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).  

PPA: ABSOLUTE, UNCONDITIONAL AND IRREVOCABLE

The Power Purchase Agreement (PPA) is not a sexy subject though it is important; far more than suggested by the negligible attention it received two months ago.

The PPA defines the terms, conditions and amounts ratepayers are obligated to pay Muskrat Falls Incorporated, the Nalcor subsidiary holding the generating assets of Muskrat Falls.  A separate Agency was established for the purpose of holding and financing the Labrador Island (LIL).  It is not clear if the 51 years of “Base Block Payments”, rising from $148.5 million in year 2 to $933.3 million in year 50, include the transmission costs, too,  or whether we ought to expect a second PPA.

This PPA details, in 196 pages of legalese, a host of obligations on ratepayers via Newfoundland Hydro (NLH).  In typical Nalcor fashion, no details accompanied its release.

Your attention is drawn to Section 4.2(C) (d) (pp. 37-38) regarding “Base Block Payments” which the PPA calls an “Irrevocable Obligation”.  It states:

“Notwithstanding any other provision of this Agreement, including Section 15.1, until the date on which the Initial Power Purchase Agreement Page 33 of 76 Financing is Paid in Full, NLH’s obligations to make the Base Block Payments shall be absolute, unconditional and irrevocable, and shall not be subject to any reductions under any circumstances whatsoever.” (Emphasis added).

Fundamentally, that means Nalcor can lose the Water Management case now before the Quebec Superior Court, the turbines coming from China can seize up, the water can dry up but your obligation to pay is “absolute, unconditional and irrevocable…”

Just possibly, the Consumer Advocate might awaken from his blissful slumber and report to ratepayers, on the implications for them, of this and many other parts of the Agreement.