Guest post written by David Vardy

Previous columns on this blog by JM have spoken about the 2015 budget and its optimistic assumptions with respect to future revenues. JM referred to comments by senior officials comparing the oil and gas developments off our coasts with those in the North Sea and the need to inject reality rather than euphoric fiction into our social and economic planning. Public debate and dialogue on the future of the province must be informed by realistic assumptions.

There have been a number of statements made by government and by Nalcor which promise unrealistic returns to the province from the Muskrat Falls project as well as from Nalcor’s investment in oil and gas. This article deals principally with the revenue prospects for Muskrat Falls and how they have been portrayed by our political leaders.

Quick and Lucrative Return Promised

The following six claims have
been made by government and its officials promising lucrative returns from
Muskrat Falls and a short payback period for recovery of the province’s

1.     In the House of Assembly, on November
21, 2012 Natural Resources Minister Jerome Kennedy said that

There will be
approximately $130 million available to the Province in 2020 that will be over
and above the payment of all expenses. That is based on 40% of the power. It
does not include the export or the other 40%.

2.     On December 17, 2012, while announcing
the sanctioning of Muskrat Falls, former Premier Dunderdale made the following

Muskrat Falls will
provide the province with a stable revenue stream and will not impact net debt.
The project will also generate estimated revenues in excess of $20 billion over
50 years once it comes onstream.

3.     On December 20, 2012 Finance Minister
Tom Marshall said in the House of Assembly that Muskrat Falls

will pay a dividend to
the people of Newfoundland and Labrador of in excess of $20 billion, starting
in 2017 for the life of the project. If we were to include estimates of sales
of surplus power into the American markets, it would be over $24 billion.

In June of 2014 the CEO of Nalcor Energy said in
a media release that
Over the life of the Muskrat Falls Project, significant value and cash
flows in excess of $30 billion will be generated by the project.

The 2015 Budget Speech contained the following
statement about the recovery of the province’s investment over a mere eight

Government’s last equity
injection in Nalcor will be in 2017-18. Over a total investment period of 10
years, the provincial government will have invested $3.1 billion in Nalcor.
Every penny of that money will be
returned to the province
by 2025-26. From that time on, the dividends
continue to increase for Newfoundlanders and Labradorians.

recently in a Leaders’ Debate on CBC On Point June 13, 2015, Premier Davis made
the same comment:

By 2025 our equity investment will be returned and they we will start
to create revenue for the people of the province for the next 100 years.

These claims neglect the fact that the $3.1 billion
equity provided by the province is largely borrowed money.  Since 2006 the province has been injecting
equity investments into Nalcor which is essentially borrowed money.  Nalcor are now stating that by 2025 this
equity will be returned.  Does this
include compensation for the interest paid on the borrowed equity?

The Record
What has been the history of Nalcor in returning revenues to the province? 

The promised return of revenue to the province would be a remarkable turnaround. Prior to the creation of Nalcor, Newfoundland and Labrador Hydro returned a handsome dividend to the province, $150 million from 2003 to 2006 (see Edward Hearn and Dennis Browne, Portrait of a Money Pit, Telegram, February 12, 2015). From 2009 to 2014 Hydro paid dividends to its parent company, Nalcor Energy, in the amount of $284 million. The dividends remained within the Nalcor group of companies and were not passed on to government.

On top of these dividends retained by Nalcor from Hydro, its subsidiary, the province transferred substantial funds for oil and gas activities and for investment in Muskrat Falls. From 2011 to 2015 these amounted to $1,874 million, including $760 million this year. 
Muskrat Falls will require an infusion of at least $2.8 billion in total from the province, and even more if the cost escalates beyond $8.3 billion. 

Remember that the federal loan guarantee is capped at $5 billion so all cost escalation must be funded by the province, which has given a completion guarantee.  The reversal of the cash drain, heralded by the claims cited above, and the touted conversion of Nalcor Energy into a cash cow, would indeed be good news. However the realism of the six claims cited above is open to question.

Revenue Requirements of Muskrat Falls based on Costs
The touted $20-$30 billion in revenues is largely coming from the pockets of Newfoundlanders and Labradorians. 

The structure of the Muskrat Falls project requires that revenues, through rates charged, cover all costs. To boast about the high revenues is to boast about the high cost which will be inflicted upon our citizens through this project, which is disproportionately large relatively to the size of the local population and economic base. Rates will be set to cover all costs and to allow a “risk premium” to the provincial government, similar to that which would be earned by a regulated, privately owned utility, such as Newfoundland Power. 

JM, in an article entitled Muskrat Falls Revenue Stream: Fact or Fictiondated January 2013, attempts to estimate the gross revenues and costs, along with the net revenue or profit earned by Nalcor.  JM concludes that any potential dividends or net revenues

Must first be used to repay the equity borrowing, before it can be used to build hospitals, roads or provide salaries to public servants.

This statement is based upon the fact that the so-called “equity” is in reality borrowed funds on which government must pay interest. It is not free money. It must be repaid with interest. On one hand government may at some point receive dividends from Nalcor, but this must be offset against the borrowed principal and interest.

Analysis of Realistic Payback
JM notes that the federal loan guarantee imposes restrictions on the amount that can be paid in dividends to the province throughout the loan repayment period. The requirement for a minimum debt servicing ratio of 1.4 will result in a lower dividend in the early years of the project and will create a negative cash flow in 2020. His estimate is that the project will not have positive cash flows until 11-12 years after first electricity, which would place it on or about 2030.

The 2015 Budget Speech claims full repayment will take place by 2025, a payback period of only eight years. JM estimates that dividends will be less than $200 million annually until 2048. When allowance is made to include export revenues his calculation is that net revenues will not become positive until 2023 and, more importantly, in responding to the 2015 Budget statement, cumulative net revenues will become positive only by 2031. JM’s article was written before the cost escalation announced in June 2014, which increased the cost estimate from $7.4 billion to $8.3 billion. The inevitable cost escalation beyond $8.3 billion, along with a delay in producing full power, will also impact on the economics of the project and defer the return of provincial equity.

The notion that the equity will be repaid within eight years is preposterous, as is the statement that the project will generate $30 billion in revenues to the province.

The province’s vision of increased revenues from Muskrat Falls has to be tempered by the fact that borrowed “equity” must be repaid, along with the interest. Sales of energy to other provinces will contribute revenues, but it must be remembered that the so called “Nova Scotia” block  of power (about one billion kilowatt hours annually) will generate no revenues while the power sold under the infamous “energy access agreement” will recover only a small fraction of the average energy cost.

Electricity rates will be established by Nalcor, and not by the Public Utilities Board, and they will be set at rates which will generate an 8.4% rate of return on the province’s “equity” investment and also high enough to pay interest and principal on the federally guaranteed debt.

These power rates are tantamount to user fees or taxes and ratepayers will have two options if the rates are oppressively high, which is likely. They can switch to other energy sources, such as heat pumps and energy conservation. Alternatively, ratepayers may choose to leave the province. Whatever the option chosen to avoid high power rates, the effect of rational consumer decisions by ratepayers will be to curtail consumption and make it difficult to achieve the vaunted lucrative revenue returns. If costs cannot be recovered from ratepayers government will have no choice but to shift the cost to the taxpayer. Taxpayers can avoid the burden only by leaving the province.

Muskrat Falls will not be a major generator of new revenues for the province. It will not compensate for the optimistic revenue projections made in the budget documents to offer assurance that the budgetary deficit will be turned around in five years. Instead, it will continue to be a major financial drain on the province, with $579 million allocated in the 2015 budget along with $189 million for oil and gas for a total of $760 million, all of which is included in the $3.1 billion contribution described in the Budget Speech. While the current account deficit is described as $1,093 million the overall deficit is closer to $2 billion, when the $760 million is included, along with other capital account borrowings. We are borrowing 25 cents of every dollar we spend.

Recovery of Costs over 50 years
We learned during the 2012 PUB hearing into the Muskrat Falls reference that the project will not follow traditional “cost of service” accounting. To do so would be to ascribe far too much cost to the early years, creating “rate shock” which would be unacceptable to electrical consumers. Instead the rules were changed to shift more of the cost to future generations. How are we to reconcile this dearth of revenues in the early years with the notion of a cash cow which will return our “equity” investments over eight short years?

In accordance with this departure from accepted public utility accounting, the Power Purchase Agreement (Appendix A of Schedule 1) describes the capital costs recovery schedule for the generation plant. The amounts collected total $24 billion over the 50 year cost recovery period. In year 50, capital cost recovery is shown as $933 million. Is this consistent with the recovery of investment over eight years?

Reality or Fiction?
It is unrealistic to tell the people of the province that the project will repay our investment in eight years or that it will be a revenue bonanza to allay all our concerns about the mushrooming deficit and the rising provincial debt. These statements lull the public into the belief that all is well and that Muskrat Falls will enhance our social programs, rather than threaten them.

How is the public to understand these glowing statements by Premier Davis, by Nalcor, by the former Premier and by other Ministers, as well as those contained in the 2015 Budget Speech? Should they be understood as statements of fact or fiction? You decide.

Editor’s Note:

David Vardy is a graduate of Memorial University and holds post
graduate degrees in Economics from the University of Toronto and Princeton
University. Vardy is an economist who served as a senior executive in the
Government of Newfoundland and Labrador for close to 30 years in a variety of
positions, including Secretary to Cabinet (Clerk of the Executive Council),
President of the Marine Institute, Deputy Minister of Fisheries and Chair of
the Public Utilities Commission.
He has had a long standing interest in the development of sound
public policy. He is the recipient of the Gold Medal Award from the
Professional Institute of the Public Service of Canada (PIPSC), the Lieutenant
Governor’s Award for excellence in public administration from the Institute of
Public Administration (IPAC) of Canada, and an Honorary Doctorate from Memorial

Vardy is a professional associate with the Leslie Harris Centre of
Regional Policy and Development (the Harris Centre) at Memorial University,
where he has undertaken public policy research on fisheries, energy,
governance, immigration, regional development and transportation. In 2013 he
was awarded the Queen’s Diamond Jubilee Medal for his work to improve the lives
of people with autism. Also in 2013 he was awarded the Pottle Award of the
Canadian Mental Health Association for service to people with mental health and
addiction challenges.
David is a member of the St. John’s Rotary Club and is a Paul Harris
Fellow of Rotary International. David is also an active member of the board of
directors of the Canadian Mental Health Association-NL Division (CMHA-NL). 


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.


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?


  1. In the most basic of terms MF will produce 4,500,000 MWhr of energy each year. The province will get 3,500,000 after the delivery of the free power to Nova Scotia. At 60$/MWhr, minus 10$ for transmission to NE this will yeild about 175 million in revenue annually. At 3.5% interest, the 5 Billion loan will be 175 million in annual interest, not including repayment. This does not include the other 3 Billion + the province in putting in.

    Any revenue coming from MF to the people of the province is coming from our own pockets. A tax! Without MF being the so called "lowest cost option" there is no business case.

    Gull Island will also bear similar economics. The most recent discussion with Ontario is crazy.

    By developing MF, and committing NL to the take or pay arrangement, Nalcor has undermined the development of Gull Island. The people running Nalcor have made poor decisions.

  2. "The people running Nalcor have made poor decisions."

    And the rest of the people cheered them on, every step of the way. Danny Williams retired a hero. Kathy Blunderdale won a huge majority government. The St. John's establishment took out Todd Russell, the only elected official who dared raise questions and concerns, in what increasingly looks like a fraudulent election. Poor old Danny Dumaresque gets laughed at (best case) or condemned for the crime of having a "French" name (worst case) despite having been proven right, over and over.

    The people at Nalcor have made poor decisions. But so have "the people" writ large. The same "people" will be the first to turn on Danny Williams when his legacy is shown to be a multi-billion dollar white elephant that will sink the province's economic future and its public finances, for three generations at least. The people can't say they weren't warned.

    Commission of Government looks better by the day.

  3. While capitalism is certainly open to criticism, there is nothing capitalistic about Muskrat Falls: it is like some great project in the former Soviet Union where a State-owned enterprise is allowed to glorify the nation through a gargantuan undertaking that destroys the environment without even generating a profit.

  4. It is much more like the crony capitalism that swept eastern Europe in the wake of the fall of the Soviet Union. Your oligarchs have taken control of whatever they want, they repress the opposition have banned any competition with the oligarchs and they effectively control the media.

    The media is dysfunctional and shields the sleazy deals from public scrutiny by refusing to even publish letters that point to the rot. They send a cub reporter to do a PR series on MF on the Nalcor dime! They don't blush at this egregious violation of journalistic ethics but rationalize it.

    Lastly your Opposition is not only incompetent, they are complicit in the defiling of democratic institutions, your economic future, social equity (if you are poor your choice is misery or leave. If you are old and poor god help you) and the ecological integrity of Labrador.

    Time to demand answers and transparency from every corner of NL. This is an economic and ecologic disaster that can and must be stopped.