Yes, people want to know why Muskrat — a project glorified
by all strata of society — could have been so poorly conceived and executed. They
want to know if malfeasance was involved. But, in the end, they will leave the
issue of responsibility and recrimination to the institutions charged with the
maintenance of civil society.
Most know that what is hanging over them will be devastating
if no action is taken to alter the outcome. By and large, people now want to
hear solutions. They want “fixes” that constitute something more than empty
promises by politicians whose focus is the next election.
The financial analysis conducted by PlanetNL, in a February 26th post entitled “Can Muskrat Float After a Bailout?”, is both important and
timely. The piece provides the basis for why it is foolish to await a “miracle”
when a better bet is to start facing facts now.
Unlike Nalcor, PlanetNL does not deny simple economic
concepts like demand elasticity (influence of price on demand for a commodity).
He calculates a 30% reduction in power demand — from 7000 GWh to 5000 GWh — acknowledging
consumer behaviour in a 17 cent/kWh environment. He uses Nalcor’s numbers for debt
servicing and operations, post-commissioning. If none of the debt is
written-off, he calculates, the revenue shortfall for Muskrat will be $500
million annually, an amount that will rise almost exponentially (see exhibit below).
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| Source: PlanetNL |
PlanetNL also addressed the issue of a “bail-out” of the
project. Successive exhibits in the piece show that even if the entire debt of $12.7B — including $7.9B of
bond funding borrowed under the Federal Loan Guarantee, $800 million from Emera
for the Labrador-Island Link AND the $4B equity contribution from the
provincial government — is entirely “written-off”, the project may break-even
for a few years before it will, again, require additional subsidy due to
increased costs to operate the Muskrat asset.
As much as the idea of write-offs seems fanciful, it is
not. Write-offs are inevitable. They are inescapable. They should be on the
minds of the public now, except that the Premier and the Finance Minister continue
to obscure the issue with promises of “rate mitigation”, giving false hope to
the public and opportunity for the Feds to wait until the eleventh hour when
the Bond market dries up and we are on our knees.
If this discussion were in reference to the debt of a
private company, it would end quickly. The company would be bankrupt and civil
law would be employed to clear away the detritus.
In the case of Muskrat, Emera is involved, but it is
insulated by a multiplicity of legal agreements.
Nova Scotia was never
on the hook for cost overruns. Then, too, the UARB saw an opportunity to skin Nalcor
alive when the latter — having already spent several hundred million dollars
and wanting a deal at any cost — allowed themselves to be backed into a corner.
Emera’s investment in the Maritime Link and legal
commitments for the supply of power to Nova Scotia could be turned upside down if
the province defaulted. But for legal reasons and for political ones, too,
Emera is likely to be kept whole, and likely by the Federal Government.
At bottom, governments are the ones on the hook for the debt
and, of them, only the Federal Government is financially competent.
As PlanetNL suggests, the Feds will be forced even to look at
the approximately $3.7B of NL’s $4B equity contribution to the project.
Right now, it shows up in the Government’s books as part of
the “Total Debt”, allowing the façade of solvency to treat it as an active
asset. Written off, it would be included in the Province’s “Net Debt”.
Of course, the issue is academic. The Province is not in a fiscal
position to service an additional $3.7B, especially while it continues to rack
up deficits well over $1B to fund annual current and capital account needs. (Don’t
be put off by the terms “debt” and “equity”. It’s really smoke and mirrors
— it’s all “debt”.)
The Government continues to talk about “rate mitigation” as
if taxpayers were capable of servicing the entire $12.7B capital cost but, as
already noted, this is fiction. For that reason, the public needs to go to war
first with the Ball Administration, then with the Feds. We have a Government
deliberately obscuring our dreadful financial condition when it should be
girding the public for both a tough fight and challenging times.
Far too many members of the public, as well, are cavalier
about the impact of 17 cents/kWh power on those with low and fixed incomes. Perhaps
they forget that even middle class purchasing power will take a hit when
reality catches up.
The Premier is both weak and very partisan; he will not
challenge the Prime Minister on this — or any other issue — before the federal
writ is dropped early next fall, or in advance of the provincial general election
next October.
But before people get engaged, they need to be informed. They
need to understand the truth about promises of rate mitigation; even more,
they need to know why the Feds are
culpable and how they enabled the
sanction of an ill-conceived Muskrat Falls project.
Let’s be clear: in the same way that there is no magic in
the words “rate mitigation”, there is nothing original or innovative in the
idea of Federal Government “write-off”. What is important is only that it is
necessary and that the alternative is unthinkable.
Unless the public prefers to believe in magic or is
willing to accept the pain of penury, they have to get ready to test the
goodwill and the patience of the whole of Canadian society.
But, first, they should try and understand why the Federal
Government must let “write-off” enter its lexicon.
They might also want to not only goose the Ball
Administration, but also awaken the seven Federal MPs from their slumber.
An examination of Federal “complicity” in
the Muskrat Falls debacle is coming soon.