DAVID VARDY'S TEN COMMANDMENTS FOR RATE MITIGATION

Guest Post by David Vardy

THE DECALOGUE: THE TEN COMMANDMENTS FOR RATE MITIGATION

Introduction

The silence on rate mitigation is too deafening. The public needs to know what is happening and what objectives are front and center in the negotiations, now led by former Nalcor Chair Brendan Paddick. We need to adopt a set of principles or criteria, which can both guide the negotiations and measure their success. This post is an attempt to propose ten “commandments” for successful rate mitigation. Because the “misguided” Muskrat Falls project and its impacts on the province are of such “Biblical” proportions it is appropriate to invoke the Mosaic law of the Decalogue, The Ten Commandments.

Premier Andrew Furey was first sworn in as Premier of Newfoundland and Labrador on August 19, 2020. He appointed Brendan Paddick as chair of the Rate Mitigation Team on September 25, 2020. This signalled that the rate mitigation plan announced on April 15, 2019 by Premier Dwight Ball remained unfinished. It also signalled that the progress reported by Premier Ball and regional Minister Seamus O’Regan at a press conference on February 10, 2020 had not advanced as planned and needed a “reset” and a new Team.

EVER WONDER ABOUT THE VALUE OF GULL ISLAND AND CHURCHILL FALLS?

Guest Post by PlanetNL

PlanetNL37: Market Valuations for Gull Island and Churchill Falls

Plus The Atlantic Loop and A Curious Re-Analysis of Muskrat Falls

PlanetNL36 provided an analysis of the fair market value of Muskrat Falls based on prevailing wholesale electricity rates.  The analysis concluded that the project would be completely incapable of generating any net earnings to put toward return on debt or equity. Worse again, like a true boondoggle it could continue losing money after it is put into operations.  The Muskrat project should never have made it beyond round one of screening alternatives, let alone been sanctioned and built.  That Nalcor and Government sanctioned a project that forced ratepayers to pay ten times greater than market price, and with cost overruns more than twenty times market price, is an obscenity.

The same methodology for economic worthiness is used to consider the market value of the potential Gull Island project and the Atlantic Loop.   In addition, it will be used to put an estimate on the 2041 market value of Churchill Falls.  Plus, one final look at Muskrat will consider whether the project in a lesser form might have been more viable.

To better understand the methodology, be sure to read PlanetNL36 first.

THE HARD TRUTH ABOUT THE VALUE OF THE MUSKRAT FALLS PROJECT

Guest Post by PlanetNL

PlanetNL36: A Market Value Estimate of the Muskrat Falls Project

Simple Calculations Reveal Hard Truths

Have you wondered what the $13.1B Muskrat Falls project would be worth if it were treated as a business that had to fairly compete on the wholesale energy market?  Was it even worth the original cost estimate of $7.4B indicated by Nalcor at the time of sanction?

This post uses a simple economic analysis method useful for determining the fair market value of most any business or to determine if a project concept may be viable.  The accuracy of the method mainly relies on inputting honest numbers. 

This is the analysis Nalcor would not do and still refuses to acknowledge.  You will see why.

TERRA NOVA - IS THERE ANOTHER WEAPON IN OUR ARSENAL?

 Guest Post by Ron Penney

We’ve been told that the drop dead date for the sanctioning of the refit for the Terra Nova FPSO is June 15th and that the decision must be unanimous among the partners. Every indication is that there isn’t unanimity and that the likely result will be that the refit will not go ahead and the field will be decommissioned and abandoned. 

The Official Opposition has disclosed a briefing note from provincial officials on the possibility of the province taking an equity position in the project. This would have been a mistake given our dire fiscal situation. We can’t afford to take any more risks. Muskrat Falls, I rest my case. 

I’m pleased that the government just announced that they aren’t going to go down that road.

Taking an equity position would require even more borrowing,  exposing ourselves to further  credit rating downgrades, already trending downwards. Once the ratings get to the point that they are no longer investment grade, they would be junk bonds attracting higher rates of interest, assuming anyone would lend us more money. 

NALCOR ANNUAL REPORT: THE BAD NEWS STAN MARSHALL FAILED TO RAISE

Guest Post by PlanetNL 

PlanetNL35: Nalcor 2020 Annual Report Released

A Document in Search of Good News

It was a foul day outside so what is a dog to do but read the Nalcor Financial Statements and catch up on the latest numbers as Stan Marshall says farewell at the morning press conference.  This short post delivers two notable items of public interest that went unacknowledged by the executive team at the event.

Big Losses in Oil and Gas

Somehow the loss of $49M in 2020 on “settlement of commodity swap contracts” did not get much attention.  Nalcor did talk at length about oil prices tanking and recovering but not this item.  To do so would be to admit management error. 

The power of déjà vu says we have been here before.  Uncle Gnarley rightly chastised Nalcor for the loss of $66.9M in 2017 on a pure financial gambit after receiving $1.8B in funds through the second Federal Loan Guarantee to keep the Muskrat Falls project going.  That was reckless and ugly.  Parking the cash safely was not good enough.

Government Accountable for $1B+ Giveaway to the Iron Ore Mining Sector (Update)

 PlanetNL34 Addendum: Additional Information On Labrador Industrial Rate Policy

On the same day as PlanetNL34 was posted on the Uncle Gnarley blog, some pertinent information was discovered while researching for future postings.  The query into Government inaction on the Labrador Industrial Rates Policy (LIRP) is no longer a mystery: It was indeed implemented. 

An evidentiary trail of breadcrumbs led to finally finding the LIRP revenue stream in an unexpected place.  This means some key errors were made in PlanetNL34 that will be corrected and clarified here.  At the same time, Government is by no means absolved as they substantially failed to capitalize on the opportunity, and they appear to have committed to the deed until 2041.

TIME FOR IRON ORE MINING SECTOR TO PAY FAIR MARKET ELECTRICITY RATES

Guest Post by PlanetNL

PlanetNL34: Labrador Industrial Rate Policy Overdue for Revision

(With Update - June 8, 2021)

The price paid for electricity by the Iron Ore Company of Canada (IOC) in Labrador City and Tacora Resources, the new operator of the Scully Mine in Wabush, is very low.  It is shockingly low.  

According to a footnote found in the 2017 General Rate Application submitted to the Public Utilities Board (PUB) by NL Hydro, the blended cost for the Labrador Industrial Rate that is specific to only the Labrador West iron ore mines was a miniscule 0.315 c/KWh.

The mining companies are getting record high iron ore prices these days and sending their profits not just out of province but out of country.  Providing them electricity at giveaway pricing is a practice that needs to end right away.  They can easily pay a fair price for electricity and would still make enormous profit.

The Provincial Government, despite their talk of desperate need for rate mitigation, is apparently happy to let the giveaways continue.  This post shows the opportunity cost of Government’s blatant negligence.

BUDGET 2021: LOOKS A LOT LIKE JIGGERY POKERY

If you hoped for something more than rhetoric from Premier Furey’s ebullient Minister of Finance or a definitive response to the debt crisis of the Province, you won’t find it in the 2021-22 Budget.

Furey likely didn’t need much reason to delay fiscal repair, but he found it (ostensibly) in a rebound in revenues; from a one-time cash payment of $325 million from the federal government to aid the oil industry, other federal-provincial cost-sharing agreements, and higher oil revenues ($1.1 billion up from $567 million).

The Government boasts revenue projections for 2021-22 of $8.5 billion, an increase of $1.4 billion over 2020-21. The figure contrasts with revenues projected on a “cash” basis of only $6.48 billion. That is a big difference based solely on accounting methodology.

Frankly, the Government’s “accrual” figures look a lot like jiggery pokery!