WHEN LEGACY TRUMPS COMMON SENSE (SOES PART II)

It is fine
to suggest the Province ought to have a ‘Crown Jewel’ like Hydro Quebec or
Statoil. But, when the motivation for a monolithic State Owned Enterprise (SOE)
comes from a Premier, whose business experience is chiefly in the ‘regulated’ economy
and whose motivation is legacy, you can imagine other questions abound.

It seems
easy enough. Find a need, like electricity; design a hydro project, develop a
set of estimates, engage the markets and the public purse to finance it,
execute a power purchase agreement requiring the public to pay it all back and
then some.  What could be simpler!

Of course,
it isn’t simple at all.   

What if the hot economy isn’t conducive to
controlling costs, the management team is limited by a lack of basic construction
experience, the captive market needs only 40% of the power, possibly less, and
you need to achieve 100% cost recovery from just that market?  What if you are forced to give away 20% of the
project’s power potential to achieve export access?

What if you
agree to incur 50% of the cost overruns on that transmission link and commit
all your remaining ‘surplus’ power to keep your export partner happy; what if
you are given a not so gentle reminder all the risk is yours and that the
benefits of the Federal Loan Guarantee belong to Nova Scotia! 

What if you
are told by the Nova Scotia regulator: take it or leave it. 


To make
matters worse, the price of that surplus power must be the lowest possible, set
by auction, in a vicious and over supplied New England market, where
electricity rates won’t cover the cost of transmission  let alone production. 

So, the
amount of export revenue you are likely to earn, won’t amount to squat if the
final project costs continue to escalate such that ‘rate shock’, among your
high paying island-captive customers, is a concern.    

The big fear
is they might employ conservation options, new technologies (or, old technologies,
like heat pumps and wood) such that far
less
than the forecast of 40% is needed.

Those are some
of the risks.  There are others.  Indeed, we haven’t even mentioned the North
Spur or the Water Management Agreement; the recent loss in the Quebec Courts should not be translated as encouragement.

You may have
come to realize your SEO is not in the power business at all; what you have
signed on for is an expensive, risky, tangly, construction project.

None of this
is the stuff of a successful State Owned Enterprise, is it? 

If Nalcor’s CEO wakes up on a given morning after folklore’s ‘old hag’ has spent the
night sitting on his chest, expelling gnarly threats and warnings of
foreboding, he might realize he has been very foolish.  Just possibly, he might hope the
Government that gave him licence to be foolhardy might have been at least wise enough to
keep a few shekels and provide a margin of safety if it went off the rails.

Now you know
that a former Premier, a business magnate, a visionary, too, one hell bent on
chiselling a legacy, would have prepared for such an eventuality!

Understanding
the vagaries of business as keenly as he must, he would have set down the
ground rules so that his own and successive governments, like Dunderdale’s and
Marshall’s and successors, would be insured against risk, bad luck, bad
judgement or just plain incompetence.  

But, then,
the ‘old hag’ comes out of our culture, not Statoil’s Norway.

The safeguards
I mention suggest a culture of ‘discipline’. 
Discipline is in Norway’s culture. 
Is it in ours? 

It certainly
wasn’t a hallmark of the William’s administration, nor Dunderdale’s, nor
Marshall’s.

Such a step
would have dramatically enhanced NL’s readiness for a future without oil, even
without a ‘Heritage Fund’. It would have ratcheted down the risks of giving an
SOE a blank cheque.    

That is not
all.

In place of
imposing limits on government spending, while his risk laden SOE was committing
billions, Williams emasculated what was, historically, a very tight-fisted and
independent Treasury Board.  He placed it
within the Department of Finance, where a compliant Deputy Minister, (the
current Auditor General) was no match for a former stingy Treasury Board
Secretary.

Williams added
2400 public servants to the public wage bill; he permitted departmental heads to
run amuck despite the negligible increase in the population count.

Government
Program Spending rose by 75%, growing from $3.8 billion in 2003-04 to $6.6
billion in 2012-13 creating a ‘structural’ demand for steady revenues; he ignored
the reality that 36.5% of those revenues are dependent on the vagaries of oil.

Lower
production rates, due to both scheduled and unscheduled maintenance, were
blamed for the monstrous deficits of 2012, 2013 and 2014; discounting simple profligacy.    

The deficit
in the public sector pension plan, alone, adds $876 million to that debt, this
year, and the ‘can’ continues to be kicked down the road. 

Is this the discipline,
the planning, the serious financial management, all the stuff of which “Crown
Jewels” are made and ‘Heritage Funds’ developed? 

Who is
kidding whom?

Surely,
somewhere in the body politic, there is recognition that a ‘wish list’ alone
isn’t enough; management skills, prudent governance, and discipline are key
underpinnings of a Province seriously gazing into its fiscal future.

The latest
mutterings from Nalcor CEO Ed Martin, his ‘spin’ extracted, place Muskrat’s
capital cost in excess of $10 billion. The project has barely begun.  The news should evoke cries of derision from
every quarter. But it does not. 

In time, we
will ask ourselves why. 

We will ask,
too, why groups like NOIA and the St. John’s Board of Trade give standing
ovations to one so complicit in advancing a plan of economic folly; one in
which none of the true hallmarks of entrepreneurialism are found, let alone held
up for public scrutiny. 
Those audiences
are sated just by the words “Statoil” and “Hydro Quebec”; they are emboldened
simply by the rallying cry: “we want to be like them”!

If that is all
anyone brings to Danny’s quest for legacy, I suggest, during those ovations, the
admirers remain standing, lest they sit on their credit cards. 

Perhaps, as
one commentator noted on Bureaucrats Masquerading as Entrepreneurs (SOES Part I), ‘for now they
are just pleased to be making lots of money’. 

As for the
rest, cold hearted bankers find no currency in the passions of patriotism.  
Des Sullivan
Des Sullivan
St. John's, Newfoundland and Labrador, Canada Uncle Gnarley is hosted by Des Sullivan, of St. John's. He is a businessman engaged over three decades in real estate management and development companies and in retail. He is currently a Director of Dorset Investments Limited and Donovan Holdings Limited. During his early career he served as Executive Assistant to Premier's Frank D. Moores (1975-1979) and Brian Peckford (1979-1985). He also served as a Part-Time Board Member on the Canada-Newfoundland Labrador Offshore Petroleum Board (C-NLOPB). Uncle Gnarley appears on the masthead representing serious and unambiguous positions on NL politics and public policy. Uncle Gnarley is a fiscal conservative possessing distinctly liberal values and a non-partisan persusasion. Those values and opinions underlie this writer's views on NL's politics, economy and society. Uncle Gnarley publishes Monday mornings and more often when events warrant.

REMEMBERING BILL MARSHALL

Bill left public life shortly after the signing of the Atlantic Accord and became a member of the Court of Appeal until his retirement in 2003. During his time on the court he was involved in a number of successful appeals which overturned wrongful convictions, for which he was recognized by Innocence Canada. Bill had a special place in his heart for the underdog.

Churchill Falls Explainer (Coles Notes version)

If CFLCo is required to maximize its profit, then CFLCo should sell its electricity to the highest bidder(s) on the most advantageous terms available.

END OF THE UPPER CHURCHILL POWER CONTRACT: IMPROVING OUR BARGAINING POWER

This is the most important set of negotiations we have engaged in since the Atlantic Accord and Hibernia. Despite being a small jurisdiction we proved to be smart and nimble enough to negotiate good deals on both. They have stood the test of time and have resulted in billions of dollars in royalties and created an industry which represents over a quarter of our economy. Will we prove to be smart and nimble enough to do the same with the Upper Churchill?

3 COMMENTS

  1. The Water Management issue, which will determine whether the project can deliver power when needed or only as HQ needs the Upper Churchill, won't be heard by the Quebec Courts until after the next election here. The schedule for production of documents etc. shows that being completed August 2015. That "fact" is of course known to the Premier and cabinet, who are pressing ahead blindly indifferent to the folly of this multi-billion dollar photo op.

  2. Very good analysis with relevant historical context. The Statoil model worked for Norway because the government guys didn't operate or influence it.

    Nalcor has bulked up on a lot of people and is pushing through an uneconomic project. They have a cost structure like Eastern Health which loses $250 K per year on a Tim Horton's with a large captive market and always lined up around the corner selling 10 cent coffee for $1.50. Nalcor spent $30 M drilling a well in Western NL when the cost range for a similar well in Alberta is between $1 M and $7 M. Granted the people and infrastructure are not yet here but a partnership for a small percentage to one of the juniors in this province could have done about three wells for the same investment and require a lot less people back at the mother corp.

    Perhaps future administrations will change how Nalcor operates and help dig us out of Muskrat. The 77% rate increase announced by Ed Martin in the Telegram (17.4 cents in 2020 from 9.8 cents when most of the analysis was done in 2011-12) will not pay for it if we lose the WMA. Also according to Mr Martin the rate will increase thereafter between 1 and 2% per year or in other words inflation. That is a remarkable achievement to be able to increase the rate 77% in less than ten years increasing with inflation thereafter when it was only designed to replace 12% of the previous power (Holyrood) and pick up load increases. The only known load increases will come from the Vale smelter which is an industrial load and easy to supply from less expensive options.

    • There is only one way out of this mess…NALCOR and its incompetent head honchos have to go! Their inability to properly manage energy resources was made painfully obvious during Dark NL but their predictable shifting of blame was their trademark response.

      An entity that touts its own expertise and greatness…particularly a politically-created entity…is not one to be trusted and NALCOR has given us ample reason to be distrustful. Their singular determination to plunge ahead with a clearly unviable and uneconomic project like Muskrat Falls….despite major cost overruns, changing market dynamics, reliance on in-house expertise, hiding behind a wall of government protection from any real scrutiny….all of these traits are the hallmark of an organization that is more successful at navel gazing than they are at developing a successful business model.

      This entity was born out of the grandiose and pompous arrogance of a PC administration that was lucky in the extreme…. but one whose level of competence was never high. They exploited the generous goodwill of the ordinary people of the province and continue to create a province of haves and have nots. Ironic, isn't it, considering our poor cousin status within Confederation for so many decades!!