only now admitting the realities of price shock and demand for their customers. That 6c kWh increase might now be half of the actual kWh price residential power customers will see on their first post-MF bills.

      $80 million in export sales woo-hoo "it's better then nothing" said an infamous PC/MF booster - PhD Spinologist (spin + apologist)

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