Paying Twice for Muskrat Falls
Can Muskrat Falls get any worse for taxpayers and ratepayers?
Yes it can get worse if we are forced to pay for it twice. That is the path on
which we have embarked.
The fundamental problem is that, once Muskrat Falls is accepted
as part of the energy landscape, people will attempt to avoid paying for it by
purchasing heat pumps and making other investments to reduce consumption of
electricity. This avoidance and substitution is why demand for Muskrat Falls
power will decline over time, perhaps quickly. Without a domestic market,
export markets become the only avenue to generate revenues.
In a normal world it is good for people to reduce demand for
high cost power by seeking alternatives. It is good to conserve through more efficient
heating technology. But in our upside down world it may be increasing the
overall investment surrounding Muskrat Falls from $12.7 billion by perhaps
another billion dollars.
Dr. Feehan proposes that the rate-making design should be
based on opportunity cost, which is the price we can obtain when we export the
energy. With the Maritime Link our system will no longer be an isolated system.
We can import and export electricity and have contracted with Emera under the
Energy Access Agreement to sell power to Nova Scotia at spot market rates.
These rates were forecast in the July 22, 2013 Board Order of the Utilities and
Review Board of Nova Scotia (UARB) at five cents per kWh. These represent our
opportunity cost at the wholesale level.
Once Newfoundland Power’s distribution cost is added we have an
opportunity cost rate at the retail level of around nine cents per kWh, instead
of Nalcor’s rate projection of 22.9 cents. 
The lower rates would accomplish three goals. They would 1)
encourage use of Muskrat Falls power; 2) generate more revenue, if demand is
elastic and 3) they would be more affordable for low income customers.
If such a radical departure in rate design is taken rates
should fall after interconnection and not double. These numbers need refinement
but the intent of this post is to identify rate design options which will make
sense and to avoid adding additional and unnecessary costs. My intent is to
make the best of a bad investment decision, not to “make Muskrat Falls right”,
which is not possible. It is not intended to rationalize or legitimize flawed
public policy and irresponsible project management.
Without policy direction on rate-setting in a post-Muskrat
world we will lurch from one crisis to another, as we attempt to impose a
regime which was unworkable from the start. The Power Purchase Agreement was a
flawed model. Its central premise was that people could be forced, through a 50
year take-or-pay contract, to utilize Muskrat Falls power. It simply ignores
consumer choice. To continue on this course is to create needless instability.
The provincial budget released March 27, 2018 reports health
care spending at $3 billion, with debt servicing rising quickly this year to
rival education spending, each exceeding $1.4 billion. When Muskrat Falls comes
on stream the annual cost of electricity, on the Island alone, will be $1.5
billion and rising. Why are we committing more money to electricity than we are
to education? Is this not an egregious overinvestment?
Can we place a limit on the damage inflicted by Muskrat Falls
or are we condemned to pay for it twice, by creating an incentive for people to
invest in reducing demand for electricity, thereby compounding the
overinvestment?
The current failed plan will result in insufficient revenues
to recover costs and perhaps lead also to an actual drop in revenues, from the
current level of $700 million, to serve customers on the Island. With costs of
$1.5 billion to be recovered will this lead to large losses by Nalcor, losses
which will have to be supported by government. In the process there will be a
massive shift away from the use of electric power due to higher rates.
Rate design cannot be separated from decisions as to who will
bear the cost of Muskrat Falls. If we leave the current flawed plan in place,
without re-engineering, then it will collapse and create financial instability
for our province. We cannot kick the can down the road, as our government likes
to do. Government will inflict more pain and more cost if they do not take
action. To be clear, rate redesign will not bridge the gap between annual
system cost and revenue from rates. We simply lack the fiscal capacity to
absorb these increased operating costs.
Where does all this lead? There must be cooperation with the
federal government to achieve a realistic sharing of the costs of Muskrat Falls
in an orderly pro-active basis. There must be a consultative process which
allows citizens to participate in decision-making on who will bear the cost of
Muskrat Falls power and what rate design will serve us best.
This can be added to the mandate of the Muskrat Falls Inquiry.
If government gives it the priority it deserves they will amend the terms of
reference for the Inquiry and request an early interim report dealing with two
issues: the realistic allocation of costs among the parties and the design of
an efficient system of electric power rates.
We face at least two perils. One is of overinvestment in
energy by citizens and their governments. The second is the peril of bankruptcy
which will likely devalue all assets, starting with Nalcor and its investment
in Muskrat Falls, but extending to other assets in the province, both privately
and publicly owned. For most households the family dwelling is the principal
asset. Residential property will not be immune from the devastating impact of a
bankruptcy situation.
Our province’s credit rating is a common property resource
which affects us all intimately and personally, as well as governmentally. The
response from Moody’s to our recent provincial budget makes it clear that
credit rating agencies are fully cognizant of the risks that lie ahead and will
respond negatively to a government that does not take pro-active measures in
advance, before a full blown financial crisis is upon us.
Failure to act will ultimately lead both to further
overinvestment in electricity and to a massive write-off of in the value of
assets, both public and private assets. It will devalue the equity which our
citizens have accumulated both in private family assets and in public
infrastructure.
Do we have the courage to overcome fear, acceptance and
silence, to deal with the pressing public policy crises which beset us on many
sides and of which Muskrat Falls is surely the most pressing?
David Vardy
