Guest Post by David Vardy
August of 2018 Premier Dwight Ball told us that ratepayers would not have to
pay for Muskrat Falls. Recent news reports indicate that the Premier has met
with the Prime Minister and further federal support will be announced in
January. Does this mean that Nalcor CEO
Stan Marshall was wrong when he told the PUB the cost was inescapable? The PUB
heard little in the way of proposals to lighten the burden other than the
shifting of costs from ratepayers to taxpayers. This offers little comfort
because for the most part we are all both ratepayers and taxpayers.
presenting to the PUB on October 8, 2019 Nalcor’s CEO Stan Marshall said the
cost of Muskrat Falls was “hard wired” or inescapable: “you got a hardwired
cost, the regulator can’t do anything about that, I can’t do anything about
that. The Provincial Government can’t do anything about that”
110). He said the PUB can exercise no control or oversight (page 112), nor can the
Oversight by PUB
counsel for the PUB asked (page 144) if there was an oversight role for the PUB
including the right to deem certain costs to be imprudent and therefore
disallowed. “Hard wiring” seems to preclude such oversight. Are the financial arrangements as immutable
as CEO Marshall claims they are? What are the arrangements currently in place?
revenue requirements which must be paid, either from ratepayers or taxpayers,
are enormous. In a presentation by Stan Marshall dated February 15, 2018 and entitled “Understanding Muskrat” he said that the project would add
$808 million to the cost of the Island Interconnected system. Another Nalcor document (IC-NLH-017, attachment 1,LUEC tab)
calculates that over the 50 year supply period, which begins when the project
eventually comes on stream, the undiscounted costs will amount to $74.6
billion. There will be some offset from
fuel savings, export revenues, potential cost savings and electrification
(e.g., electric vehicles) but the remaining burden will still be enormous.
Terms of Reference
report of the Muskrat Falls Commission of Inquiry will be released at the end
of the month. How will it deal with the impact of the Muskrat Falls project on
the financial obligations of the province? The Commissioner’s terms of
reference, section 5(e), call upon him to consider: “the need to balance the
interests of ratepayers and the interests of taxpayers in carrying out a
large-scale publicly funded project”. As a minimum one would expect that the
Commissioner will estimate and measure how the burden will likely be
distributed between ratepayers and taxpayers.
would expect as well, drawing upon 4 (a iii) of his terms of reference, that
the Commissioner will attempt to estimate how much of an excess burden over
least cost power resulted when government
empowered Nalcor to undertake this project and conferred monopoly powers
by statute upon Nalcor. As Tom Baird pointed out in 2012 if the Muskrat power
was least cost Nalcor would not have needed monopoly protection nor would the
PUB be exempted from its normal regulatory role.
In his interpretation of his terms of reference the Commissioner states: “At this stage of the Inquiry, I take this to mean that the
Commission must look to how to balance or apportion the financial costs of an
electrical generation project like Muskrat Falls as between power consumers and
all of the Provinces’ taxpayers.” (paragraph 49, ).
I take no issue with this statement.
What does it mean?
project was sanctioned on the basis that 100% of the costs would be paid by
ratepayers. Some of the legal documents speak to “non-recourse” to the province
and its crown corporations, other than those corporations actually borrowing
federally guaranteed money. In other words the taxpayer will be shielded from
bearing the burden. This means that there were to be no financial obligations
imposed other than those imposed on the four crown corporations, subsidiaries
of Nalcor, identified in section 1.4 of the loan guarantee of November 30,
2012. However the legal issues are more intricate and will need to be weighed
by the Commissioner, along with the economic forces, which cannot be ignored.
Let us look at the legal obligations.
Full disclosure: I am not a lawyer.
|David A. Vardy|
disavows obligations of Nalcor/Hydro
late 2012 the province enacted changes
to the legislation governing Nalcor Energy and NL Hydro, specifically section
3.1 of the Energy Corporation Act and 3.1 of the Hydro Corporation Act.
3.1 of the Energy Corporation Act includes the following: “the Crown shall not
be liable as principal in contract, tort or otherwise at law or equity for the
liabilities of the corporation created directly or indirectly by those
contracts or arrangements.” If the Cabinet has approved the contract and if the
contract explicitly makes the corporation an agent of the Crown then the Crown
can be bound. A similar revision was made to the Hydro Corporation Act except
there was no exception identified where the Crown could be bound or obligated
to assume obligations from the Corporation corresponding to that in the Energy
leaves NL Hydro unshielded?
power purchase agreement dated November 29, 2013 calls for NL Hydro to pay all
revenue requirements when billed. The Power Purchase Agreement at Muskrat Falls
Inquiry Exhibit P-00457, between NL Hydro (NLH) and the Muskrat Falls
Corporation (MFC), signed November 29, 2013, provides for a return on equity
and a return of equity. Section 1 of Schedule 1 includes the following
Block Capital Costs Recovery” or “BBCCR” means the recovery over the Supply
Period of the following costs, without duplication:
Development Capital Costs, which shall provide for the repayment of principal
Financing and the return of equity capital to the equity holder;
Development Financing Costs; and
Distributions to equity holders sufficient to enable Muskrat to achieve its
14.4 of Schedule 1 to the Power Purchase Agreement defines an “event of
default” for NLH. The Grant Thornton Report prepared for the MFI, at Exhibit
P-00454, on page 38, makes the following statement:
PPA provides specific remedies if Base Block Payments are not made. In particular, if NLH fails to make the
necessary Base Block Payments while MFCo
continues to be in compliance with this agreement, MFCo may provide
notice to NLH it is invoking their rights under the PPA which requires that
within 10 days of providing such notice,
if NLH has not paid the outstanding payment, NLH is required to pay a lump sum amount equal to the full repayment of the
debt financing (including principal, accrued
interest and any premiums) plus any associated costs (including legal,
advisory, transaction and administrative
PPA is backed up by the Exemption orders, also issued on November 29, 2013.
Order-in-Council 2013-343 orders that the PUB include as costs, expenses or
allowances “without disallowance, reduction or alteration of those amounts, in
Newfoundland and Labrador Hydro’s cost of service calculation in any rate
application and rate setting process, so that those costs, expenses or
allowances shall be recovered in full by Newfoundland and Labrador Hydro in
Island interconnected rates charged to the appropriate classes of ratepayers.”
these statutory amendments and Orders-in-Council, in concert with the infamous
power purchase agreement between two subsidiaries of Nalcor, relieve the
province of any financial obligations? If NL Hydro, the province’s largest
utility, goes into default and cannot pay its bills can the province walk away
from the obligations? This leaves a huge gaping question as to who will make
the payments when ratepayers can pay no more.
guarantee agreement-undertakings by province
is another side to this story, one which raises questions about the immunity of
the provincial Treasury from the obligations from Muskrat Falls. Let us go back
to the November 29, 2012 loan guarantee agreement, which was confirmed a year
later in an intergovernmental agreement dated November 29, 2013. Section 3 of
Schedule B of the intergovernmental agreement places the following obligation
upon the province with respect to the
Muskrat Falls Corporation: “Ensure that, upon MF achieving in-service, the
regulated rates for Newfoundland and Labrador Hydro (“NLH”) will allow it to
collect sufficient revenue in each year to enable NLH to recover those amounts
incurred for the purchase and delivery of energy from MF, including those costs
incurred by NLH pursuant to any applicable power purchase agreement (“PPA”)
between NLH and the relevant subsidiary or entity controlled by Nalcor that
will provide for a recovery of costs over the term of the PPA.” This places an
obligation upon the province but it is not clear what the limitations are or if
it breaches the provincial shield created by the statutory amendments to the
Energy Corporation Act and the Hydro Corporation Act.
is a “Whereas Clause C”, in the same intergovernmental agreement, which refers
to a “condition precedent” that “NL agreed to indemnify Canada for any costs
that it may incur under the Federal Loan Guarantee as a result of a regulatory
decision or regulatory change (including through legislation or policy) that
prevents the Project Entities from being able to recover Project Costs and
fully service the debt guaranteed by Canada under the Federal Loan Guarantee;”
Rate Recovery Unacceptable
his presentation Understanding Muskrat, Nalcor CEO Stan Marshall showed that,
in order to achieve full cost recovery, power rates would need to be set at
22.89 cents/KWh. Nalcor probably understood that such a dramatic increase in
rates would not only be unaffordable but was also completely unachievable, due
to consumer resistance and ratepayer switching to alternative forms of
energy. To establish such rates would
create a utility death spiral.
a high rate would have been unacceptable to ratepayers. Government responded by announcing a rate mitigation plan which would keep rates at 13.5 cents per KWh. This was based on revised revenue requirement of $726 million
for 2021, down from $808 million, even though
the capital cost estimate has not been reduced). Is this a “policy change” which “prevents the
Project Entities from being able to recover Project Costs”, namely the policy
decision to keep rates at 13.5 cents and not force the system to the limit at
22.89 cents/KWh? Is it an event of default?
calculating the $726 million in revenue requirements for 2021 Nalcor included
dividends on Emera’s investment. This investment is shown in the consolidated
financial statements of Nalcor as a liability, with a cost to Nalcor of 8.5%.
The latest Nalcor estimate (from PB-519-2019)
of Emera’s investment is $865 million. Government’s rate mitigation plan, by
accepting the $726 million as the target for mitigation, takes responsibility
for these payments. The question this provokes is whether government has now
accepted the full 50 year revenue requirements of $74.6 billion as a financial
obligation of the province, including debt repayment?
the government understand that such an intervention by the province might
trigger financial obligations under the provisions of the loan guarantee
agreement? Or did they seek legal advice to confirm that the statutory
amendments, the regulatory exemptions and the power purchase agreement would
continue to shield the province from liability? Or was the shield against
financial exposure simply a façade from the beginning?
the federal loan guarantee place the province squarely on the hook not only for
providing a “completion guarantee”, including all necessary equity funds to
complete the project, but also for ensuring that all revenue requirements are
paid? Does this mean that the taxpayer is fully obligated to make payments to
cover any shortfall? Our net debt is currently $15.7 billion. If Muskrat fails
then could this potentially add more than $12.7 billion to our net debt?
the legal shields erected by the province stand up against the storm of
financial pressure which Muskrat Falls brings upon us, with costs continuing to
escalate and as the target date for first power passes by without notice. The
latest Oversight Committee report dated October 15, 2019 shows the date for
first power from Muskrat Falls as October 15, 2019, the same date (page
49/52). This target has come and gone as
have others. Further delays will add to the capital cost which will in turn
raise the revenue requirements over the 50 year supply period. The recent Liberty report warns of further delays because of problems with transmission
software and additional problems with synchronous condensers.
Muskrat Falls Concerned Citizens Coalition raised a number of questions at the
Inquiry to determine the financial obligations falling to the province.
Unfortunately many of the most probing questions remain unanswered. The
challenge facing the Commissioner is a daunting one. The fiscal impact of the
project remains the elephant in the room and must be addressed sooner rather