Written by Des Sullivan and David Vardy
(with research and analysis contributed by PlanetNL)
The Ball Administration asked the PUB to examine alternatives to
offer ratepayer relief from unaffordable Muskrat Falls power. Because the cost
of rate mitigation is too large to be imposed on either ratepayers or taxpayers — not that they can be distinguished — the public should be wary that the PUB is
possessed of a magic wand. The Government has essentially kicked the “mitigation”
can down the road, too.
of continuation vs termination, the Premier was right to engage the PUB for the
purpose. Unfortunately, the Provincial Government offered the PUB and its
Consultants absolutely no guidance as to what interventions may be available
from them or the Federal Government. Even a plethora of nips and tucks won’t
suffice given the magnitude of the problem, yet they must know that MF threatens
not just the public welfare but our collective solvency and, hence, the
Province’s sovereignty, too.
In this context, readers should bear in mind that the
requirement to meet the conditions of the Power Purchase Agreement (PPA)
imposed on NL Hydro by Nalcor, to make the Muskrat Falls project financeable,
is approximately $800 million. After subtracting Holyrood costs and some modest
export sales, island ratepayers likely face a problem of $600 million in new
revenue requirements, nearly doubling the amount that they now pay.
rates won’t cause power consumption to drop from its current flat-lined
position, impacting both sales and revenues, too? We suggest that Nalcor will be
exceedingly lucky if it succeeds only in maintaining demand given the flood of
heat pump installations in recent years, which may actually require a rate
drop to staunch.
Group and Synapse Economics given the size and complexity of the problem. But
it is not fine for public expectations to be foolishly raised; nor is it fine
to give the PUB an impossible task.
reading suggests that an exhaustive process is underway to uncover the mitigation
formula that has eluded the “international experts” at Nalcor and the Finance
were engaged by the PUB following DarkNL to assess why the lights were out for
days in January 2014, and later to assess issues of reliability, recognizing
that Muskrat is at the end of a climate-challenged 1100 km extension cord. They were none too
complimentary towards Hydro, noting its neglect and mismanagement of our electrical
opportunities” including “alternative cost savings initiatives and rate
that Liberty’s focus is on the financial structure of the project. It intends
to assess the “magnitude and probability of producing material changes to the
Base Revenue Requirements.” In plain English, it wants to consider stripping
out the dividends inscribed in the PPA — but only for Nalcor and the province, not for Emera who are entitled to dividends of $70 million. It is considering the idea of adding to the MF debt as a way of addressing rate mitigation in the early years
after commissioning. Are we hearing: don’t just kick the problem down to our
grandchildren, let’s include the great-grandchildren, too?
in the meantime!
corporate structure of Nalcor as well as “resources, processes, activities, and
costs of Nalcor business operations.” It is seeking savings from human resource
duplication. It even suggests that certain operations can be performed more
efficiently by Newfoundland Power. This may be part of the answer, but the size
of the problem demands big-money solutions.
the Power Purchase Agreement — not fiddling with it. The public should
understand that the PPA is constructed on the basis that MF is financially
self-supporting. Whether the project was ever able to claim that status is
moot; the current price tag of $12.7 billion makes it an impossible prospect.
Fully implemented, the PPA will be not just be economically distortive, it will
have a significant negative social impact, especially on lower income
requires not one but two Consultants. It is clear that no one has a ready
answer to such a knotty problem. Indeed, the two preliminary Reports offer
important insights and different approaches. Yet neither Consultant has come
close to identifying a magic bullet.
that, had they been independently conducted in the beginning, might have thrown
Nalcor off its myopic path. Synapse is re-examining Nalcor’s optimistic (to be
kind) load forecasts for the province, taking into consideration ‘elasticity of
demand’ in relation to the impact of higher rates.
to 11 percent lower than they would be without MFP, depending upon how much the
project increases retail prices.” The Consultancy does not suggest how far demand
may drop if the rates necessary to pay the cost of Muskrat are tacked onto your
They point out that “Winter peak sales in January are two and a half times
greater than the off-peak sales in August.” They want to use enhanced
Conservation and Demand Management (CDM) Programs to lower the winter peak, ostensibly
to free up more power for export.
and CDM programs will cost more money — unless the game is to lower demand via
higher rates. Could more spending to reduce local consumption now make any
as the most likely market for the additional surplus power. The key attraction
would be offering more “firm” power as opposed to the block of off-peak energy
already contracted to Emera.
in firm energy availability as an opportunity for another thermal plant to be
shuttered in Nova Scotia. The power “might” command a higher rate than non-firm
power, too, which is selling pretty cheaply at MASS HUB — an auction
destination for short-term sales in the north-eastern U.S.
in reducing the need for backup generation. (Planned in conjunction with
heat-pump installations, it might have robbed Nalcor of MF sanction.) It would obviate the need for many MWs of new
combustion turbine construction, diesel storage and consumption.
the continued penetration of heat pumps — now at 13% according to Synapse — may
put Muskrat Falls’ generation completely outside NL’s demand orbit. That is to
say, a further lowering of demand may require all the power from Muskrat to be
exported. But that won’t make our problem go away. Export power commands far
too low a price to sate the shareholders and bondholders and pay operations and
strategy puts us in a position of reliance on Nova Scotia, taking the place of
Quebec, much the same as Williams and co. claimed Muskrat was lifting us from.
province. Its preliminary work suggests that the furnace oil trade should be
worried. Then, too, it has an eye on the electric car market, which is promising
for GHG emissions, but won’t goose demand a sufficient amount nor soon enough to
serve as a viable revenue source. Besides, electric car buyers want cheap
electricity to offset the high cost of those models.
spread the fixed MFP costs over more customers, and increased revenues will
help bring in more funds to cover costs; both effects will help to lower costs
for ratepayers.” Who would disagree with the theory?
they make sense — for which purpose their final report is necessary — time,
minimally, is what Synapse’s ideas require. Liberty, on the other hand, is
playing in the margins; it is tough to imagine that their ideas will free up
more than a few million dollars, when ideas to save several hundred million are
the PUB last week in response to the two Consultant reports. It is clear that they are leaving the decisions to
Government, who appear content to string along the public leading up to the
Provincial election. Given the
meanderings of the Consultants and the deliberate lack of direction from
Government and Nalcor, the PUB has a thankless task to cobble together their
preliminary rate mitigation report next month.
for rate mitigation, while we parley with an array of untested ideas, likely
don’t understand the imminent presence of the “debt” wall that the Budgetary
deficit and Muskrat is growing uncontrollably. Premier Ball is among the group content
to maintain the fiction that the Government has the problem in hand.
subject of dividends, suggesting that Nalcor might convert (perceived) equity
in the project to debt — to which, as noted, Liberty Consulting also alludes.
The return on equity now permitted under the PPA is 8.4%. Ball would have us
believe that taking on more debt is a savings to ratepayers because it is
cheaper. In fact what he suggests is mere smoke and mirrors. Nalcor is merely
switching pockets when it chooses between dividends vs. power rates. There is
no net savings there.
equity stake in the LIL on which 8.5% is paid. (The figure may be as high as
$800 million when the full cost of allowance for funds used during construction
(AFUDC) is considered.) This is a substantial sum, not applied to rate mitigation
but to returns for the shareholders of Emera. In normal circumstances they
would be entitled to the return, but that right is mired in insolvency. Similarly,
the Premier needs to go to the Federal Government — now, not later. The Feds
and Emera need to be told that Muskrat is a bankrupt project.
agree on a new corporate structure for the project in which they, Emera and the
Province will become equity participants — just not on the basis prescribed in
the current PPA. That deal was foolish to begin with. Now the fools have to
face the reality that Muskrat revenues won’t cover the obligations to which
Ball never intends to bring to this issue. When he should be mad as hell that
the Tories have put us in this boat, simultaneously he should be warning the
enablers — Emera and the Feds — how they will be expected to help resolve the
crisis. Instead, he is glibly proposing bogus solutions.
ratepayers except the vague promise that neither they nor taxpayers will pay
for the project which few, if anyone, believes. As a result, many people are
making individual decisions, such as installing mini-splits, because they
anticipate rates going through the roof, when that may not be the case — if the
necessary political leadership is brought to bear.
using the PUB to justify delaying the critical decisions needed to deal with
the crisis of Muskrat Falls debt — from which the issue of rate mitigation is
inseparable — he will let the federal government off the hook, too, in advance
of a federal election this fall.