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.
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.
serious reservations about the project in terms of the business case. They
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).
reference from the provincial government, concluded that
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)
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.
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.
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.
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.
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.
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 province, demands that have been met by provincial borrowing, so that the
term “equity” is really a misnomer.
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.
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.
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.
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 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.
ownership through an LCDC model is based on the following three arguments:
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 completion guarantee pursuant to the loan guarantee agreement.
proceed, notwithstanding strong caveats expressed by a joint federal provincial
environmental panel and by the province’s public utilities board.
province has dramatically changed, partly because of Nova Scotia’s strong
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%.
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.
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.
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.
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