WHEN LEGACY TRUMPS COMMON SENSE (SOES PART II)

It is fine to suggest the Province ought to have a ‘Crown Jewel’ like Hydro Quebec or Statoil. But, when the motivation for a monolithic State Owned Enterprise (SOE) comes from a Premier, whose business experience is chiefly in the ‘regulated’ economy and whose motivation is legacy, you can imagine other questions abound.

It seems easy enough. Find a need, like electricity; design a hydro project, develop a set of estimates, engage the markets and the public purse to finance it, execute a power purchase agreement requiring the public to pay it all back and then some.  What could be simpler!

Of course, it isn’t simple at all.   

What if the hot economy isn’t conducive to controlling costs, the management team is limited by a lack of basic construction experience, the captive market needs only 40% of the power, possibly less, and you need to achieve 100% cost recovery from just that market?  What if you are forced to give away 20% of the project’s power potential to achieve export access?

What if you agree to incur 50% of the cost overruns on that transmission link and commit all your remaining ‘surplus’ power to keep your export partner happy; what if you are given a not so gentle reminder all the risk is yours and that the benefits of the Federal Loan Guarantee belong to Nova Scotia! 

What if you are told by the Nova Scotia regulator: take it or leave it. 

BUREAUCRATS MASQUERADING AS ENTREPRENEURS (PART I)

We live in part of the world which has a highly developed free enterprise economy, access to capital and to markets; yet, state capitalism still thrives.  

This is not just a Newfoundland and Labrador or a Canadian phenomenon; state owned enterprises (SOES) are a feature of governments almost everywhere.

Norway is one of the most successful of countries engaged in SOES; Statoil is its flagship along with a ‘Heritage Fund’ that is approaching the trillion dollar mark.

Arguably, state capitalism boasts a high level of popular support even in countries where private enterprise is by far the predominant generator of GDP.

In the ’80 and 90s many state governments, including Canada’s, pared SOES after subsidies and poor governance became far too burdensome on the public purse.  Selling them rid the state of their operating losses and helped reduce debt.

In this Province, the Newfoundland Liquor Corporation (NLC) continues to operate as a Crown Agency.  But no SOE, not even NLC, causes intoxication as does the word ‘hydro’.

RETURN OF THE 'JOEY MAN'

“He’s just a Joey Man” my mother once said to me as if to offer protection from verbal assault by one much older.

The lecture to which I was subjected was a vigorous oration delivered by a particular ‘worthy’ in defense of the Only Living Father, as J.R. Smallwood liked to be called. Evidently, I had the temerity to speak ill of the great helmsman. 

A “Joey Man” I enquired of her? What’s that? “Oh”, she replied, “you’ll see lots of them. Their minds are taken over by Smallwood; a single criticism and they’ll tear you apart as if you were a traitor.  My”, she declared, “they get so emotional, if you say anything against their man. Don’t expect them to use any reason”, she added gently; “facts are not their strength...any criticism is disloyal; best to ignore them until they go away” was her final word on the subject.” 

In later years, I discovered that such people come from all strata and are not limited by education, social or financial advantage.   Even some members of the media have earned such a reputation.

T.E. BURSEY WRONG ABOUT MUSKRAT SAYS DAVID VARDY

I am writing to take issue with points raised by T.E. Bursey in his article to The Telegram of July 15 (Muskrat Falls is the Right Project for N.L.). Mr. Bursey seems to believe that Muskrat Falls will be the solution to the reliability problems experienced during the past winter.

Nalcor has posited that emergency power will be available from Nova Scotia in the event of a disruption of Muskrat Falls power. We believe that a thermal plant at Holyrood will continue to be needed and that emergency power from Nova Scotia is unlikely to be available when we need it.

The PUB inquiry, particularly phase II, will weigh the evidence on this point but we question the premise that Muskrat power will be more reliable without continued thermal backup on the Avalon.

Mr. Bursey lists experts who provided "supportive reports and comments." Only one of the listed reports was prepared by an independent group, namely the joint federal provincial panel, which was anything but supportive.

THE CONTINUED BECLOUDING OF ELECTRICITY PRICES by JM

On July 12, 2014 the CEO of Nalcor wrote a Letter to the Editor which was entitled “Muskrat Falls Remains the Best Option”.   Its intent was clearly to counter some of the recent discussion about the final costs of electricity within the province.  Unfortunately, it did little to remedy my concerns about where electricity rates in the province are heading. 

We should begin with a simple clarification.  Nalcor CEO, Ed Martin quoted that:

“In 2018, electricity rates for households on the island are projected to be 16.4 cents per kilowatt hour (kWh), which is about $249 for an average monthly bill, approximately half a cent higher than the rate estimated at sanction of the Muskrat Falls project (15.9 cents/kWh)”. 

Unfortunately,  Mr. Martin is not correct.  

ELECTRICITY RATES: AN INDUSTRIAL-SIZED MESS

It is rare that anyone expresses concern over how electricity cost increases affect industrial concerns, like Vale, Corner Brook Pulp and Paper or the Come By Chance Refinery. 

They possess the financial, technical, legal, and political heft to lobby Governments, seek recourse before agencies like the Public Utilities Board and, if necessary, the Courts.  The public rarely takes notice except when a company’s pending demise becomes front page news.

These days the Province is pretty cocky about its over-hyped economy. The Unions will only sulk when the jobs are gone.

Enlightened public policy will not disassociate the interests of industry from the public interest.

While this Province has long offered subsidies to the sector, this scribe is not fond of schemes that download operating costs to taxpayers and shift high capital costs and risk to their sponsor, the Government. That issue may be worth debating another day.

Still, such incentives are a feature of developed and developing economies alike; they are not likely to disappear.

OTTENHEIMER, DAVIS AND KENT: THREE PRINCES OF SERENDIP

Serendipity is a condition understood to be a "fortunate happenstance"; a "pleasant surprise".  In the context of the Tory Leadership Race that means the likelihood the Province will get a suitable Premier, from one of the three contenders, depends essentially on dumb luck. 

Horace Walpole, an English politician and man of Letters who coined the word ‘serendipity’, in 1754, used it to explain an unexpected discovery by referencing a Persian fairy tale ‘The Three Princes of Serendip’. The Princes, he noted, were “always making discoveries, by accidents and sagacity, of things which they were not in quest of”. 

The requirement of a second leadership process is serendipitous by any measure.  Given the weak line-up of new contenders, sensible decisions from the winner might be an unwarranted expectation.

There was a time when one thought serious candidates for high office possessed ‘extraordinary’ talents rather just those of the ’ordinary’ kind.  Serendipitous hope seems an odd substitute for a more certain skill set.

"MUSKRAT MADNESS" Book Review by David A. Vardy

Muskrat Madness

by Cabot Martin

(Available at Afterwords Bookstore, 245 Duckworth Street, St. John's

and Online at:  http://www.muskratmadness.ca/)

Cabot Martin has once again rendered a major public service to the people of Newfoundland and Labrador by writing his new book Muskrat Madness. It is required reading for those interested in sound public policy.

This is the same Cabot Martin who advised Premiers Frank Moores and Brian Peckford in the early days of offshore development and who helped develop policies to ensure maximum benefits to the people of the province from oil and gas development.

Cabot has now prepared a memoir on Muskrat Falls, an invaluable document that does not claim to cover everything that happened, but which covers many of the key issues including project costs and how they fit into the energy economics of 2014. 

His memoir includes some of his letters to the Telegram. In one of these he concluded that “Muskrat is a dog-unless, of course, you are Nalcor.” In June 2012 Cabot opined that future oil prices are key to the viability of Muskrat. He said “the combination of, say, a 25% increase in cost and a fall to $100 per barrel…would result in  a similar eradication of Muskrat’s economic advantage even as constructed by Nalcor-and that’s actually where we find ourselves in the summer of 2012.” 

Res Ipsa Loquitur (THE THING SPEAKS FOR ITSELF)

In common law, the doctrine of “res ipsa loquitur” (Latin for "the thing itself speaks") states that a conclusion can be inferred without direct evidence.  The photograph (below), recently obtained by this Blog, is an excellent example of such a proof.

The image offers visual certainty, to arguments advanced by Muskrat Falls’ critics, that there is still time to cut our losses on the project; we should shut it down.

Nalcor CEO Ed Martin, stated recently in announcing an additional $800 million cost overrun, that he is now “comfortable with the cost envelope”.

Martin's comment accompanied no documentation, no independent verification, and no evidence of the kind of contracts to which Nalcor is committed.

A recent Post, on this Blog, COST OVERRUNS: YOU CAN'T HANDLE THE TRUTH included this comment: “with no work begun on the North Spur, the power house or the transmission line, as well as on other major components of the Project, no experienced builder would give the kind of assurances Martin is attempting.”

The photo was taken from a public area of the North Spur, looking south.  

MUSKRAT MADNESS: NEW BOOK A WAKE UP CALL TO GOVERNMENT

Cabot Martin, lawyer, the former senior advisor to several Premiers, and Muskrat Falls critic, has just published a new book entitled “Muskrat Madness”.   

The book is self-published and available at Afterwords Bookstore, 245 Duckworth Street, St. John’s for $16.95.

Martin is a prominent spokesperson on the perils of the “Quick Clay” instability problem at the ‘North Spur’; a point of land that extends into the Churchill River forming a natural damn structure on which the Muskrat Falls hydro project relies. 

He has researched the issue extensively compiling a variety of technical studies conducted since the 1960s, offering an analysis of the problem, its threat to the geological integrity of the Muskrat Falls project and the dangers to residents downstream in Goose Bay and Mud Lake. 

While the issue of “Quick Clay” is a major preoccupation, “Muskrat Madness” engages in a much larger overview of the Muskrat Falls project providing keen perspective on the history of the project and an intelligent analysis of the many technical, market and financial risks Nalcor ignored in order to obtain project sanction. 

MUSKRAT’S CHANGING NARRATIVE

The reaction, last week, to Nalcor CEO Ed Martin’s announcement that another $800 million had been lathered on to the Muskrat Falls project attracted some interesting reactions from provincial politicians; in another case there was no response at all. 

Newfoundlanders and Labradorians seemed to take the news with typical equanimity. 

There were no street protests, no calls for Martin’s resignation (though there ought to have been), no demands for the Government to resign.  

Public quiescence was maintained possibly because Nalcor still has cash flow; Newfoundland Power will send the bills later.

Still, an additional $800 million is a staggering sum.  The new total is $8.33 billion when interest during construction on the new overage is included; that is slightly higher than the $8.19 billion I had reported in my last missive (having been corrected by a ‘qualified’ economist).

Speaking of which…we haven’t hear from Dr. Wade Locke. Locke is the MUN Economist, who proclaimed to a capacity crowd filling the Inco Centre, he approved of the Project. 

But, it was the warning he left with an audience in Norman’s Cove, a few days later, that some remember.  Locke is reported to have stated, if the Muskrat Falls Project exceeds $8 billion it will cease to be the lowest cost option.