Back in
November 2012, as the Dunderdale Government was about to conclude sanction of the Muskrat
Falls project my brother, Brendan Sullivan, found himself among the handful of “naysayers”
who could see through its economic folly.

and the Dunderdale Government had concluded their end run around the PUB, having ring-fenced the two power options it wanted to give evaluation. Of course, the outcome was already predetermined, many of the assumptions favouring Muskrat Falls having been contrived. In the end, the charade served only to
justify a truly “nutty” project. 

Brendan, a former provincial government economist, explained some of his concerns
in a Blog Post entitled “Muskrat Falls and Voodoo Economics”. He wrote at least
one other article in the Telegram.

passed away on Monday, after a long and heroic battle with a rare disease called Wegener’s Granulomatosis. I am re-posting the Piece today in his memory.

This Blog got started largely as a reaction to the arbitrary manner the Government was driving formal sanction of the Muskrat Falls project. It was a vent for outrage against stupidity and secrecy which evolved as a source of analysis and commentary on Muskrat and on other public policy issues. 

Brendan’s views frequently crept into the articles I wrote. Almost
daily, we parsed the information which Nalcor shared with the public, much of
it misleading, inadequate, and always with an unmistakable “spin” designed only to reinforce its view. We felt strongly the Government didn’t want the public to have the opportunity to analyse project economics and other details as much as they were expected only to believe.

In the more
than thirty years Brendan and I developed and operated commercial real estate,
condominium development, and retail businesses, there was one characteristic about which there was always clear agreement. We both felt it was a necessary element of business and life to be honest and forthright, and be prepared to say as much, even if, sometimes, the view seemed blunt or even harsh. The necessity for open and honest government was an integral part of this view.

I shall miss
his humour, enormous intelligence, and most of all his penchant for absolute straightforwardness.

loved this province. As an economist and businessman, he was always greatly
disturbed that politicians and public servants, who ought to have known better, engaged in such a wanton disregard
for our financial future.

It probably
won’t surprise you, given the more recent and disturbing revelations regarding
the Muskrat Falls project, to which the public is awakening, his 2012 Post is just as
relevant today as it was then.  May he
rest in peace. – Des Sullivan

Here is
Brendan’s Piece.   


Thursday, 29
November 2012
The method
that Nalcor is using to price the electricity from Muskrat Falls should be a
major concern to the residents of the province. The cost to the ratepayer, in
the first instance, will be kept artificially low to obscure the true cost of
the project. Here are the reasons why you need to be concerned:
Nalcor (the
unregulated owner) will sell Muskrat Falls power to Newfoundland and Labrador
Hydro (a regulated subsidiary of Nalcor) under what is known as a Power
Purchase Agreement (PPA). Under this agreement, electricity will be priced in
constant dollars and will escalate annually by a figure adjusted for the rate
of inflation. This is also known as “escalating supply pricing”. The project,
then, would be paid for over a period of 57 years. In other words, the returns
on the project are back-end loaded, the depreciation in particular, is
calculated by using what is referred to as a sinking fund – the depreciation is
written off much later, a procedure that is used by only a few provincially
owned utilities in Canada.  

The simple
fact is that the provincial government, through Nalcor, is ‘kicking the can
down the road’ and making it a problem for the next generation. Only government
would engage in this practise. Private enterprise, especially those with public
shareholders, like Fortis, would not.
In the early
years the Muskrat Falls project will lose money under conventional pricing.
Normally the cost of service (COS) pricing methodology is used. The COS method
would see the project paid for over a much shorter period, depreciation would
be calculated using a different method and future generations would not be
submits that “this (PPA) approach avoids intergenerational inequity…” In
other words Nalcor is suggesting that your children and grandchildren will be
paying essentially the same price for power as you would today on an inflation
adjusted basis. In fact, the opposite is true. Planning to pay for a project
over 57 years in constant dollars means that there is no flexibility to adjust
for technology changes over this period (witness the extent to which the
emergence of natural gas is changing the pricing of electricity in the
Northeast United States).
Hydro International (MHI), the PUB’s chief consultant, also admitted, in its
submission to the PUB, that “… uncertainties in power systems have been
augmented by various factors such as advancements in technology, the increased
complexity of system design and operation, the deregulation of the utility
business, the increased utilization of intermittent energy sources and the
imposition of more mandatory regulatory requirements.” 

57 years is a long
forecasting period to assume no technology change and, in any case, forecasts
over this extended period mean very little, no matter how solid the
assumptions. Moreover, significant capital may have to be expended over the
next 30 or so years to repair or replace parts of the infrastructure.
Long term
financing for projects such as Muskrat Falls is obtained by floating long term
bonds. The maximum length of a bond is 30 years. We do not know if the
escalating supply price method takes into account the level of interest rates
beyond the initial bond term when this project will have to be refinanced, nor
the cost of refinancing. One very knowledgeable person observed: “Who is going
to lend money for a fixed rate of interest for 57 years?” I would be very surprised
if the Federal Government loan guarantee extended beyond the initial period.
It is
interesting to note that the transmission line from Muskrat Falls will be
financed by a new corporate entity; Emera of Nova Scotia will be part owner.
The conventional method or the cost of service (COS) approach is being applied
for its pricing strategy. The reason: a PPA agreement wouldn’t pass muster
under the Nova Scotia PUB Board. Emera shareholders wouldn’t go for it either!
Nalcor in
its final submission to the PUB stated that “…the PPA approach…recovers all
investment and operating costs and provides the shareholder (Nalcor) with
positive cash flow every year. There is no subsidy in the early years, there is
no foregone income…”. This is nonsense, especially when only 40% of the power
will be sold. The PUB in its Report to Government on March 30, 2012 stated:
“Nalcor explained that it does not intend to sell Muskrat Falls power for
$214/MWh and instead will sell it to (Newfoundland) Hydro at $76/MWh.”  

With a recently announced 25% increase in the
capital cost of this project Muskrat Falls power will rise to approximately
$267/MWh and $95/MHh respectively. Under this approach to pricing there will be
a significant shortfall of cash in the early years and up to the point of
break-even which some have suggested will be around the year 2028. Either the
ratepayer pays or the taxpayer pays in the form of a subsidy directly to
Nalcor. Alternatively, Nalcor will be paying a lot fewer dividends to the
government – a subsidy by any other name.
We need to
see the details of the Power Purchase Agreement. After all it is an agreement
between two government- owned entities. The Minister needs to tell us why the
PPA will not be subject to the Public Utilities Act. He needs to inform us why
Nalcor will not be subject to the regulations of the PUB. He needs to tell us
why he is engaging in voodoo economics to justify the Muskrat Falls project.
Written by
Brendan Sullivan

Sullivan is an economist and businessman in St. John’s).


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. Des… my deepest condolences on the lost of your brother.

    I remember this original post, as it was at the time I was really trying to understand the economics of the Muskrat Falls project. The term Voodoo Economics resonated with me then, as it does today. I will re-post my original comment from back in 2012. Unfortunately the 2 Billion equity contribution will now be closer to 5 Billion. The annual debt servicing fee to the province on this borrowed equity will be ~200 million a year. It really is voodoo economics. None of which was included in the lowest cost analysis used to justify the project.. JM

    Not only the price. The PPA should have very clear terms on 1) When the power will be delivered (in daytime periods during the winter, or regular montly intervals) 2) The penalties if Nalcor can not deliver the power to NLH as required 3)The capacity which will be made available.

    I would also like to know if the CPW includes the interest payments the government will have to pay for the money borrowed to provide the equity contribution. I would expect the inclusion of the equity debt payments would show the isolated option to be the cheaper option.

    It must be remembered that a 2 billion equity contribution, if put on our debt, would result in a 100 million less debt servicing charge.

    This was not included in the CPW analysis between the options.

    This is the true voodoo economics.

  2. Des,
    Condolences to you and your family. Brendan sounds like a good man.
    His early decrying of the regulatory dysfunction and voodoo economics, that even to my untrained economic eyes were shocking, speaks to his integrity and love of his province.

    This is the true pride of place that respects the people and culture.

  3. Sorry for your loss Des.
    What was the COS kWh price for Muskrat Falls power 30c kWh? 16.4c kWh was the oft quoted residential rate – Nalcor's argument: your power will ONLY go up by 50% with MF and continued use of Bunker C is $2.2 billion more expensive over the same time period (DG2). Nalcor assumed consumption would remain the same with escalating price yet even Wade Locke in his power point MF rehash said +20% price = -5% demand.
    Prices might have gradually reached MFs initial 16.4c kWh with alternatives but it would have been gradual over many years, giving time for demand to be reflective of higher prices. Nalcor has taken out the free market for NLrs and built a facility 2.5X the domestic demand (only full paying customers).
    In hindsight Harper's FLG played Danny Williams for a fool, but since all Federal parties blindly supported the FLG DW was going to lose anyways.
    Muskrat Falls, Hebron, Gallway and Ice Caps – DW sure can pick winners