Monday, 25 January 2021


Guest Post by PlanetNL

PlanetNL31: Muskrat Must Be an Unregulated Government Business Enterprise

Rate Mitigation platforms presented by the Liberal and Conservative parties are way off base and pose great risk of rate escalation when difficult and contrived mitigation measures fail to work.  Worse is that the mitigation strategies completely fail to recognize that ratepayers should not be responsible for paying Muskrat project costs at all.  Muskrat must be made into an unregulated export-focused Government Business Enterprise with energy made available to any buyer, including NL Hydro, at competitive market rates.  There is a compelling case to do so, yet the political parties appear indelibly committed to the deceitful plans laid out by past governments, setting a course for maximum economic destruction.

A Primer on Regulated and Unregulated Utilities

NL Hydro is the only regulated division of Nalcor.  NL Hydro is a traditional monopoly utility.  In lieu of any competition forcing a monopoly business to be efficient, the business operates “open-book” before a quasi-judicial regulator that reviews in detail the utility’s strategies, capital projects, operating costs, and profitability.  The Public Utilities Board (PUB) is the provincial utility regulator and must approve NL Hydro’s proposals before it can integrate related costs into consumer rates.  Rejection of costs and projects, either planned or incurred, is not unprecedented and the utility is wary to step out of bounds.

Unregulated divisions of Nalcor are not subject to review by the PUB because ratepayers make up little or no part of the business.  Churchill Falls (CF) is an example where only a small part of CF generation is used within Labrador: regulation review by the PUB could be at odds with the predominantly energy export side of the operation.  For Labrador zone ratepayers, the lack of conventional regulation is not a major risk as they receive the same negotiated commercial rate as the main arm-length’s customer, Hydro Quebec (HQ).  Getting the same efficient negotiated high-volume pricing as HQ assures Labrador ratepayers of as good or better value than if a separately determined regulatory-reviewed pricing exercise were in place.  Nalcor’s ownership share in CF is a Government Business Enterprise (GBE) whose mainly export-derived profits are solely for the benefit of the principal shareholder, the Government of Newfoundland and Labrador (GNL).

Nalcor Energy Marketing is another unregulated division whose main activity is selling surplus export energy outside the province that is not already committed through other contracts.  This business has little or no direct impact on serving ratepayers: it is an unregulated GBE exempt from PUB review whose earnings flow to GNL.

Nalcor CEO Stan Marshall (R) and Rate Mitigation Team Chair, Brendan Paddick (L)
(Photo Credit: CBC)

The Gull Island project that was nearly started in 1998, until HQ pulled out of the deal just before a signing ceremony, represents another important example of an unregulated enterprise aimed at export markets.  Government at the time legislated that the project would be an unregulated GBE, not for domestic ratepayers and therefore exempt from PUB regulatory process.

All unregulated utility businesses fall into the category of GBEs that are built not for domestic demand but primarily for lucrative Government profits.  If a GBE loses money, Government must pump in more equity to keep them going or another GBE must support the struggling one – either way, Government loses.  NL Hydro ratepayers neither benefit nor are harmed by the gains or losses of a GBE.  Ratepayers are only supposed to be covering the approved projects and costs of the regulated utility division, NL Hydro. 

Muskrat Falls – The Abominable Unregulated-Regulated Utility

Firstly, Nalcor did not get PUB approval to proceed with the Muskrat Falls project.  Government was availing of existing legislation that lumped Muskrat in with Gull Island, classifying Muskrat as an unregulated GBE and therefore PUB review and approval would not be required.  Despite this, Nalcor and GNL sought to recover 100% of project costs from Island ratepayers as if it were a regulated project.

Critics such as Ron Penney and Dave Vardy called out GNL on the absurdity and demanded a full PUB review to decide the fate of the project.  Relenting to growing pressure, a last-minute rushed PUB “Reference Question” was developed by GNL seeking a rubber stamp approval.  If successful, the public would be led to think formal processes were being followed when in fact GNL gave the Board zero authority to stop the project.  The PUB would report that Nalcor’s information was insufficient to proceed with the project.  Astounded the Board wouldn’t fall into line, Government Ministers derided the report and belittled the Board’s members, just as they’d done to critics like Penney and Vardy.  Soon after, GNL would sanction the project without returning to the PUB.

To be clear, the Williams and then Dunderdale led Governments defied all conventions of principled governance to get their project sanctioned.  They chose to make Muskrat an unregulated GBE which should have meant Muskrat was primarily an export project and that energy would be sold to NL Hydro at market rates competitive with the export sales.  Instead, presumably acknowledging they fully knew the wild risk of this undertaking, they ensured complex agreements between non-arm’s length Nalcor companies would force NL Hydro’s regulated ratepayers to pay for the entire project and bear all the risk.  They also passed additional legislation immediately upon sanctioning the project to completely disarm the PUB’s ability to review costs.

Binding ratepayers to pay for it, this was in all appearances a regulated project but it was entirely dishonest. GNL acted expressly to bypass the regulatory function that would have prevented approval of the project in the first place.  This was a massive violation of the trust and faith bestowed upon elected officials and also of the duty of NL Hydro and Nalcor executives to provide least-cost power to their ratepayers.  It was no accident: it was highly orchestrated duplicity.

In the absence of regulatory review, there remained one legitimate path for Muskrat energy sales in the province: to sell energy at a clearly competitive market price.  The Churchill Falls precedent where NL Hydro pays the Hydro Quebec rate is a clear example of how that is done.  Nalcor and Government were certainly aware of these principles but blatantly chose to further embarrass themselves when in 2012 they finalized Emera’s participation in the project with a last-minute special add-on deal to ensure that Emera’s project would attain approval from their provincial utility regulator.  By acting favourably to facilitating Emera’s regulatory process but abusing the rights of their own ratepayers to regulatory review and approval, Nalcor and GNL committed a devious act of atrocious inequity.

The add-on deal for Emera, titled the Energy Access Agreement (EAA), allowed Emera to purchase project surplus energy at rates not exceeding that from the competitive New England market.  With the EAA, Nalcor and GNL created a clear market price model for selling Muskrat energy. Doing so is further proof that Muskrat is an unregulated Government Business Enterprise.  Yet, they persisted in their conniving deception to ensure that Island ratepayers would pay for the entire cost of the project as if it were regulated.

To add further insult to ratepayers, GNL dictated that surplus energy sales, as per the GBE model, would be earned by Government.  Export revenue would not be available to relieve the ratepayers who would be burdened with far higher than competitive market energy costs.  Now that we know the pre-sanction Island energy forecast was a total work of fiction it is clear that at least two-thirds of Muskrat energy will be exported.  As established by David Vardy for this blog, the true price of Muskrat energy that will be used by NL Hydro ratepayers is at least 60 c/KWh, but Emera will buy it for well under one-tenth as much based on prevailing competitive market rates.

The evidence is overwhelming that Nalcor and GNL created what should be easily recognized as an unregulated export-focused Government Business Enterprise.  Through repetitive guile, lies, misuse of legislation, galling political recklessness, the neutering of essential regulatory process, they have unflinchingly abused ratepayers with tremendous financial harm.

Muskrat Falls Must Become a Fully Unregulated GBE

The rate mitigation plans as proposed by the Liberals and Conservatives are nearly as bad as doing nothing at all.  They do not amend the intent to treat Muskrat as a regulated project.  The proposed rate mitigation measures are terribly complex and overly optimistic.  When those measures inevitably fall short, the ratepayer will be left with no defense but to pay through punitive rate hikes. 

Their chosen approach might look good to voters, but the reality is it gives a spineless Government the cover it wants to mask failure and avoid commitment.  They will eventually back away from mitigation and deceitfully claim they have done all they can and must stand back and let costs be paid by ratepayers.  These terribly weak plans guarantee the worst possible outcome of major irreversible damage to ratepayers, the utilities, and the economy and society at large.

The political parties do have an alternative: it is called integrity, responsibility and true principled leadership when facing difficult problems.  It begins with publicly acknowledging that fraud and legislative abuse were committed by previous administrations as we already know from the Commission of Inquiry. 

In 2021, Government must formally recognize that Muskrat is principally an energy export business with only a small role as a potential supplier to NL Hydro and that it was not PUB-approved nor would it ever have been.  They must classify the entire Muskrat project, including all transmission components, as a totally unregulated GBE, just like Churchill Falls and just like the Gull Island proposal.  GNL must amend legislation and invalidate Nalcor’s punitive and harmful contractual obligations that were inappropriately forced upon ratepayers through NL Hydro. 

The Benefits to GNL

Making Muskrat a GBE will stabilize electricity rates at somewhere just between the Liberal and Conservative targets.  Growth in demand for electricity has already stalled with virtually no prospect to increase but will presumably stabilize.  Consumption should not drastically plummet and trigger a rate death spiral as it would if major rate increases were unleashed. 

With rate stability, the Nalcor utility companies will in turn be stabilized and can finally resume paying dividends to GNL for the first time in more than a decade (dividends during that period were wasted on funding the Muskrat project).  GNL can use those dividends to partially mitigate the losses of their Muskrat GBE.  GNL can also challenge their utility companies, regulated and unregulated, to find new efficiencies and potentially pay better dividends without harming ratepayers.

All available Muskrat energy must be sold at competitive market rates following the terms and conditions of the Emera Energy Access Agreement.  NL Hydro must be offered identical access.

Government would score a major win with ratepayers, in both the residential and commercial sectors, in allaying their fears of runaway rate increases.  Consumer and business investment decisions on hold due to rate concerns should pick up.

Stabilizing the future of Nalcor and especially NL Hydro, will be a major relief inside the organizations allowing them to focus on efficiencies, and to maximize their future value and return.  

Perhaps best of all, Government will restore the faith and trust of the public for demonstrating good ethics, honesty, clarity and action – valuable hard-earned qualities that will be crucial to meeting a string of tough challenges going forward. 

The Benefits to Government of Canada

Revising Muskrat into a truly unregulated GBE will create a much cleaner slate for engaging the Government of Canada in the financial restructuring of Muskrat. 

The Government of Canada likely has great reservations about participation in the rate mitigation of what appears to be a regulated provincially owned utility.  Along with the messy inter-company contracts created by Nalcor and GNL, Canada may see too much of a high-risk precedent that could lead them to being called upon to bail out bad utility projects across the country.  With Muskrat revised into a totally unregulated GBE, the optics and mechanics of Canada becoming a shareholder are much improved.  

Canada also sees value in the Muskrat assets and energy output to fulfil their green energy agenda in the Atlantic Region.  They may well see the political capital benefits as being worth the financial cost.  Muskrat offers them a major cornerstone that can give traction in the rollout of a major long-term federal strategy.

Despite their silence, the Government of Canada also knows their role in enabling Muskrat in the first place.  The Harper administration surely was not blind to the shameful work of Nalcor and GNL in denying regulatory review, their authoritarian means of quelling dissent, the poor quality of project estimates, the contorted business evaluation, and the unjust making of ratepayers as the bearers of all cost and risk to name but a few.  Officials in Ottawa had to see more red flags than at a bullfighters convention but a Prime Minister chose to roll his political dice on it anyway.  The gamble was lost and now the wager is due.

Canada also knows the dismal financial condition of the Province.  The Muskrat debts are unsupportable by the Province and one way or another Canada’s assistance is needed.  The easiest route for a federal intervention, and the one with the most immediate need for action, is a major debt for equity restructuring within Muskrat.  Making Muskrat properly unregulated is critical to removing the internal roadblocks that could limit maximum financial restructuring by the Government of Canada.   

Muskrat Should be the Major Election Issue

Dr. Andrew Furey’s Liberal Party is perceived as the front runner to win a majority Government in this election.  His campaign is based primarily on the feel-good success story that his Government limited COVID-19 spread in the province.  This angle may at first resonate with the voting public but it is a shallow indication of his ability to govern as the geographic isolation and rural nature of the province were a natural defense while federal-led health policies did most of the rest. 

What is there on which to evaluate Furey and his readiness to address the major economic threats that must be dealt with in the next four-year term of Government?  His quietness regarding a $2 billion deficit this fiscal year and the steady as she goes relations with labour unions don’t exactly herald a leader with the grit needed to manage a Province that is rapidly running run out of options.  

The Liberal rate mitigation plan, while released by Furey’s predecessor, is now his plan.  It contains numerous flaws, it will fail, wreak maximum economic damage, and limit potential Federal involvement in Muskrat restructuring.  It does not challenge or correct the misdoings of previous administrations – only by changing Muskrat to a totally unregulated GBE can that happen.  Unless Furey revamps Muskrat strategy in this fashion, then he is committed to blindly driving the Province straight off a cliff.

Electing a Conservative Government, which polls indicate is very unlikely, would prove equally disastrous.  Their rate mitigation plan is equally non-apologetic, over-optimistic and a thorough waste of scarce capital.  The new campaign slogan to be a “job-creating machine” invokes fear of repeating the Muskrat folly of jobs at any cost because it wins elections.  That would be intentionally driving off the cliff hoping to land on the other side.

The NDP and NL Alliance have no defined Muskrat policy position that can be found.  If they are waiting for policy ideas to drop upon them, please send them this post.

The electorate and media need to challenge candidates on the issue of Muskrat.  There is no bigger issue facing the province and it ought to be the true election issue, bar none.

If one party, hopefully a contending one, emerges with policy resembling that proposed in this post, voters should throw their full support behind them. 

If all parties continue to be mum on recognizing the need for a drastically different approach to Muskrat, then strategic voting to return a minority government is recommended because there is no way a majority Government should be trusted.   

At that point, all that may be left is hope the Federal Government will provide the necessary guidance from behind the scenes to implement the policy because our own leaders will have proven to be too stunned to do the right thing.  They’ve been consistent at earning that reputation so far.