“VOODOO” ECONOMICS RE-VISITED

My late brother, Brendan Sullivan, was one of
the first opponents of Muskrat Falls and wrote a
pre-sanction article employing the term “voodoo economics”.  It described a scheme contrived by Nalcor to lower power rates early in the
project by back-loading the equity repayment onto future generations. His post
of November 29, 2012 stands the test of time. He was efficient in his words of
caution, too. 
Brendan could see the project for what it was:
economic smoke and mirrors. 


This is part of his article:


Now, almost 7 years after it was first used to
describe the Muskrat Falls project, it is time to re-introduce the phrase that
perfectly describes something far worse than a “boondoggle”.

______________________________________________________
voo·doo ec·o·nom·ics
noun 
An economic policy perceived as being unrealistic and
ill-advised, especially a policy of maintaining or increasing levels of public
spending
 ______________________________________________________
As the project nears completion, and the bills
bear down on us with ever greater certainty, it is becoming very clear just how
ill-advised this project really was. Nalcor was forced, long ago, to
acknowledge that its demand forecasts were hogwash. Even the demand at sanction
is not expected to be met again until 2032!


As to Brendan’s reference to long-term bonds, some
of the bonds are actually fairly short-term and have the protection of the
Federal Loan Guarantee. If the Province can still borrow when the first series
of bonds comes due, the FLG will likely not be available and interest rates may
have risen even further than they have already. Any “roll-over” — borrowing to
pay off those having matured — will only compound our fiscal crisis.


On July 20th, NL Hydro filed their
General Rate Application to the PUB
In this document, NL Hydro made reference to the
June 2017 prediction by Nalcor that electricity rates would be in the range of
23 cents an hour in the event that there is no rate mitigation. However, Hydro
have advised to not worry — the media having reported that government will hold
the rates at 18 cents/kWh. 


Within the formal submission to the PUB there is
the following statement: “Therefore, rate mitigation to limit residential
customer rates to 18¢ per kWh will require funding in the range of $280 million
to $350 million per year.”


Back in 2013, Muskrat was expected to generate $200
million in profits to the government. Now Hydro has acknowledged that, in order
to keep rates within a level that will not cripple the local economy, the
Provincial Government will have to interject $350 million a year into the crown
corporation!


But this is not where it ends. 

Staying true to the term “voodoo economics”, the
province continues to pay interest on the ‘equity’ given to Nalcor over the
last 5 years. Most, if not all, of that $4 billion has been borrowed, and the
taxpayers are already paying several hundred million a year in additional debt
servicing. 


Once Muskrat Falls is fully commissioned in 2020
(based on Nalcor’s current commissioning schedule), the province will spend
over $500 million a year on rate mitigation and to service the debt on the
borrowed equity. This will be coming from the taxpayers. Dr. Jim Feehan’s Submission
to the PUB regarding the effect on electricity demand from higher rates —
including at 18 cents per kWh — only confirms this long-held assertion.


Newfoundland is on the verge of a socioeconomic
crisis. The PUB Hearings need to acknowledge this crisis. Realistically, where
will the province find this $500 million in cash on an annual basis to service
Muskrat Falls? 


How will our society survive an 80% increase (optimistically)
in electricity rates, and how do NL Hydro engineers claim that electricity
demand will hold constant under this burden? 
The reality is the province doesn’t have $500
million a year, and the majority of households in NL cannot endure an 80%
increase in rates. Therefore overall consumption will decrease. To make things
worse, come 2025 we will still have reliability issues. Despite 3 years of
discussions at the PUB, it is still not clear where the province will get extra
generation in 2025 to meet reliability standards, and what that will mean to rates.   


Brendan was right in calling Muskrat Falls “voodoo
economics” some 6 years ago. 
The Tories skated through two elections — in 2007
and 2011 — on the crazy idea.
The current Premier’s prescription is to create more
delusion as time evaporates, important policy decisions are avoided and Federal
complicity — which puts them on the hook for some of the responsibility for
this debacle — is given no attention.


I suggest that, no matter how hard Premier Ball
may try, he will not be able to skate through the election of 2019 with those
issues unresolved or even barely discussed.


While “voodoo economics” was employed to get us
into this mess, more of the same won’t help us get out of it.


Finally — and this is as much a warning for the
media as for anyone else — don’t let the politicians bamboozle you with
promises of lower rates unless they can also define exactly where the money for
rate mitigation is coming from.


So far they have no answers, which suggests that
we have not yet heard the last of “voodoo economics”.
 

OPINION POLL OVER-RATES INEFFECTIVE TORY OPPOSITION

Having survived in spite of themselves, in Opposition the Tories have been lazy and uninspiring.  The fact that it is summer, and the House of Assembly is closed, admittedly makes their job tougher, except that the Party’s manifest weakness is not a seasonal problem.

REMEMBERING CABOT MARTIN (1944-2022)

He was an exceptional person. A gifted intellect for sure; irascible and argumentative, too. What endeared him to many was not just that he was analytical and insightful, but that he was honest and forthright. He was a public policy wonk; resource policy interested him most. He loved to travel and read; people, with something to say, were always important.

GNL RUSHING INTO ANOTHER “SCHEME”: CABOT MARTIN

I must say that after the Muskrat Falls fiasco, I thought our government had finally learnt its lesson and would not to rush into another such scheme where calling it “green” was enough to suspend all critical analysis.

36 COMMENTS

  1. Ed Martin Letter to the Editor July 2014 (Telegram)

    "In 2018, electricity rates for households on the island are projected to be 16.4 cents per kilowatt hour (kWh), which is about $249 for an average monthly bill, approximately half a cent higher than the rate estimated at sanction of the Muskrat Falls project (15.9 cents/kWh). Looking out to 2020, electricity rates will be around 17.3 cents/kWh or about $262 for an average monthly bill. This includes anticipated rate increases with Muskrat Falls in service and all planned capital projects by Hydro on the island. When Muskrat Falls is fully operational and our province is powered almost exclusively by renewable energy sources, rates will stabilize for customers, increasing on average around one to two per cent per year."

    At the time rates were just under 10 cents so by now it would be a 65% increase in electricity rates raising 1 to 2 % per year or in other words inflation. Aside from this Blog there was very little outcry and certainly not from the Politicians of any stripe. Now people are demonstrating against 18 cents for 2021 where Martin was proposing they would be even before the vast overruns.

    If I read correctly the energy cutback range expected by Jim Feehan with 18 cent power there will be very little additional revenue other than what is obtained by selling on the Mainland for deep discounts. Simple math is increase rates 50%, cut back is 1/3 so 2/3 usage as compared to before leaves 2/3 * 18 = 12 cents equivalent. No extra revenue from rate payers.

    We are not totally responsible for this boondoogle. It could never have been financed without a loan guarantee which was given without any due diligence to meet GHG credits for the country. We have to turn some of this debt over to the Feds.

  2. Deficit budgets should be illegal and when something large and important comes up like Muskrat Falls ($6 Billion originally), then the financing of the thing should require a referendum with a 60% majority.

    The average age in NL is 45. The average life expectancy is 82 in Canada. That leaves the average voter with about 35 years left on Earth. It should be illegal for anything to be financed longer than the average remaining lifetime of a population since with no skin in the game, why should selfish people care?

    This debt was rammed down our throats by force and lubricated with lies. It is odious debt and regime debt.

    • In the same church but different pew, I despise when people refer too much of a cost for half a million people'. It should be phrased too much for a mere 225,000ish households… actually maybe a lot less as many are still using oil and wood for primary heating. Potentially less than 200,000 households have been burdened with Muskrat FAILS goes to show government is the largest organized crime outfit in our province. The real 1%ers are the elitists and we all know who they are. Greed rules.
      dm

    • Hi Anon 09:21,

      The concept of very long contract is not a guaranteed burden for future generation. If the project is done right, it may very well be a great legacy. In Quebec, the James Bay project and many others where financed over many decades and they are a great heritage for next generations.

      The UC was the same : an exceptional power plant, built and paid for, at no risk and capable of supporting Newfoundland for over a century after the end of the Power Contract.

      The biggest projects and investment are often on the longest period. They have to be managed carefully, but a long contract does not translate instantly to burden for future generation.

      As for the referendum, according to many sources, the support for MF at its beginning was well over 60%. As such, a referendum requiring 60% would have approved the project. Long after the fiasco was evident, support for MF was still over 50%.

    • Regarding dm's comment, at the MRF sanction cost of $6 billion, that amount of money could've purchased 5 (FIVE) heat pump for each NL household, even at the apparently inflated cost of purchase/installation charged by the local heat pump cartels.

      Think about that.

    • Anon, 14:54; You are so correct, and the same was said in the 1980's, when it became apparent that Long Harbour/Holyrood needed to be phased out, conservation and smart grid technologies, based on Renewables, avoid power demand from baseboard heating, build higher density, etc. Fell on Deaf ears. Even more of concern today, there is no program towards low carbon construction and land use planning. Muskrat can happen again today, with the attitude and mindset of our leaders. Very sad.

  3. From Nalcor: "What recourse does the federal government have in the event of default?

    A2. Similar to any secured lender, in the event of a default that cannot be cured under the provisions of the project finance arrangements, the federal government has the ability to exercise its security interest and assume control of the financed assets."

    We could selectively default on the odious debt MF loan and let the Federal government assume control of the liability. Let the sparks fly.

    I think we should use the term "odious or regime" debt when referring to this loan since we received no benefit from it and the manner it was forced upon us is like you'd expect in a dictatorship.

    • If we default it will not be the federal government who assumes control but rather the NYC bond holders that have invested in this mess and it is they who will demand that our taxes first and foremost pay for their investment before all other public expenses such as hospitals, schools and salaries etc are paid-thats if there is any left over. That is exactly what happened in Puerto Rico when it defaulted on its debt and that is exactly what will happen here.
      Let's face it. Trying to get another region to pay for the biggest mistake in Newfoundland's history isn't going to work and will create a backlash severely felt if the Conservatives are elected in 2019. If you think Harper had a mean streak, try dealing with team Doug Ford, Jason Kenney and Andrew Scheer. Best to prepare for a doubling of rates.

      It is our fault we elected Danny Williams when the oil money was flowing in because everyone thought he was the next messiah but I guess he is like all other business leaders turned politicians-in search of another layer or power over his consumers. Not all things in private enterprise are worth saving

  4. UG says,"The current premier's perception is to create more delusion as time evaporates, important policy decisions are avoided and Federsl complacency……Is given no attention". This describes the current relationship between the two Liberal governments, and even more so by the friendly relationship between some members, including our 7 tiny federal Mp's. We are currently receiving "love money" being transferred to keep us afloat, and that will continue should both Liberal governments be re-elected in the coming elections, without having to deal directly with the loan guarantees and the boondoggle. And that is all fine for the short term, but should and when hostile governments get elected, then the shit will hit the fan. With no further policy agreements between both levels of government, and the "love money" cut, we will be up shits creek without a paddle. Because as we all know, governments only look to the next election, and to do what is necessary to get re-elected. As Joey use to say, the first responsibility of any government is to get elected, and the second responsibility is to get re-elected. But even that has a limit, and Joey was able to push it to the limit, like for 23 years. Ball and all cannot repeat that, and certainly not Trudeau, so a day of reckoning will arrive, how far down the road the can, can be kicked is anyone's guess. So maybe it's just "be happy, while the love money flows", says Joe blow.

    • Good point levy payer. What might have been!!! One thing we can know for sure if Grimes had made a deal with HQ it could not have been worst than the boondoggle we have now. Or no deal at all with HQ, or no muskrat would have been a hell of a lot better than where we are. The oil was flowing when Grimes was defeated, and Hibernia had just finished paying off its capital debt. So royalties we just starting to flow when Danny came in, and the price of oil was beginning to skyrocket. White rose and terra nova oil fields were flowing before Danny. So that only leaves Hebron, as Danny's only oil claim to fame, and seems it may be 10 years down the road before we get any real royalties there, or return on our 5 percent equity. So yes, we could have done without Danny and his buddies, and the puffin too, says Joe blow. That's why it is so important we know who we are electing before the election, rather than after. And a similar thing may occur again, so let's get where they stand now, and their plan, rather than after. And a reliable and independant media if they were that, and doing their job, should be able to go a long way in determining that for us, as well as blogs like UG and the John Q. Public. And how about our great political scientists at the higher place of learning, what do they have to contribute in determining our future. Hope it is more than the last time!!!

    • I see the VOCM poll asking if Nfld should be talking with Quebec as to MFs that might lower power rates in Nfld, it shows 59 % favour the talks and 36 % against, I wonder what Heracles thinks of that? However Heracles might point out that such talks need to address also CFs, and if that was included in the question, it might be less in favour.
      But really, Mfs it itself has nothing to Offer to Quebec, a useless asset unless the SPur is made safe, so more expenditure….so eventually we get to 15 billion price tag.
      Vardy worries about spending 1 billion on HPs, saying we invest twice, but with MFs once at 5 billion and if it climbs to 15, that is 15 times the HP solution, hey b'y. Can we roll back the clock and start allover as to least cost?
      PF

    • Anon@17:46
      I find it difficult to understand what it is about HPs you are so against. I have had a heat pump installed for almost 2 years now.
      My house is warmer in winter, cooler in summer and less electricity used. If everyone subscribed to your line of thinking we would still be in the horse and buggy days or riding camels.

    • Bully for you… you might get the money you've blown on that contraption one of these days… or not. With the MRF take-or-pay scheme that's no longer certain.

      BTW… horse and buggy is carbon neutral.

    • Bully for you… you might recoup the money you've blown on that contraption one of these days… or not. With the MRF take-or-pay scheme that's no longer certain.

      BTW… horse and buggy is carbon neutral.

  5. All: The problem is much, much worse, I'm afraid. Have a look at this:

    https://www150.statcan.gc.ca/n1/pub/91-002-x/91-002-x2018001-eng.htm

    Basically, over the first quarter of 2018 the population of NL shrank (chiefly because of outmigration) by 0.3%, a very pronounced acceleration of outmigration from NL compared to the first quarter of last year. Which in turn leads to an unpleasant yet quite relevant question: how many inhabitants of NL will be leaving annually after power rates increase 80% or more? Related question: since those leaving may be expected to be on average younger and better-educated -and, thus, more liable to already be employed in NL- than average, what will the impact of this accelerated emigration be upon NL and its fiscal picture? A growth in the number of unemployed and retired inhabitants as a percentage of the population of NL: this is NOT something that will simplify matters with regards to Muskrat Falls, or indeed coming up with a balanced provincial budget. Getting back to Muskrat Falls: to succeed, any mitigation plan must take this demographic reality into account.

    Which in turn leads to the question: how can the cost of Muskrat Falls be handled in such a fashion that it does not accelerate the depopulation of NL? I am no mathematician or economist, but I quite simply do not see how it could be done. And it is not a matter of it being *politically* impossible; to my eyes, it is a matter of it being *mathematically* impossible.

    I had already mentioned the possibility of a "negative demographic feedback loop" in my April 2 comment here:

    http://unclegnarley.blogspot.com/2018/04/paying-twice-can-muskrat-get-any-worse.html

    It looks like this trend had already begun when I wrote my comment. This is one instance where I wish I had been proven wrong.

  6. Hydro has withdrawn it's 6.5 percent rate increase that was before the PUB. May be a post by UG on this subject is coming soon. Hydro said it was withdrawing the increase in response to the rate payer and their protest as unable to pay, and they were passing it over to nalcor and the government to find a solution. And of course that is exactly where it belongs. The burden and solution rest with those who caused it and not with the innocent people. So it's about time that both liberal governments put this on their agenda to come up with a solution that does not place an unfair burden on the ratepayers, that it be kept at around 12 cents as per the norm in the other 3 Atlantuc provinces. So the enablers will have to belly up to the bar. And maybe when talks begin the "love or hush money" will come to a trickle. As no doubt that's what both governments were hoping and they would stay quiet on the boondoggle until after both elections were behind them. But we need to raise it and push the local politicians to raise it with the Feds at every opportunity so that it can't be ignored and kicked further down the political road. Maybe the day of reckoning is nearer than we thought. Come on media do your job and ask about the "take or pay contract" every day, so that Ball will be forced to confront the Feds, and Chess will have to make his voice loud and clear. Then we can decide on who we want to elect in the coming election. Do it now, why wait till spring, or before the next election, says Joe blow.

  7. UG correspondent from Texas checking in:
    Texas has a population of about 25 million. With Texas oil, the Dallas and JR TV series, we might have the impression that Texas is one of the richest states. In terms of household income it ranks 2 percent lower than the national average. 4% makes over 200 thousand year,15% 150-200,26% 50-100; 29% 25-50; 23% <25 thousand, and 19% below the poverty line, which may be 20 thousand mark.
    The power peak demand in Texas is 71,000 MW, and just this week broke the 2016 record. I believe Quebec has about 35.000 MW capacity, vs our 2000 island capacity, and just 700 summer load. So now Texas uses about 100 times our summer load. If my math is correct, Texas uses about twice the power per person we do in summer, but as our load is about 1600 in winter, we use more per person in winter than in Texas. Hence our baseboard winter heat problem that Ed Martin and Nalcor chose MFs at the cheapest solution, despite we then being 85 % green island hydro, using voodoo economics and a 12.7 billion boondoggle.
    Power rates in Texas is about 11 cents , almost identical to Nfld. The USA avg is 12 cents with Hawaii the highest at 37 cents ( Have they tried the Ball solution of Mitigation)?
    With the Nfld oil industry here, more Nflders than usual are back and forth to Texas, some stationed there. One now there living in a modest 2000 sq ft older home reported his last electicity bill as 510.00. He has air conditioning running steady, so bills for colling are high like we use for heating in winter. So those planning on abandoning the ROCK due to heat costs better think twice as to where you go, and consider cooling costs. Temperatures in Houston running from 95 to 101 this week. The inside of double pane windows feel warmer than our body, which it is. Last summer my AC cooling costs in Nfld cost 6 dollars.
    One sees few outdoors walking in Houston, and not a cowboy hat to be seen, except for sale at the airport vendor.
    The 1950's song: There's a little bit of everything in Texas, was very popular in Nfld, and sung often in rural outport Nfld, including at our home. The cowboy in Texas is much like the swiler in Nfld, a rare sight.
    I test drove the Leaf all ecectric, it lists for 32,000. If we need to grow the revenue for the power compaies here, electric cars is one way. I am much inclined to buy one. The equivalent MPG is 125 for city and and 100 for highway. QUebec gives incentives for these and building highway charging stations. Perhaps Heracles could comment.
    Winston Adams

    • WA – if 10,000 electric cars appeared overnight in NL, the electrical load would increase 0.5% at most. It would take 200,000 to increase load by 10%. At any reasonable rate of adoption, electric cars will have a negligible impact on total load growth. Much as I'd like to have one eventually, it's not an effective part of keeping Hydro's revenue up. I don't expect government to have the coin to offer big incentives to stimulate it either.

      Here's a point you'll be interested in. A 1 ton mshp will save about the same energy vs resistance heat as an electric car will use. We should expect a lot more mshp's to be put into service than electric cars to be put on the road. Load growth has nowhere to go but down.

  8. Now, what about belt tightening, and the 600 million possible via efficiency on health care,to knock that off our 3 billion a year health care cost, as proposed by Choosing Wisely, and reported on UG?
    Recall too, the troll, John Smith who for years promoted MFs as the best thing since sliced bread? Repeated he said MFs as an expenditure of 1.5 billion a year for 8 years, but Health is 3 billion a year every year and growing. And the 600 million a year potential reduction on health spending, it largely offsets the shortfall on MFs…..So…………..did Smith have a point, that this is past due for consideration?
    Now, consider this: as to health issues, Nfld is really "world class" in the wrong direction, as to colon cancer. That is not fake news. How bad? Worse rate of this disease in Canada, and in North America,and maybe the world. And our health outcomes in Nfld is not good for the money spent, and I suspect this applies also to colon cancer.
    So, why do we get so much colon cancer? What is being done about it?
    Are we making any or no progress to reduce the incident rate and cure rate? What is the effect on our GDP from this disease? What is in the Liberal, The Way Forward Plan, or Ches's Tory Plan to address this?
    Need we accept being worse in North America? Has health minister John Haggie spoken to this?
    Fortis CEO makes no headway as to Nfld Power having the 2nd worse Conservation and efficiency Plan in Canada, so maybe too, are leaders in government and health, are content that so many of us die off from colon cancer? Is this the kind of leadership we deserve and expect? Heck no. How are we to absorb the boondoggle of MFs, that more of us will be cold in winter, further causing more heath problems, while already crisis another going on with our health care?
    Winston Adams

  9. Check out Sunday Edition podcast on Denialism this AM;

    https://podcast-a.akamaihd.net/mp3/podcasts/sundayedition-M9hXmb14-20180817.mp3

    About 1:08 into broadcast.

    We all should get a better understanding when putting our "reasonable" arguments forward that levels of denial exist in all of us. Will the General Inquiry shed light on the deniability factor during the sanctioning of Muskrat? We are currently experiencing extreme smoke from combustion, (local fires, combustion engines, industrial pollutions, etc.). Yet a high level of deniability exists regarding man made climate change and its consequences. Maybe MUN should run a course or two on Human Deniability.