Thursday, 3 March 2016

CBC RADIO SHOW INSPIRES DEAR ABBY LETTER

Following former Premier Tom Marshall's recent appearance on CBC "Cross Talk", I received an email from a quite astute listener; one seeking clarification on a point raised by the former Premier that really bothered him. I have reprinted the letter here together with my reply:

DES: 
I need help. I listened to the chaotic CBC "Cross Talk" today with Tom Marshall, and I could hardly believe my ears. I actually phoned in, but was on the tail end of the show and was left hanging with a number of other callers on the waiting list.

I then thought I would write a letter to the Telegram to ask the burning question that was on my mind. But I held off, because of my total incompetence in the field of economics. I really don't want to make a fool of myself in print, because it distracts from the substance of the debate!

The question I wanted to ask Tom was on the point he kept hammering:

"Profits".  The "profits" from Muskrat Falls would come back to the people of NL, he said, so it was a good deal. What "profits", I asked myself? Simple economics tells me that if I am a widget-maker, and I only sell my widgets to myself, for my own use, I CANNOT make a "profit".


I can increase the price of the widgets all I like, especially if the government has legislated that I have to buy my own widgets and not some others that might be cheaper; I will have to pay the increased costs, which means I can go bankrupt selling my own widgets to myself! There's no real money being made.

To my simple mind, here’s the problem: Nalcor has only one customer, the people of Newfoundland. There are no other customers in sight. The province of Nova Scotia will get the power FOR FREE for the next 35 years. Moreover, a Google search can prove that the New England states are paying a pittance for surplus power.

So, we poor souls in Newfoundland will keep paying exorbitant rates (BY LAW, thank you Dunderdale and Marshall, for removing Muskrat from the authority of the PUB) so that NS can enjoy their freebie and reap whatever "profits" there might be.

I kept asking myself, HOW DARE Tom Marshall try to defend this insane concept, the "biggest giveaway" in our history? But then I kept thinking that Mr. Marshall is an eminent lawyer, a former Finance Minister and even pro tem Premier, so he MUST know more about economics than I do.

Does he? That's where I need help. If I'm out to lunch in my concerns, please tell me so.

Signed,
Feeling Powerless


Dear Powerless:

Of course, the profits that Marshall talks about are fictitious.

Moreover, virtually all the revenues from Muskrat will come directly out of the pockets of Island ratepayers; power rates will have to pushed skyward just to cover interest on the debt being borrowed for the project. 

That is the case even after revenue from power exports, which the Liberals said will be applied to lower Island power rates, are used to lower Island power rates. At most those exports will represent a savings of just 5 cents per KWh. 

Based upon JM's research, in a piece entitled "Stable Rates: Eleven Myth Of Muskrat", published on this Blog, your cost of Muskrat power, even after offset by exports, will be at least 25 cents per KWh.

As JM noted, that’s more than 2 times what we currently pay. It is 4 times the power rate paid in New England, where some of the surplus power will go. And, our rates will be 2.5 times the cost Nova Scotians pay.

Put a different way, Nalcor will need, based on the current capital cost, $534 million of revenue to cover Muskrat's interest and operating costs, annually.  In business, we frequently use the expression "cash flow is not profit". It's one of those "duh" comments. Marshall has not learned to differentiate the two.

But that's not all. If Nalcor insists that it get an 8.9% rate of return on the money you invested in the project, your power rates will be even higher. If cost overruns grow, as they are expected to, 25 cents per KWh will begin to look like a good deal.

And don’t try to reduce your consumption of energy, either. As you noted, by law you must buy your power from Nalcor (via Newfoundland Power).

And don’t think you can apply that keen mathematical brain of yours and attempt to use less power. It won’t work; you’ll just drive your power rate higher! I am not kidding. That’s the effect of the "take or pay" model which Tom Marshall and co. used to assure that the Federal Loan Guarantee would be repaid.  Tom Marshall omitted that little detail, too, didn’t he?

Where is the profit Tom Marshall is talking about? Let’s have one more look.

Nova Scotia will pay Nalcor ZERO cents per KWh for the 20% of Muskrat power, so there’s ZERO revenue there.  The 40% surplus power will net 5 cents per KWh, if you are lucky. But, it’s the last 40% that’s the money maker. It is here you have to make all the profit, because there isn’t any other customer to pay and no more power to sell.

Now, as I see it, if Nalcor charged 30 cents KWh instead of 25 cents per KWh, it could start t to make a profit if construction costs don't go higher. But, as you note, in the case of your widgets, why stop there? Why not let Nalcor charge you 35 or 40 cents per KWh and let them make even more money! Don't you see how easy it is!  Aren't you feeling richer already?

Of course, you know the difference, even if Tom Marshall does not. Newfoundlanders are essentially the only ratepayers. You can mark up widgets, or Muskrat power, all you want; you will not get one cent richer. 

It's even been suggested we should start paying for Muskrat Falls right away; even before we receive a single KWh of power.  How ingenious is that! Pure profit!

DES




19 comments:

  1. You are not alone "Feeling Powerless" I sent this email in to Crosstalk late in the show, but too late.

    QUOTE ---- Profits?

    The so-called 'profits' are coming out of the pockets of NL ratepayers in the first place !!!

    There are no 'real' profits (even outside sales that do occur must be subsidized by NL ratepayers)

    Can Mr. Marshall respond to that?

    Maurice Adams, Paradise" Unquote

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    1. "Why shouldn't we own it" is code for the PC's fixation on Hydro-Quebec and its role in political largesse.

      The big difference is that Hydro-Quebec doesn't build junk generation, and make no mistake about it: muskrat falls is junk generation. It has never made economic sense as a stand-alone project, and barely made sense as a follow-up to Gull island.

      BTW, the Muskrat Debt will ensure nothing happens at Gull Island any time this century. If HVGB people were banking on Gull Island, think again.

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  2. Can you explain the "take or pay model" and why using less power isn't going to be effective in keeping your home costs down?

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    1. "Take or pay" is the basis of what is known as the "Power Purchase Agreement" in which ratepayers must purchase 40% of the power produced at Muskrat or approx 330 MWs. Nalcor is depending upon the sale of that block in order to pay the interest on the debt and the operating costs of Muskrat. This is a legal agreement entered into by the Dunderdale Gov't of which Tom Marshall was Natural Resources Minister. If NL Hydro doesn't sell it on the Island, it must be paid for anyway; hence the phrase "take or pay". That is the basis of the Muskrat Fall project. Conservation makes sense only when our requirements exceed the need for that 40% Block. But always remember NL Hydro is responsible for Nalcor's entire cost of the MF Project even if we never use a single electron from that 40% Block. That is the reality Newfoundlanders seem never to have quite understood. As costs continue to spiral out of control the figure of 25 cents per KWh will grow. The "naysayers" have said their piece; it's time for the public to join in.

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    2. A couple of corrections. The Take or Pay, although initially 40% grows each year until NL will be responsible for 80% of the MF output, then growing to 100% after the 35 year emera deal. This will eventually over 1.2 Billion each year due by the rate payer. Also, there is no fixed capacity in terms of MW. What that means, although there is 822 MW available from MF, any reduction to to available water would limit our access. Furthermore, Nalcor must provide 167 MW to Emera, before the island rate payer. If the WMA agreement fails in quebec courts there may be less than 200 MW of firm access coming from the plant. Which means Holyrood or some variant would be required.

      The Quebec court case is the last great challenge for Nalcor.

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  3. Another remarkable part of the Marshall show was that he is like all other project proponents. No one can say, what is the cost where this project dont make sense? Is is 12 Billion?

    Marshall kept talking about how it is Hydro... it has to make sense! Like Ed Martin who is talking about this being a 100 year project. We own it. etc.

    Tom Marshall dont understand what he has imposed upon the people of this province.

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  4. I could hardly stomach Mr. Marshall's explanation as to why this is such a great project for NL. He is either being purposely disingenuous or truly lacks the capacity to comprehend the risk to this province.

    In Mr. Marshall's world of modern socialism I suppose this makes perfect sense...just redouble your efforts. Someone please save us from ourselves.

    Keith

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  5. "Profit" is the same rational used to defend the government's monoploy in the liquor business.

    Government crown corp's do not make profits. The budget process determines the estimated "dividend" the NLC will pay to the province in the upcoming fiscal year. The NLC then sets pricing based on historical trends and demands. In essence it is another version of "take or pay". If the demand goes down we'll just charge you more.

    Then at the end of the fiscal year the provincial government, and the NLC itself, tells us how wonderful this model works.

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  6. One additional insult to NL taxpayers. The Martin weasel has made it clear that Nalcor "profits" exacted from helpless ratepayers will flow to Nalcor, not the NL treasury, and he will do with it what he pleases (like more horrendous capital investments in the offshore). In otherwords the profits will be "privatized" by your crown corporation.

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  7. Of interest, Nfld Power says MF profits to counter power rate increases are uncertain, causing Tom Johnson, our consumer advocate to remind Nfld Power that it has been so mandated that profits will offset rate increases...... it is in the question and reply part of the current Nfld Power Rate application, filings with the PUB. Can it be that Johnson is not sticking up for the consumer, or he and Marshall are the only experts on all this profit stuff

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  8. More on the Power Rate application.... Is nfld Power concerned about customers converting to oil just to save 10 percent on a energy bill. They argue that payback to save takes 68 years for a forced air system and 137 years for a hot water radiation system. Not sure if they are worried about a 6 year payback for a minisplit heat pump. And these are all electric, but consumers so little electricity

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  9. More on the Rate Application
    If you are business, Nfld Power will rebate you up to 50 thousand dollars to reduce demand with air source heatpumps. But for households, nothing, NOTHING. Is this discrimination. Or just smug about customer satisfaction rates of 90 percent. We are we all so satisfied.

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  10. And while the rate application is for 3.1 percent average, it is actually 3.6 present for the DOMESTIC , the residential, while some business is reduces rates.

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  11. We are sticking it to ourselves for sure and it was entirely predictable as warned against on this blog and other detractors many times.

    There is however one part of the communication that many are using with which I disagree. NS is getting their power for free. To me that is the same logic that Nalcor and the Government at the time had been using to justify the project. You know it. Spin such as 100 year plus power, harnessing free water running downhill that God and the Environment lifts back up again. This is all true except for the fact that we have to borrow and pay interest on $9 Billion and counting (probably $11 Billion by commissioning date in 2020, 2 years late). We also have to maintain those assets and replace most of it after 35 years particularly the transmission assets. The dam may last longer with steady maintenance on the concrete but the pumps and membrane and other assets to protect the North Spur from sliding will be expensive to maintain and hopefully can be maintained without catastrophic results.

    Nova Scotia has to borrow and pay interest on $1.8 Billion to build the link to import their share of the power. They also have to maintain it except they turn it over to us in 35 years when it needs wholesale replacement. Emera adds those costs to the ratepayers. I fail to see how that is any freer than us borrowing $9 Billion to build the other 80%. Nova Scotia wins on another front which had little press coverage. That was the complete capitulation on the renegotiated deal with their new Liberal Government in order to secure the loan guarantee. From that new deal, NS is capped at approximately $1.8 Billion in capital. Any further overruns will be covered by Nalcor. NS gets a large block of firm power from the surplus power at New England market rates which are currently about 5 cents and expected to stay down as long as natural gas is cheap. This brings their average cost to below 10 cents per kwh.

    Readers should note that one of the cornerstones of the Energy Warehouse is to be able to supply peak power and other balancing needs on an as required basis at high rates. We can store energy in the reservoirs and release it with great flexibility and for very attractive rates when needed across North America. Removing most of the surplus output to be sold at the New England blended overall rate takes away this one possible bit of optimism and off course not having control of the Churchill water flow may be the second nail in this optimism.

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  12. I believe economists will in future use Nalcor as a textbook example of the perils of socialism. Here we have a government owned enterprise that will make us pay the highest electric rates in North America. When governments go into business, they always manage to do things inefficiently. When they step back and just regulate (as with an empowered public utilities commission) it better ensures an efficient low cost operation.

    Government chose Muskrat over the cheaper alternatives because it had a certain political appeal at the time. They only used decision based evidence making to show Muskrat as least cost. They prevented the Public Utilities Board from doing its job of determining the least cost option. This was in stark contrast to Nova Scotia where its regulator exercised its full power to ensure that their private sector provider, Emera, got the best deal possible from Muskrat. Kudos to the smart folks in Nova Scotia.

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    1. You must learn the difference between socialism and crony oligarchic capitalism. Socialism is benefit for all, MF is pain for all brought to you by unaccountable oligarchs after the democratic controls were short circuited.

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  13. One of the interesting tid-bits to come from the Marshall interview was his acknowledgement that Nalcor or the Government had approached Hydro Quebec about selling power to the province. His response was very detailed in that although Hydro Quebec would offer to sell energy, they could not commit to defined amounts of capacity due to the demands of their domestic response. This answer was sufficiently detailed, and specific, such that it could not be confused with some other negotiation.

    This was very interesting, as Nalcor have long stated that they have never approached HQ about the potential to purchase power and to send to the province via the Labrador Island Link.

    This of course was an alternative that was suggested by many critics, as a way to reduce the risk associated with the full project development. Building the transmission, but not the plant, would have saved 4 Billion from the overall capitial investment. We could have purchased power from Hydro Quebec, then used Holyrood as backup.

    Nalcor discounted this option. They advised that this energy was not available. They concluded that building the plant was the preferred option.

    The media should be asking questions about this. But then again the media really only have a superficial understanding of the project.

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  14. Seems your views to this website , now over 508,000, seems to be at at increasing rate. Maybe more tune in, especially as to likelihood of doubling of power rates and where Muskrat Falls is leading us. WA

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    1. The views reflect the sad fact that blogs are the only place left where journalism is still practiced.

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