GNL SHOULD REJECT RISKY CANADIAN BUBBLE

Guest Post by David Vardy

As of now, we have no active Covid-19 infections in the province, 259 have recovered and three have died.  In the face of the surging pandemic south of the border and in other hot spots around the globe, this is no time to reduce controls over imported infections by dropping the requirement for quarantine or self-isolation (I use these terms interchangeably). We should instead build upon the natural protection arising from our isolation, as have other jurisdictions, such as Iceland and New Zealand. Having eradicated the virus our goal should be to remain virus free.

We should maintain the 14 day quarantine and begin to test people arriving in the province.  We should also require the use of contact tracing apps for at least 14 days after arrival.  The Atlantic Bubble is a bad idea. The proposed “Canadian Bubble “is much worse. These “Bubbles” are both flawed because they exempt more people from quarantine, thus increasing risk of imported infections without offsetting measures to reduce risk, such as testing and contact tracing.

HOW TO REOPEN SAFELY: THE BALANCE BETWEEN PUBLIC HEALTH AND ECONOMICS

Guest Post by David Vardy

Are We Ready?

The pandemic has become the biggest public policy issue which we face. It poses a threat to our public health and to our economic and fiscal sustainability. Yet government has hesitated to engage in a systematic consultation process as had been recommended or to establish advisory councils to seek guidance from concerned citizens on governing in the age of coronavirus.

How far should we go in locking down our economy? Should we protect only the vulnerable and the elderly or lock down the full economy? GNL is being pressed to reopen the economy, particularly by the tourism industry and various business people who recently wrote to the Premier. Are we now ready to reopen fully and to invite tourists to the province? The letter to the Premier asked for “an immediate end to the State of Medical Emergency and a return of the governance of the province to our elected officials.

WHAT SHOULD WE EXPECT FROM OTTAWA? (Part 4)

Guest Post by David Vardy and Ron Penney

What should we expect from Ottawa?

Part Four

GNL has to commit itself to put its house in order, recognizing there are practical limits. GOC will not want to write us a blank cheque. Ottawa will seek a commitment to a three to five year fiscal recovery plan and they will demand a say in the plan. Will we have to surrender our sovereignty in order to secure the help we will need? Or will a commitment to balanced budget legislation at the end of a three to five year fiscal recovery plan be sufficient?

We have 1.38% of the population of Canada. We receive 0.947% of federal transfer payments. Nova Scotia has 2.58% of the population and receives 4.43% of the federal cash transfers. Nova Scotia gets $2.1 billion in equalization, while we get none. This is the case because the equalization program is based on fiscal capacity and operates with a lag. Our fiscal capacity has been above the national average so we have not been meeting the threshold but this does not mean there is not a strong case to be made for enhanced funding under both existing program such as Fiscal Stabilization Payments and under other funding mechanisms, designed to provide fiscal relief during the pandemic. 

FISCAL CHOICES AFTER REOPENING: A FRAMEWORK FOR DISCUSSION (Part 3)

Guest Post by David Vardy and Ron Penney

FISCAL CHOICES AFTER REOPENING:
A FRAMEWORK FOR DISCUSSION 

PART THREE

We had intended to send this to the Telegram to ask if it would publish the two parts as guest columns as it had for the first two. 

The Telegram has been very good to both of us and has published the many opinion pieces we wrote both together and individually on Muskrat Falls and other public policy issues over the past decade. In the same period the Telegram has done an excellent job though it’s columnists, such as Russell Wangersky, Pam Frampton and Brian Jones, on Muskrat Falls, and other important public policy issues, as has its reporters such as Ashley Fitzpatrick. 

The recent decision of the Telegram to suspend further columns from Brian Jones is not what we expect from the Telegram, the last bastion for freedom of the press in Newfoundland and Labrador.  

As Voltaire said “I may not agree with what you say but I will defend to the death your right to say it.” 

UNDERSTANDING THE BALL-O’REGAN RESTRUCTURING PLAN

Guest Post by David Vardy
Former CFO Derrick Sturge told the Muskrat Falls Inquiry the project and its financing were “rock solid”. CEO Stan Marshall told us two years ago the project would “finish strong”.

Premier Dwight Ball promised “Newfoundlanders and Labradorians that they will not bear the burden of higher electricity rates or taxes as a result of Muskrat Falls. We will deliver on that promise.”

On February 25, 2020 Nalcor CEO held a press conference and took questions from the media confirming the delays which had already become well known. He did not provide a cost update on the project, which appears likely to exceed the official 2017 estimate of $12.7 billion. He repeated the statement that Nalcor would “finish strong”.

ROCK SOLID: ANOTHER MYTH EXPOSED

Guest Post by David Vardy
Our credit rating, albeit already downgraded, hangs on a slender thread. It depends upon the false premise that Muskrat Falls is self-supporting and that Nalcor Energy is a “self-sustaining” Government Business Enterprise (GBE). Nothing could be further from the truth. This is the myth which supports our credit rating and which is our tenuous buttress against falling over a steep fiscal cliff.

Sturge: Project Rock Solid
On March 28, 2019, Nalcor’s then Vice President and Chief Financial Officer Finance Derek Sturge told the Muskrat Falls Inquiry that the financing of the project was “rock solid”  (page 26). This is the same CFO whose contract has just been terminated “without cause” and who was awarded a compensation package of $900,000, in keeping with Nalcor Energy’s entitlement culture. Legal counsel for the Muskrat Falls Concerned Citizens’ Coalition had asked him:

FISCAL CLIFF: HARD OR SOFT LANDING?

Guest Post by David Vardy
How many people in this province believe we are heading for a fiscal cliff? How many are aware of how precarious our position has become as a result of our high public spending, combined with the tragic decision to build Muskrat Falls? What are the options available to us? This post will review some of the options, including early negotiations on a possible power contract with Quebec after 2041 and the prospects of enhanced federal support. My intention is to bring some of these options to light for respectful, informed dialogue. With final reports due soon from both the Muskrat Falls Inquiry and the Public Utilities Board there is a plethora of evidence and ideas. Sadly the greatest dearth of research relates to the fiscal impact of Muskrat Falls, which is the real elephant in the room.

THE NORTH SPUR: WARNINGS IGNORED

Guest Post by David Vardy
Many warnings about the North Spur have been ignored.

Dr. Lennart Elfgren and Dr. Stig Bernander, both full professors at the Lulea University of Technology in Sweden, wrote the Minister of Natural Resources on August 1, 2019.  In their technical report entitled A Downward Progressive Failure of the North Spur at Muskrat Falls - A Possibility that ought to be investigated and mitigated, dated July 25, 2019, submitted to the Minister, they said that “The most critical inclined progressive downward failure surfaces of the North Spur at Muskrat Falls have not been properly investigated. Relevant stress/strain properties of the metastable soil layers have not been made available, and no independent external experts seem to have reviewed this aspect of the stabilization work.”

They said that old methodology was used to assess the safety of the North Spur, the same model which had been used unsuccessfully at other failure sites, such as Mount Polley, a copper/gold tailings pond owned by Imperial Metals and located in central British Columbia. They repeated their call for an independent panel of experts to undertake the research and to assess the need for further remedial work.

MEASURING AND MANAGING THE FISCAL IMPACT OF MUSKRAT FALLS

Guest Post by David Vardy
Measuring and Managing the Fiscal Impact of Muskrat Falls

Is it possible for us to manage the fiscal burden of Muskrat Falls? Moody’s downgrading of our credit rating raises serious questions as to whether we can handle this massive burden. It was Premier Dwight Ball, speaking at the St. John’s Rotary Club, who said “you cannot manage what you cannot measure”.  This is a variation on a quote from W. Edwards Deming, the father of modern quality management theory.  Can we really find a remedy to the problem if we cannot diagnose it and measure it? Surely the burden can be measured.

The PUB is relying on Nalcor’s revenue requirements in 2021 as a measure of the burden to be carried. We know that this does not take into account the 8.4% rate of return on equity on the generating assets in Labrador, an equity burden already being carried on the books of the province but deferred for future recovery from ratepayers.

STAN MARSHALL’S MUSKRAT BARGAIN: CAVEAT EMPTOR!

Nalcor CEO Stan Marshall gave testimony this week at the Muskrat Falls Inquiry.  During his examination he referred to the need to see the “big picture” as to the economics of Muskrat Falls. He said that this can best be done by explaining the cost of Muskrat Falls in cents per Kilowatt Hour, which makes it easier to understand than by using large numbers in the millions and billions.

His theme was that the project is not really all bad, the costs not unreasonable. When you look closely a different picture emerges from the one Stan has presented. The “big picture” is not nearly as rosy. Was his presentation an attempt to explain away the “boondoggle” or to rationalize it? 

FINANCE DEPARTMENT LEFT OUT OF MUSKRAT RISK ASSESSMENTS

Guest Post by David Vardy

Department of Finance Bypassed
Former Finance Minister Cathy Bennett told the Muskrat Falls Inquiry this week that upon her appointment to the Finance portfolio in 2015 she discovered the Department had been marginalized. Bennett said she was not going to allow it to continue. She invoked the Financial Administration Act (FAA) which provides broad powers to the Minister. She said that where there is conflict with Nalcor and its governing legislation, the Energy Corporation Act (ECA)  the FAA will trump the ECA.

Nalcor had been successful in bypassing not only the Department of Finance but also the Executive Council Office as well. Previous premiers had allowed the Nalcor CEO direct access to the Premier’s office and this allowed the Nalcor CEO to tell provincial officials that his actions had been approved by the Premier so they had better watch out. Most of these meetings went without formal record, unlike the Cabinet system where the Clerk issues official records of Cabinet decisions.

GILDING THE LILY ON 61 CENT POWER

Guest Post by David Vardy
At the recent Nalcor AGM CEO Stan Marshall repeated his mantra that Muskrat Falls will “finish strong”. He said that its costs are comparable to, if not lower than, the unit costs of other Canadian energy projects. The Chief Financial Officer bragged about the growing asset base and spent little time warning of the large liabilities.  When asked about dividends at the Muskrat Falls Inquiry the CFO said they were “rock solid”.

Nalcor’s annual report spoke in glowing terms about the project and about the profitability of Nalcor. The prospects of growing dividends were glowing. Suddenly the problems had vanished and we were living in a world of milk and honey. What had changed to spark this bright and cheerful outlook in the face of a financial disaster? Was Nalcor “gilding the lily” along with the politicians who are looking to sweep Muskrat Falls under the carpet in advance of imminent federal and provincial elections.

FIFTEEN TAKEAWAYS PHASE I MUSKRAT FALLS INQUIRY

Guest Post by Muskrat Falls Concerned Citizens Coalition Members David Vardy, Ron Penney and Des Sullivan

Now that the second phase of the Inquiry has begun it may be helpful to take stock of where we are and what we have learned to date. 
Here are fifteen key issues on which the Inquiry Commissioner, Richard LeBlanc, must opine and about which the public should be informed. We have not attempted to assign priorities to them but we can say they that, while they are important, there are others issues that have been identified. We will post them another time.  

1.         When the Muskrat Falls project was sanctioned there was only a three per cent probability that the project would be completed on time, based on evidence provided by Nalcor’s risk consultant Richard Westney.

WERE SNC LAVALIN TROUBLES OPPORTUNISTIC FOR NALCOR?

Guest Post by David Vardy

SNC LAVALIN: THE MUSKRAT FALLS EXPERIENCE
SNC Lavalin’s role in the Muskrat Falls project has figured prominently in recent hearings of the Muskrat Falls Inquiry. On Friday the Inquiry heard from Nalcor’s senior procurement officer on the project’s management practices, including those which led to the selection of SNC Lavalin (SLI) as EPCM contractor in 2011 and to their removal from this role in 2013.

The New York Times had this to say on the biggest scandal facing Prime Minister Justin Trudeau:
“The case revolves around accusations that SNC-Lavalin, a multinational engineering company based in Quebec, paid 47.7 million Canadian dollars in bribes to officials in Libya to win contracts there, and defrauded the Libyan government and its agencies of 129.8 million Canadian dollars.

“The prime minister and his aides have been accused of pressuring his justice minister at the time, Jody Wilson-Raybould, to drop the criminal inquiry against the company because a conviction could potentially cost thousands of jobs in Canada, and diminish his Liberal Party’s political fortunes.”

WILL THE PUB GO FAR ENOUGH ON RATE MITIGATION?

Guest Post by David Vardy

The PUB has been asked to make recommendations as to how increases in power rates arising from Muskrat Falls can be avoided, a daunting task indeed, but one for which they have been given a broad mandate.  They have just released an interim report on measures to increase revenues and reduce costs. Their work plan is quite ambitious and covers a wide range of options. The question is how far they will go and how receptive will government be to major changes?

Will they recommend the kind of surgery needed to right-size our electric power industry and to extirpate Nalcor as an unregulated monopoly? Will they go so far as to propose that Nalcor be removed from the power system after Muskrat Falls has been completed?

WILL MUSKRAT FALLS PAY DIVIDENDS? (PART I)

Guest Post by David Vardy

Part 1: Is the PPA another Churchill Falls Contract?

Russell Wangersky was right when he said in the Telegram on October 27, 2018 that Muskrat Falls is “a win for investors but the risk’s on us”, the ratepayers.  “The fundamental assumption in the financing of the project is that the revenues charged to island ratepayers for the generation and transmission of Muskrat Falls power will flow unfettered to the lenders to satisfy debt payments.”  

In this post I examine the underpinnings of this “fundamental assumption”, beginning with the take-or-pay power purchase agreement (PPA), the role of equity and the concept of freedom of choice. Does the PPA lock us in to an abusive relationship, not for 65 years but for 50? Is it another Churchill Falls Agreement which strips us of our rights? In my next post I will ask if the PPA makes Muskrat Falls self-supporting and whether revenues from rates will cover all costs and generate dividends for the government of Newfoundland and Labrador (GNL).  

PREMIER SHOULD SEIZE ON BETTER SOLUTION FOR POWER RATES

Guest Post by David Vardy
Premier Dwight Ball said this week that power rates will not be allowed to double. This statement is an important step toward a better solution. It recognizes that the take-or-pay power purchase agreement (PPA) is not a workable solution to the question as to who will pay for Muskrat Falls. The PPA places the burden on ratepayers which is unfair because ratepayers did not ask for Muskrat Falls. It was imposed by an overbearing government, supported by a relatively small group of people who stood to benefit.

The government proposes that ratepayers bear roughly half the cost and that taxpayers pay the rest, citing 2021 rates in the Maritimes at 18 cents per kWh, compared with 12 cents on the Island. Such high power rates, even when reduced from 23 cents to 18 cents per kWh, would still be unaffordable for low income people. They represent an increase of 50%.

IS RATE MITIGATION EVEN POSSIBLE AFTER MUSKRAT?

Guest Post by David Vardy

This is the sequel to my post of March 19, 2018 on the financing of Muskrat Falls called The Impossible Dream Part I: Financing The Labrador Transmission Link. In this post I measure the increased costs associated with Muskrat Falls and discuss the impact on rates and the potential for rate mitigation.

Rate Mitigation

A recent Telegram article (“Power Rate Options Still Unclear”, Telegram, May 5, 2018) . refers to “$60 million to $70 million required to decrease customer rates by one cent per kilowatt hour”. This suggests that, if rates were increased from 12 cents to 17 cents, revenues would rise by $300 million to $420 million. This is highly unrealistic.

ANDREW NIKIFORUK A SOULMATE FOR DAVID VARDY

David Vardy, a frequent contributor on this Blog, can often be found discussing how the failure of the Muskrat Falls project is symptomatic of a broken democracy. He met up recently with Andrew Nikiforuk, an award winning journalist who has written for twenty years about the energy industry.

CAN THE MF CONCERNED CITIZENS COALITION MAKE A DIFFERENCE?

Guest Post by David Vardy

Will the Coalition make a difference? 

One of those invited to join the Muskrat Falls Concerned Citizens’ Coalition (MFCCC) asked the following questions:

Thank you for the invitation to join your Coalition. I have two questions, answers to which will have an impact on my decision as to whether or not to join:

Questions:

1:   How can the Coalition positively impact the disastrous situation that Messrs Williams, Martin, Bennett and others have visited on the residents and taxpayers of this Province? 

2:  What can the Coalition do to prevent similar misadventures by future majority governments?