Monday, 24 February 2020


Guest Post by Ron Penney
We are faced with two big problems, either one of which would be difficult, if not impossible, to resolve. 

The first is the fiscal situation. 

The Auditor General, in her most recent presentation, set out again our perilous financial situation. By almost any measure we have the worst fiscal metrics compared to the other provinces, despite having the highest per capital revenues in the country. 

 Expenses have gone up 33% over the last ten years. Over the same period revenues decreased by 9%. Over the past 7 years we have had a cumulative deficit of $6.4 billion.  

We have the highest per capita expenditures in the country by a large margin. 

We also have one of the highest tax burdens per capita in the country so we can’t tax our way out of this, despite some recent suggestions to the contrary. 

Reaching a projected surplus in 2023 requires annual expenditure reductions of 1.94% a year, with no allowance for inflation or wage increases. The recent reports of a 4% increase to NAPE, which will set the tone for the rest of the public service, puts the lie to the projected 2023 surplus. It just won’t happen without massive reductions in public services, for which there is clearly no appetite. 

Worse, even those who should know better, are calling for increased expenditures. I refer in particular to senior executives of Memorial, who you would think would know better than most the dire fiscal situation in the province, but want to add a Law School and extract additional money from the treasury! 
Ron Penney

So what we have, despite the best efforts of the Auditor General, is the failure to collectively recognize what we are facing. 

How can we make our citizens understand the depths of our problem and that we can’t continue to borrow our way out of this? 

I think that part of the answer is to do what Alberta did and appoint a panel of experts to investigate and report on the fiscal situation, hold hearings around the province, and authoritatively inform all of us of what we are facing and how we can get out of it, if it is even possible.  

Otherwise the debt rating agencies, like Moody’s, which recently downgraded our credit rating, will eventually tell investors that our ever increasing borrowings are no longer investment grade and will be junk bonds.  

Turning to rate mitigation.  

Dave Vardy and I were very surprised to receive an invitation to the press conference supposedly announcing the much anticipated contribution of the federal government to rate mitigation. We were warned on the way in by someone who had seen the announcement in advance to be “underwhelmed.” We were and said as much.  

No wonder the Premier resigned a week later.  

It wasn’t an agreement, or even a memorandum of understanding outlining a framework for an agreement. It was a piece of political theatre outlining a sketchy concept of changing the way in which the project might be paid for over time and the “monetization” of future dividends.  

Moreover those dividends were supposed to be used to pay the interest and principal on the $3.7 billion and counting we borrowed for our “equity” in the project. Who will pay for that? 

We were subsequently provided the opportunity to meet with public officials who kindly provided us with more detail but still not enough to satisfy us as to what the ideas actually will mean in practice.  

One important fact that we did learn is that while changing the financing model to cost of service may save us and future generations money it has the perverse effect of requiring even more money from rate payers in the first few years, thereby increasing the amount required in the early years.  

And who in their right mind, would pay us now for expected dividends down the road based on rate payers consuming more electricity with rates increasing by 2.25% a year. Those dividends will never materialize. It is a fantasy. Demand is already going down and heat pumps are flying off the shelves.  

This purports to add to the work of the Public Utilities Board which estimates that at best the rate mitigation recommendations they suggest will result in a $400 million dollar shortfall if we are to reach the target rate of 13.5 cents per kilowatt hour.  

It is important to recognize that those are estimates, some of which will take many years, if ever, to reach, and the shortfall is predicated on the project costs remaining at $12.7 billion.  

The chances of the project costs remaining at that figure are slim to none. There are certain further project delays because of the software issues and the synchronous condensers problems. Every further one year delay adds another half a billion dollars in interest costs which have to be added to the project costs.  

In addition, it is becoming increasingly more evident, as we warned when Muskrat Falls was first announced, that Holyrood will have to be continued in some fashion to ensure reliability, particularly for the Avalon Peninsula. There are studies underway to determine the best way to do this but either maintaining the present thermal plant on standby or replacing it, will require many hundreds of millions of dollars in capital expenditures and high annual operational costs, none of which are included in the present budget. 

The end result is that the gap is not $400 million.  

As we have seen all along in this project costs and revenue needs have been consistently underestimated, no matter the political stripe of the party in power.  

The most important verdict on the rate mitigation plans don’t come from us but rather from Moody’s, who remain unconvinced of the merits of what was announced. This is important because the main reason why they downgraded our credit rating is concern over rate mitigation. If their concerns aren’t allayed future downgrades are inevitable.  

So again we need to collectively understand the true nature of this problem and so far we and successive administrations have failed to do so.  

In order to do this we need to take advantage of the present minority political situation and I urge the creation of an all-party select committee on rate mitigation with the power to have hearings and engage expert witnesses.   

Our fiscal cliff and the potential doubling of electricity rates pose an existential risk to all of us and require a non-partisan approach which can engage all of us in an honest assessment of what our situation really is and what solutions, short of bankruptcy, are available to us.  

I fear for our future and for those who think it can’t happen here, read about the loss of self-government here in 1934 or what is happening in Puerto Rico now.