Guest Post Written by David Vardy

Overtures have been made to seek further federal support for the
Muskrat Falls project by raising the $5 billion cap on the loan guarantee. The
purpose of this paper is to propose an alternative mechanism for funding.
Surely the federal government must bear a greater share of the financial
burden. The previous federal government enabled this project to go forward.
They were complicit in the approval and sanctioning of this project without
normal PUB scrutiny and in defiance of the advice of the joint federal
provincial environmental panel.

The sanctioning was done without a strong business case and
without due process. The recent admission by the Nalcor Chair that the
project’s capacity is far in excess of the energy needs of the province and
admitting it to be a “boondoggle” confirms the position taken by the two
regulatory tribunals and by many critics, including the undersigned.

Regulatory Reviews Did Not Endorse Project
The Report of the Joint Review Panel of August 2011 expressed
serious reservations about the project in terms of the business case. They
concluded that

“Nalcor had not demonstrated the justification of the Project as a
whole in energy and economic terms, and that there are outstanding questions
related to both Muskrat Falls and Gull Island regarding their ability to
deliver the projected long term financial benefits to the Province, even if
other sanctioning requirements were met. The Panel therefore recommended that
the Government of Newfoundland and Labrador carry out separate formal financial
reviews before sanctioning either Muskrat Falls or Gull Island to confirm
whether the component being considered for sanction would in fact deliver the
projected long-term financial benefits.” (Executive Summary, page xiii).

The Public Utilities Report of March 30, 2012, on a limited
reference from the provincial government, concluded that

“The information provided by Nalcor in the review is not detailed,
complete or current enough to allow the Board to determine whether the
Interconnected Option represents the least-cost option for the supply of power
to Island Interconnected customers over the period of 2011-2067, as compared to
the Isolated Island Option.” (page 80)

Principal Beneficiary: Newfoundland and Labrador or Nova Scotia
David Vardy

The Term Sheet of November 2010 provided that Emera would receive
20% of the energy for 20% of the cost. Their 20% investment went into
construction of the Maritime Link which would carry up to 500 MW of power. This
Link would be made available to Nalcor so that it could export surplus power to
customers in the Maritimes and in New England as well as carry 1 billion kWh of
energy, representing 20% of the 4.9 billion kWh from Muskrat Falls, the
so-called Nova Scotia block.

Later, as a result of decisions of the Nova Scotia Utilities and
Review Board this energy commitment to Nova Scotia was renegotiated. The
commitment to Nova Scotia was raised from 20%, at zero energy cost, to a
minimum of 44% and ranging as high as 56%, at a combination of 
zero energy cost and spot market prices (ranging from five to nine
cents per kWh), far below the 40+ cents per kWh for customers in NL.

The federal role in the project was justified on the basis of the
benefits to other provinces in the Atlantic region, in addition to those
enjoyed by Newfoundland and Labrador. Nova Scotia was fortunate in having a
strong federal Minister, namely Peter McKay, who supported the Muskrat Falls
project, on the basis of the considerable benefits to Nova Scotia. The federal
loan guarantee was contingent upon power exports to Nova Scotia.

The original projections provided for 40% of the power to be used
in NL and 20% in Nova Scotia, with the remaining 40% available for export to
other markets. The projections released by Nalcor CEO on June 24 suggest that
NL load growth was significantly overestimated. Instead of 40% of Muskrat Falls
power the amount required by NL in 2021, the first year of full power, will be
less than 25%. The share of Muskrat Falls power required in NL will not reach
40% until 2030.

At the outset this project was rationalized as being mainly for
the benefit of NL. This proposition was weakly supported at the time and is now
clearly inaccurate. It will provide far more benefit to the province of Nova
Scotia than it does to our province. The case for a larger federal role is
therefore strong, provided that there is an economic case for going forward.

Escalating Equity Demands
The estimated project cost is now $11.4 billion, with guaranteed
debt supplying $5 billion and with equity investment of $6.4 billion, with $0.5
billion invested by Emera and $5.9 billion by Nalcor and the government of NL.
All increases in cost have been sourced by larger and larger equity
contributions by the province.
The following table and chart show the growing equity demands on
the province, demands that have been met by provincial borrowing, so that the
term “equity” is really a misnomer.
The table (above) and chart (below) show the escalation in cost
and how the full impact of each increase in cost is borne by the province. The
latest cost estimate of $11.4 billion raises the demand for equity from the
province and Nalcor combined to $5.9 billion, a multiple of 8.4 of the 2010
value. The dramatic realignment of the financial burden makes a strong case for
greater federal participation.
Lower Churchill Development Corporation (LCDC) Model
The Lower Churchill Development Corporation (LCDC) was created in
1978 as a jointly owned federal provincial corporation to develop the Lower
Churchill. The LCDC did not proceed beyond the planning stage, partly because
of insufficient load growth, combined with the fact that the capacity of the
Muskrat Falls and Gull Island projects was far greater than our energy needs.
Lack of progress can also be attributed to the difficulty in gaining
transmission access through Quebec other energy markets. The formula for equity
participation was 49% federal and 51% provincial equity.

The funding formula embodied in the LCDC Agreement should be
explored either as an alternative to, or in combination with, the lifting of
the $5 billion cap. Money borrowed underthe guarantee continues to be a
contingent liability of the province, while federal equity participation
reduces the financial burden on the province, making this a preferred option.

This LCDC model would allow for the injection of federal funds in
the form of equity. The LCDC was based on 49% equity from the federal
government and 51% from the province. Based upon the current $11.4 billion cost
estimate the equity share is $5.9 billion. Applying the LCDC model could
relieve the province of the obligation to inject $2.9 billion, leaving it to
finance $3.0 billion in “equity”. There are many other variations of this
funding model but injection of federal equity would reduce the pressure on the
province at a time when the province is financially stressed.

The federal government should insist on a cost benefit analysis of
the option of suspending the generation project while completing the
transmission lines, compared with blindly going forward with the project as
currently configured. Such a cost benefit analysis should be a condition
precedent to any further federal support.
The Arguments for enhanced federal cost sharing
The case for enhanced federal participation through joint
ownership through an LCDC model is based on the following three arguments:

First, the burden upon the province has increased significantly
since the Term Sheet of 2010 and the decision to sanction in December 2012. It
was unrealistic at the outset for the province to assume full responsibility
for a completi
on guarantee pursuant to the loan guarantee agreement.

Second, the federal government was complicit in the decision to
proceed, notwithstanding strong caveats expressed by a joint federal provincial
environmental panel and by the province’s public utilities board.

Third, the share of the energy which will be consumed within the
province has dramatically changed, partly because of Nova Scotia’s strong
leverage, arising 

from the fact that the federal guarantee was contingent on
the participation of Nova Scotia, leverage which was used to renegotiate the
parameters of the Term Sheet, giving Nova Scotia access to close to 50% of the
energy, compared with the original 20%.

It is recommended as follows:

1. That the province seek an injection of federal equity into the
project, along the lines of the LCDC model. This equity should be structured in
such a way as to make the return on equity contingent on the performance of the
project and should not be modelled on the equity participation of Emera, which
guarantees a regulated rate of return.

2. That the federal government and the province commission an
independent and expedited cost benefit analysis of a variety of options,
particularly that of suspending the Muskrat Falls project at the site,
preserving the assets and renegotiating all construction and power supply
contracts, as compared with finishing the project as planned. The transmission
lines would continue to be built and can be used to carry remaining Churchill
Recall Power and also to wheel a block of Churchill power purchased from
Quebec. The power purchased could be used to meet 
our obligations to Nova Scotia. Our own energy demands have now
been reduced due to the reduced load growth, reducing the amount of power
required for the Island.

3. This independent cost benefit analysis should be considered by
the federal government to be a minimum condition precedent to going forward
with the project. Failure to conduct such an analysis in the light of dramatic
changes in project cost and schedule and the fundamental changes which have
taken place in energy markets would be a dereliction of duty by both the
federal and provincial governments. Apart from any question of federal funding
the province should undertake this analysis before proceeding further.

4. That both governments make appropriate decisions with respect
to the completion or suspension of the project, in whole or in part, on the
basis of this independent expedited cost benefit analysis, while allowing the
project to continue only at a reduced and cautious pace until the analysis is


If a Big Mac costs McDonalds $10 to produce and it is sold for $1.50, McDonalds will go out of business. They would not declare a profit!


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.


  1. A hearty effort but we got into this mess ourselves. There will never be agreement in canada to swoop in and save us. The only way this will fly would be to include gull island into the solution, and include the electrification of PEI, Ontario, and New Brunswick. Of course this will require both the federal government and hydro quebec. I listened to danny yesterday. He is in denial about the state of this project. The cruel facts are when rates finally increase, and there is a mass movement to heat pumps and wood stoves, we will need less than 15% of the muskrat energy.

    Danny was a demogogue who is pathetically sticking to the same rationale, even as the evidence clearly shows that he was wrong.

  2. On the surface, a very reasoned suggestion.

    However, I would suggest that the substantial benefits accruing to Nova Scotia, recognized by Mr. Vardy as likely (or at least possibly) the principal beneficiary of this Muskrat fiasco, combined with the project's contribution to Canada's carbon reduction targets, would heavily bias the resultant benefit-cost recommendation very much in favour of continuing with both the generation/dam/powerhouse and the transmission line.

    If an independent analysis of the benefit versus the costs of Muskrat Falls "TO NEWFOUNDLAND AND LABRADOR ONLY" were to be conducted, then in my opinion such analysis would show clearly that the costs to the province and NL citizens/ratepayers would FAR OUT-WAY the benefits.

    It is those costs/benefits to NL that we should, FIRST AND FOREMOST, be concerned about —- and it is that that Dwight Ball should be pursuing.

    Maurice Adams, Paradise

  3. Sorry David but whining to "Daddy" and asking him to pay yet again for YOUR blunder is bizarre. You expect the feds to bail you and bear half the capital overruns?

    You and your colleagues stood idly by and watched democratic controls stripped away. You chose to play nice with the despot and not challenge the finances, need and the shady contracts that are still not made public.

    Why is that David? Anyone who took a cursory look at the finances knew it was a boondoggle in 2010. So did you. Some decried the boondoggle and were vilified, sued by the oligarch and had their integrity impugned. It did not deter us from the truth and from speaking truth to the illegitimate power, exercised without public scrutiny or oversight.

    Now you expect "Daddy" to come up with more loan guarantees and to pick up half the cost of the boondoggle that you are still fear being made public in all its sordid, undemocratic detail?

    This is quite rich is it not? If you love NL and democracy you and your well heeled friends need a long look in the mirror and come to the apparently uncomfortable conclusion that transparency in the contracts and engineering are essential to unravel this boondoggle.

    Asking "Daddy" to bail you out without exposing the rot is not helpful. It would only empower the authors of this boondoggle. If you do the right thing at last, it would help restore your self respect. It may even save your democracy. The helpless victims of this travesty, the old, the young, the poor are depending on you. Will you meet the challenge?

    • Bruno, all the dissent back as early as 2010 was legislated out of order. Legislated Bruno, by a majority government that branded dissent as being traitorous. You won't see that, being blind in one eye and unable to see out of the other.

    • You make my point Anon. Why did the intelligentsia stand idly by and watch your democracy shredded. Why did you?

      Why do you still make excuses for not demanding transparency into this boondoggle? What did you do when your despot branded dissent as being traitorous? Some of us stood tall and spoke the truth. Where were you?

    • First of all I publish my name to all my posts anon. I wish you would. Would it not carry more weight?

      My response to the EB comment follows:
      We have and are part of the solution! Hiding ones head in the sand about the cause of the problem, avoiding transparency in the contracts and engineering can NEVER find solutions.

      They are merely public relations if no one is uncomfortable with the questions posed, as George Orwell outlined. The pigs in your "Animal Farm" are wearing clothes and drinking. Some are clearly more equal than others in NL!

      We have and are part of the solution! Hiding ones head in the sand about the cause of the problem, avoiding transparency in the contracts and engineering can NEVER find solutions.

      They are merely public relations if no one is uncomfortable with the questions posed, as George Orwell outlined. The pigs in your "Animal Farm" are wearing clothes and drinking. Some are clearly more equal than others in NL!

    • Knowing my name doesn't change the point being made. And why the fascination with this anyway? From my read of your comments, you are far more comfortable sticking your finger in people's eyes, rather than offering a positive approach to solving the problems that NL has. Are you part of the solution or not? If you are then I suggest you start by embracing some of the ideas provided by Mr. Bonnell and Mr. Vardy or offer your own solutions. Get on the bus or get run over by it eventually. And from the sounds of it, 'eventually' is not far away.

    • I tend not to give credence to anon cheap shots.

      For the last time for the record I have offered alternatives from the outset and I rebutted the technical problems and the economics. I have been asking to see the contracts that even CFIB says should be public from the outset.

      Why do you shrink from the reality? The secrecy must end before solutions are possible. Even from behind your keyboard you are afraid to ask questions of the authors of the boondoggle. Your fear and loathing of democracy and transparency speaks to your fealty to your oligarchs. You fear the truth. Too bad.