Thursday, 3 March 2016


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:

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.

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!