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.
