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!

“Nalcor”1 (currently calling itself the “Newfoundland and Labrador Hydro group of companies”) has just released its 2023 annual report, showing record profits of $619 million, the highest level ever achieved! Muskrat Falls accounts for 62% of the record profit. In fact, profits from Muskrat Falls are more than ten times those from Churchill Falls. Muskrat Falls profits of $386 million also surpass Nalcor revenues from oil and gas, almost double. What kind of upside-down world do the people at Nalcor live in?

Nalcor declares stellar performance, while ratepayers see rising rates in the medium term, and surging rates beyond 2030. Profits are normally defined as revenues less costs. Yet we are told that Muskrat Falls is imposing a cost burden of $740 million which must be mitigated. How can these contradictions be reconciled? If the cost burden is $740 million then it cannot, by normal reckoning, be generating $386 million in profit.

There are many factors at play, including the following four:

  1. The power purchase agreement forces Hydro to pay other Nalcor subsidiaries a monthly  fixed amount for all Muskrat Falls power, along with transmission costs, rising over a 50-year supply period, and including profit as a cost.
  2. Government support, including loans to Nalcor, are, strangely, being recorded as revenues.
  3. Costs (return on equity) are recorded and deemed, strangely, to be both profits and costs.
  4. Future revenues from ratepayers are being recorded, again strangely, in advance of their collection, using what is known as a deferral account.

In 2023 Muskrat Falls made a loss of $740 million, selling 17% of the power on the Island and 83% elsewhere. The cost per KWh was $0.93 cents and the wholesale price was eight cents, for a loss of $0.85 cents. Not exactly a profitable venture. If fuel savings and profits from exports are considered, the loss per KWh is reduced to $0.75 cents.[2] So if there are profits the money has to be coming from somewhere other than energy sales. Nalcor is living in an upside-down world, reporting profits when the rest of us see only losses.

The “take-or-pay” power purchase agreement loads all costs on ratepayers and requires Hydro to pay $67 million each month to other Nalcor subsidiary companies that own and operate the assets, regardless of how much power is used. Built into these payments are a combination of costs, interest costs are blended with profits, derisking their investment and creating greater certainty for shareholders, but imposing enormous costs upon ratepayers to pay rates which are certain to escalate, indeed to surge, over the next 50 years and loading a huge debt on our children and grandchildren.

The all-powerful power purchase agreement is being used to turn uncertain profits into mandated costs. It enables profits, known as rates of return on equity, to be turned into costs which must be paid. This contradicts the normal concept of profit as a reward for risk. The risks are loaded onto the ratepayer and the profits are deemed costs whose payment is mandatory, thereby removing risks normally borne by shareholders when they make equity investments.

Lewis Carrol offers some insights into the use of language in these memorably apropos lines of Alice in Wonderland.

`When I use a word,’ Humpty Dumpty said in rather a scornful tone, `it means just what I choose it to mean–neither more nor less.’

`The question is,’ said Alice, `whether you CAN make words mean so many different things.’

`The question is,’ said Humpty Dumpty, `which is to be master– that’s all.’

The power purchase agreement is like Humpty Dumpty when it decides who is “master” and what can be included in the monthly bill and what costs must be extracted from unwilling and unwitting ratepayers. It operates on the principle that a word “means just what I choose it to mean—neither more nor less.” When Alice questions just how far you can stretch the meaning of a word, Humpty Dumpty says:

`When I make a word do a lot of work like that,’ said Humpty Dumpty, `I always pay it extra.’

Nalcor is making words do a lot of work! Profits are interchangeable with costs. Revenues are redefined to include money borrowed from the federal government in the form of a convertible debenture, a loan of $1 billion, used to keep rates down and “to reduce future amounts owing from customers”. (Annual report, page 18/98). How can a loan reduce future power rates, when its effect is to create additional financial obligations? In this strange, upside-down world, the drawdown of a loan is deemed revenue.

Equally significant is the use of a new deferral account which burdens ratepayers with financial obligations and where power bills accumulate, pending future rate increases.  This enables Hydro to record revenues before they are actually paid by ratepayers, imposing obligations on ratepayers to make large future payments, obligations which are not yet known to most ratepayers, the unwilling and unwitting victims of the power purchase agreement, now victimized once again by a “deferral account”, 3 unknown to most consumers, but approved by the PUB.

Investopedia describes a Ponzi Scheme as “an investment scam that pays early investors with money taken from later investors to create an illusion of big profits. A Ponzi scheme promises a high rate of return with little risk to the investor.” In a previous November 2, 2017 Uncle Gnarley post I described Muskrat Falls as a Ponzi Scheme and little has changed. The business case for Muskrat Falls is ostensibly built on power sales but it relies on other sources of cash (e.g., rate mitigation funds) not only to keep paying expenses but also to show a profit.

Cash continues to flow from government and from other operations (e.g., oil and gas revenues), and by monetizing future revenues through deferral accounts, combined with a power purchase account which bills ratepayers through Hydro, rolling profits into costs and homogenizes them with other costs such as interest on borrowed money and operating costs.

Muskrat Falls is an existential threat to the financial integrity of the province and its rising burden upon ratepayers over time must be addressed seriously. Redefining profits as mandated costs and deeming loans as revenues has the potential to erode public trust in an important crown corporation. Hydro, like Alice in Wonderland, is Living in An Upside-Down World where reality is conjured into fantasy.

Nalcor must reveal the true costs of Muskrat Fall and its impact not only on rates but on the public debt. Only by greater transparency can Nalcor build public trust and confidence. The Board of Directors of Nalcor has a fiduciary duty and accountability to clarify its 2023 financial report and to reconcile the contradiction between, on the one hand, Nalcor’s purported profitability and, on the other, the need for $740 million of rate mitigation.

[1] The Nalcor Energy consolidated financial statements for 2023, contained in Appendix 2, Page 51/98 of the annual report, make it clear that “Nalcor” remains the parent company and that “NL Hydro” is its wholly owned subsidiary. On the other hand, page 16/98 refers to the Newfoundland and Labrador Group of Companies as “the Company” or “Hydro”, as if it were the parent company.

[2] In 2023 Hydro sold 800 million kilowatt hours (797 GWh or 17% of the net output of Muskrat Falls) on the Island so the cost per KWh was 93 cents. The wholesale price of power is eight cents/KWh, so Hydro makes a loss of 85 cents on every kilowatt hour. Based on profits from power exports of $17 million and fuel savings of $60 million the loss per KWh is reduced to $0.75. Based on the reported $386 million profit, from Nalcor’s lens, the profit for each kilowatt hour would be $0.48 cents.

[3] The deferral account has a disarming and innocuous name, the Supply Cost Variance Deferral Account (SCVDA). The Order Of The Board NO. P.U. 4(2022) was signed February 21, 2022 and became effective November 1, 2021.

The Appendix below contains more than 50 questions I submitted to NL Hydro in advance of their annual general meeting which has yet to be rescheduled.


I am submitting the following list of 50 questions in advance of the AGM on June 26, 2024, with a request they be answered in writing.

I also intend to raise the six questions below orally, for answer at the AGM. These six questions flow from the longer list.

  1. The government has announced the termination of Nalcor. Is there a termination plan for winding Nalcor into NL Hydro?
  2. Is climate change currently affecting water levels for NL Hydro and CFLCo, as it currently appears to be affecting BC, Manitoba, and Quebec? If reduced water availability at Churchill Falls continues in 2024 at 2023 levels will CFLCo be able to meet its commitments to Hydro Quebec?
  3. Will the $2 billion in NL Hydro funding of rate mitigation between 2023 and 2030 reduce the principal amount owing on the debt incurred to build Muskrat Falls or will the principal owing be higher? If so, by how much?
  4. The 2023 annual report discloses Muskrat Falls (generation and transmission) profits of $386 million with $233 million from other operations and with $300 million paid to the province as dividends. Does the direction given in b) and c) of OC2024-062 apply to all Hydro profits, including returns on GNL equity investments in MF, LTA and LIL? How much of Hydro’s 2023 profits were applied to rate mitigation?
  5. Profit is normally what is left after costs are paid and is an indicator of performance. Such is not the case with the $386 million in Muskrat Falls profit, which is by no means an indicator of high performance. Should the equity investment in Muskrat Falls generation and transmission assets be treated as debt if Hydro is required to book the ROE as a mandatory obligation to GNL regardless of performance?
  6. Were the high profits of $619 million in 2023 an anomaly? Will they be repeated in 2024?

David Vardy


These questions relate to the 2023 annual report of NL Hydro found at

  1. Page 2 (19/100)

The May 16, 2024 technical briefing on rate mitigation includes the following statement.

Dividends amounting to $300 million have been paid to government in 2023. Will the remaining profits of NL Hydro be available for rate mitigation pursuant to OC2024-062 and the May 16, 2024 rate mitigation plan?

2. If not, how much will be available for rate mitigation?

3. How and why did the “first drawing of the federal convertible debt reduce net income and future amounts owing from customers”? How can increased debt reduce power rates?

4. Page 3 (20/100)

The $190 million was an ex-gratia non-repayable contribution from GNL. The $145 million is a repayable loan from GoC. How can a repayable loan reduce the revenue requirements from customers, when customers must ultimately repay the loan?

5. Page 7 (23/100) “no excess energy sales to Hydro Quebec” in 2023. Why were there no excess energy sales?

6. Is this a problem with hydrology and reservoir levels at Churchill Falls?

7. What were the volume and value of 2022 excess energy sales?

8. Page 8 (24/100) Petroleum and natural gas sales were down partly due to volume reduction but also “due to lower average dated Brent price”, yet the realized price was higher in 2023 both for 12 months and for the last quarter. Please explain.

9. Page 9 (25/100) “Fuel costs for the year were comparable to the same period in 2022.”

Please supply the volume of Muskrat Falls power supplied and used on the Island in 2023 and 2022.

10. Page 11 (27/100) Please explain the redetermination relating to the Hibernia South Extension?

11. Does this relate to the impairment of oil and gas assets and their reversal?

12. Reference is made to “deferred credits” relating to revenues for “NSBlock energy”? Are there any revenues associated with this “block”, given that it was to be supplied under the Energy and Access Agreement, at no energy charge? (See notes to financial statements 32m and 32o)

13. What was the value of Emera’s investment in the LIL at the close of 2023, including AFUDC?

14. How much was paid out to Emera as a return on this investment in 2023?

15. What is the value of Emera’s investment in the LIL after true up of all capital costs upon commissioning?

16. Has the write-down from 8.4% to 3.0% in ROE on $2 billion in cost overruns been implemented? If so, what impact has it had on profits? This write-down was made public in the technical briefing on July 28, 2021 when the rate mitigation plan was announced by the Premier and Prime Minister?

17. What was the effective date?

“MF/LTA Equity Restructuring – NLH/NL will convert approximately $2 billion in equity associated with construction cost overruns on the MF/LTA project into preferred shares that earn 3% (approximately NL’s cost of debt) • This will provide funds to cover the Province’s carrying costs.

“NLH/NL’s equity return on MF/LTA will start on Commissioning vs. Sanction (as under current contractual structure) • This will help to reduce the Projects’ overall financing costs.”

18. Has GNL implemented the decision to absorb the allowance for funds used during construction (AFUDC), as announced on July 28, 2021, to ensure that “NLH/NL’s equity return on MF/LTA will start on Commissioning vs Sanction”?

19. What would have been the capital cost of Muskrat Falls if GNL had not agreed to underwrite these AFUDC costs?

20. In the absence of this decision is it correct that the cost to ratepayers would be more than $1 billion higher than the official capital cost of $13.5 billion?

21. Page 12 (28/100) Reference is made under “segmented results” to $194 million in Muskrat Falls profits. Does this include the LTA or are its profits included under LC Transmission?

22. The Rate Mitigation report of the PUB entitled “Rate Mitigation Options and Impacts Muskrat Falls Project”, dated February 7, 2020 (table below from page 76) under “return and dividends”, projected the potential 2025 “returns and dividends” from Muskrat Falls, generation and transmission combined, at $182.4 million and those for 2030 at $414.1 million.

Revenue requirements supplied in Table 1 of PB797-2021, in response to my ATIPP request, show the projected return on equity each year and the level of $194 million for generation assets is reached or exceeded only by 2030 in these projections. The projection for 2023 was $36 million. In the 2023 financial report why is Muskrat Falls presenting such a high level of profitability, far exceeding projections in the 2020 PUB report and exceeding those supplied in response to my ATIPP request of 2021, for generation equity?

23. Profits from LC transmission are shown in the 2023 financial report at $192 million, compared with $154 million projected for 2023, as shown in PB-797-2021, for the LIL and LTA combined. The comparable 2030 number supplied in PB-797-2021 was $173 million. Why are the returns on equity investment in 2023 so much higher than those forecasted?

24. An ROE of $194 million, at 8.4%, the defined IRR in the PPA for generation equity, represents the cost of an equity investment of $2.310 billion. Similarly, an ROE of $192 million, at 8.5%, the ROE referenced to NP’s return, as set by the PUB for the LIL, represents an equity investment of $2.259 billion. The combined equity investment of $4.569 billion approximates the full equity invested by GNL in the Muskrat Falls project. Does this mean that Hydro has adopted a revenue recovery formula for generation equity which follows the traditional cost of service model applied to the LIL rather than the “escalating supply price” defined in Exhibit 36 of the PUB reference of 2011-12, which was reflected in the 2020 PUB report and in PB-797-2021?

25. Please confirm that $4.569 billion is the value of GNL and NLH equity?

26. The February 10, 2020 Muskrat Falls Financial Restructuring Update announced “A substantive financial restructuring” with a “Shift to a traditional cost of service model for establishing revenue requirements”. Although not referenced in the May 16, 2024 update on rate mitigation, has there been a shift to traditional cost of service, thereby treating MF and LTA the same as the LIL, which followed traditional cost of service from the outset?

27. Page 15 Reference is made to “low hydrology levels”. Please provide 2023 reservoir levels at Churchill Falls, in energy equivalent measures, compared with the average levels for the previous 15 years.

28. What research has been conducted to determine whether the lower reservoir level is the result of short terms variations compared with a long-term trend associated with global warming?

29. Reference is made under “Energy Trading” to “Muskrat Falls residual block energy”.

30. Please define and explain what is meant by “Muskrat Falls residual block energy”?

31. Please supply the volume and value of 2023 Muskrat Falls residual block energy as well as the volume and value of all other exports of Muskrat Falls power outside the province.

32. How much of the $100 million in 2023 export revenue and $83 million in associated costs is sourced from Muskrat Falls vs Churchill Falls and what are the volumes for each?

33. Page 16 Under “other electric” there is reference to revenues related to the NS Block. Again, is there an energy charge relating to the Energy and Capacity Agreement or are these sales under the Energy Access Agreement, which does include an energy charge? (See notes 32 (m) and 32 (o) to financial statements.)

34. Expenses for 2023 were $138 million higher than 2022. This is connected in the report to the $145 million convertible debenture from the federal government. Please describe the expenses connected with the debenture.

35. Do these include interest cost? What interest costs are charged and what are the arrangements for repayment of the $1 billion principal?

36. Page 17 Reference is made to impairment expenses relating to “the nature” of the oil and gas industry and that such impairments and reversals are “not uncommon”.

37. Please explain the specific impairments to which the write-down relates?

38. Please describe these expenses and compare them with corresponding treatment of impairment of value in reporting on Hydro’s public utility operations.

39. Page 20 Reference is made to the “current portion” of Class B limited partnership units. What is the current portion?

40. Page 21 (37/100)

41. When was the “climate change mitigation and adaptation” group established?

42. What research into hydrology on the Island and in Labrador has been commissioned and was the reduction in water levels at Churchill anticipated?

43. Page 22 (38/100)

Does this represent a change in philosophy? Is it consistent with Schedule A of the November 30, 2012 Loan Guarantee Agreement?

44. Page 53/100 On June 23, 2021 the Government announced the absorption  of Nalcor Energy into NL Hydro. The Premier and Minister said that:

This aligns with the recommendations of the Board of Commissioners of Public Utilities (PUB) in its February 2020 report titled “Rate Mitigation Options and Impacts Muskrat Falls Project,’ which recommended that the operations of Nalcor Energy Power Supply and Nalcor Energy Marketing be absorbed by Hydro.”

Yet Nalcor continues to exist as the holding company with NL Hydro as a fully owned subsidiary. This is confirmed in notes 1 and 1.1 of the financial statements. Will Nalcor continue to be the holding company for NL Hydro or will Hydro become the holding company?

45. Does GNL intend to terminate Nalcor as the holding company?

46. Page 54/100 Note 1.3 under “structured entities” tells us that Nalcor is not the “primary beneficiary of the MF/LTA Funding Trust or the Labrador-Island Link Funding Trust”. Who is the primary beneficiary?

47. Page 70/100 There is reference to the Upper Churchill Redress Agreement. Please explain the purpose of this agreement.

48. Please provide a copy of the Upper Churchill Redress Agreement.

49. Page 76/100 Reference is made to LIL (2021) LP under 15.2 Long Term Debt. Why has a new crown corporation been established?

50. Page 94/100 What is the purpose of the “third party transmission rights totaling $10.5” noted in 32 (g) and what role will they perform compared with the “firm transmission rights with Hydro-Québec TransÉnergie” referenced in 32(h)?

David Vardy


May 16, 2024


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.


This is the most important set of negotiations we have engaged in since the Atlantic Accord and Hibernia. Despite being a small jurisdiction we proved to be smart and nimble enough to negotiate good deals on both. They have stood the test of time and have resulted in billions of dollars in royalties and created an industry which represents over a quarter of our economy. Will we prove to be smart and nimble enough to do the same with the Upper Churchill?