Muskrat Falls and Voodoo Economics

The method that Nalcor is using to price the electricity from Muskrat Falls should be a major concern to the residents of the province. The cost to the ratepayer, in the first instance, will be kept artificially low to obscure the true cost of the project. Here are the reasons why you need to be concerned:

Nalcor (the unregulated owner) will sell Muskrat Falls power to Newfoundland and Labrador Hydro (a regulated subsidiary of Nalcor) under what is known as a Power Purchase Agreement (PPA). Under this agreement, electricity will be priced in constant dollars and will escalate annually by a figure adjusted for the rate of inflation. This is also known as “escalating supply pricing”. The project, then, would be paid for over a period of 57 years. In other words, the returns on the project are back-end loaded, the depreciation in particular, is calculated by using what is referred to as a sinking fund – the depreciation is written off much later, a procedure that is used by only a few provincially owned utilities in Canada.   The simple fact is that the provincial government, through Nalcor, is ‘kicking the can down the road’ and making it a problem for the next generation. Only government would engage in this practise. Private enterprise, especially those with public shareholders, like Fortis, would not.

More Bafflegab on the Upper Churchill

In another recent ‘information dump’ the Minister of Natural Resources released a Paper entitled: “Upper Churchill: Can we wait until 2041?”   

Many critics of the Muskrat Falls development have advanced the view that the Government should not expose the small population of NL to high cost power and to the financial risk associated with the mega project; the idea is that our incremental power needs can be met from a variety of smaller, less risky sources, until the Upper Churchill Contract expires.

For at least a year, the Provincial Government has been attempting to dispel the idea that developing a portfolio small projects, under the “isolated island” option was a viable.  Your Uncle Gnarley scribe wrote an article on the subject entitled: Upper Churchill Contract: Inherent Uncertainty or Bafflegab.  When the Minister released the new documents, The Telegram on November 10, 2012, quoted him paraphrasing an opinion contained in the Paper.  Said the Minister:

“I know at one point I laboured under the illusion that as we waited for 2041 we would get free power, we would have unlimited power, but when you look at the corporate structure of CFLco it’s not that simple.

“It’s not going to be Hydro-Quebec simply agreeing that all power will be given to Newfoundland and Labrador.  Churchill Falls (Labrador) Corp. will still exist – its ownership split between Newfoundland Hydro (with 66 per cent stake) and Hydro Quebec (34 percent).  Whatever happens with Churchill Falls, the interest of Hydro Quebec simply can’t be ignored.

“There is no doubt that Newfoundland and Labrador will benefit in 2041 power, but it’s very difficult to envision what exactly will take place”.

It is difficult to contemplate that these are the comments of the Minister of Natural Resources, a lawyer and former a Minister of Justice.   

YVONNE JONES WAS PLAIN WRONG!

Yvonne Jones was wrong, this week, to imply that she would vote in favour of the Muskrat Falls project if she could get some benefits for her district and for Labrador.

It is true, as a VOCM Reporter noted, “(t)hat the Liberal MHA for Cartwright-L'Anse au Clair has long been a loud opponent of the project, citing amongst other things, concerns of the lack of power allotted for mining developments in Labrador.  VOCM added: “Jones says it comes down to what's in the best interest of her district….in order to change her vote she'd have to see a benefits agreement for Labrador…says she's been fighting for the people of her district for 20 years and she's not going to stop now…”.

 Admittedly, the job of an Opposition Member is difficult at the best of times.    

But, Muskrat Falls is not one of those issues on which to lever district improvements, regardless of how bad they are needed.

In portraying her vote as a negotiable item, Jones does her district and the whole Province a disservice.  The MF issue is simply is too important and contains too many risks to be used as a bargaining tool. And, that is not the half of it.

The Pursuit of Apathy

I was lying in my comfy chair listening to evening news.   The forecaster called it the ‘weather bomb’.  This was a term that my old friend Uncle Gnarley had initially despised, considering it yet another example of the vulgarization of the King’s English.  But one could not deny the effect it had in describing the events which he knew was going to unfold in the next 24 hours.  The Avalon Peninsula was going to be somewhat spared.  The low pressure system was moving in from Cape Breton, over the straight and was due to hit the long range mountains by noon tomorrow.    It had come up very quickly, and it was going to be the first winter storm of the season. 

The wind beating off the side of the house was hypnotic and I quickly started to dot off.  My slumber was quickly interrupted by a knock at the door.  Who the hell would be out in this type of weather, at this time at night?  As I opened the door it was there was the cantankerous old economist Uncle Gnarley himself.  Slapped over his shoulder was an old canvas kit bag.  I motioned for my friend to come in.

“What brings you up from the shore”

“Well Nav.. I have sensed that you are getting soft in your old age, and I brought you some provisions in the event that this storm matches the high expectations of Toni-Marie”.   He looked at me, the devious smile was clearly meant as a double entendre. 

He reached into the bag, and hauled out a bottle of Laphroaig  “the peat will keep us warm tonight Nav”.

DOING THE MATH ON A MINING SUBSIDY

An article in the Kamloops Daily News, written by Columnist, Jim Wentworth, in June 2012, notes that an electrical subsidy to a proposed mine called Ajax, would alone cost B.C. taxpayers $16.5 million.

The Kamloops article suggests British Columbians already believe that they pay too much for electrical power. Wentworth adds that, “the negative revenue impact of these various resource projects may increase (B.C.’s power costs) even further. So the impact on residential ratepayers will be very substantial if the current rate structure for mining projects, such as Ajax, is not amended”. 


The issue is important to NL not just because our power rates are going up substantially too, but because of the parallels with the B. C. issue for power subsidies to Alderon and to other  mines in Labrador. 

I thought it time to put some numbers to the issue of electrical subsidy; we should decide if the cost should concern us in NL as it concerns some residents of B.C. 

Alderon is the most advanced of the mine proposals; it can help us define some of the parameters for our calculation.

The Power is in Whose Hands?

By now you have received your Muskrat Falls Brochure.  It was aptly titled “the power is in our hands”.  I have to assume that the “our” referred to, is Nalcor.

The Brochure deals less with the justification for the Muskrat Falls Project than with making sure Nalcor is credited with the Project, that Nalcor has the professionalism, Nalcor has the experience, Nalcor has the strategic vision to carry out a $7.4 billion megaproject. 

The public has been told that the marketing campaign to ‘sell’ the Project, of which the glossy Brochure is but one piece, will provide transparency and factual information to the people of the province.

It does not achieve that purpose.   

The Brochure barely notes the role of the Government. Even Muskrat Falls is secondary here. Nalcor is on display.  The Brochure boasts:  “MHI has found Nalcor’s work to be skilled, well-founded, and in accordance with industry practices…..”.  “MHI supports Nalcor’s finding….”.  “In MHI’s opinion, Nalcor has undertaken a diligent and appropriate approach…”.  Like the child that is the perennial underperformer, whose need for reassurance cannot be sated,  Nalcor needs to be the center of attention. 

WHAT HAPPENED ON THE WAY TO FORT McMURRAY?

Small island economies are naturally vulnerable.   Natural barriers, including remoteness and marine geography, implicitly, exacerbate the challenge of easy access. 

Dependence on resources like fishing, trees and tourism, historically have a seasonal character, which together with fluctuating markets and other factors, keep disposable incomes low. 

The attraction of stable, high paying jobs whether in Fort McMurray or elsewhere is impossible to ignore.

Rural communities are not just in decline, they are being gutted.  Rural NL is under threat, less now from unemployment than from labour mobility and competition for skills, from elsewhere.

Mega projects have an irresistible allure, the modest janitor can now lay claim to a six figure income out West. Fishing boats, at home, can’t attract share men.  Two paper mills have shuttered, a third hangs on, barely. 

Fish processing, the almost singular source of employment for graying fisher people, too old to do the bi-weekly flight to Fort McMurray, find China a worthy if unequal competitor. If these fisher people feel forgotten, who could blame them?  

WHO PAYS THE COST OF MINING SUBSIDIES? YOU DO.

This piece contains many questions.  I suggest members of the public should start asking some of them. 

Let’s start here: should this Province give away its minerals essentially for the few jobs mining companies offer?  Should we insist on a royalty regime for oil and gas but give back to mining companies royalties we collect by subsidizing their power costs? 

These are critical public policy questions.   

NL has a history of very high unemployment rates reaching as high as 32.7% on a seasonally unadjusted basis in 1960.  That the Provincial Government would engage in subsidy programs to lessen this burden was understandable, notwithstanding the fact that some attempts to attract industry (the ERCO plant in Long Harbour being a case in point) went beyond all reason because the number and types of subsidies awarded made a mockery of any economic rationale. 

Yet, subsidies continue today even though the jobless rate in the Province is down to 12% (and the true rate is skewed by the seasonality of under employed fisher persons and plant workers).  In Labrador West, where the mines are proposed, the jobless rate is practically zero. 

PECKFORD'S BOOK TOUR SPEAKS VOLUMES

Former Premier Brian Peckford, my boss for six years, (1979-1985) was on my mind this week.  I had read that he was spending several days conducting a Book tour in central and western Newfoundland in connection with his recent publication: Some Day The Sun Will Shine And Have Not Will Be No More.  The Globe and Mail reported recently that his Book had placed second on the Canadian Bestseller List for non-fiction.  His publisher also indicated that Peckford’s tome was already into second printing.  

I thought it appropriate that I should congratulate him on his Book’s success and enquire about his tour.

Of course, I was not without an ulterior motive. I also wanted to quiz him about the Muskrat Falls project, in particular whether the subject had emerged in his conversations with the people attending the Book Signings and what they were reporting.  I thought those two reasons were sufficient to ring him up.

I know no one else in the Province who possesses Peckford’s ability to gauge public opinion.  His instincts are uncanny and virtually incontestable. I can attest to that fact as one who directed and analyzed dozens of public opinion polls during my eleven years in the Premier’s office, working on the staff of both Peckford and Frank Moores. 

MUSKRAT FALLS: THE ‘SKINNY’ ON COST OVERRUNS

My Blog Posts and letters to The Telegram have mostly dealt with the arbitrary approach of the Dunderdale Administration and the consequences of the ill-conceived Muskrat Falls project both for the public treasury and for democratic government. 

I am a fortunate person; having served two Premiers for a total of eleven years, I left the service of government to become engaged a business career, now spanning nearly three decades, that included construction and development.  While I am not an engineer, I have learned much from some very good engineers and other construction professionals including some of the things contained in this article.

Experience is often the ingredient that offsets construction risk.  Right?  Well, not always.  Ask yourself this question: If experience alone were sufficient, why do oil sands projects continue to experience huge cost overruns despite the fact that large conventional projects can almost be now characterized as cookie cutter? Even SAGD and similar technologies are far more technically simplistic.