Paying for the power play

First up, to explain a major mistake about a third of the way into last week’s column about the Muskrat Falls project.

In that column, I said that some of Nalcor’s information on Muskrat Falls suggested that power demand in this province was expected to increase by 48 per cent in the decade after the project was completed, and by about 80 per cent 15 years after the project’s construction ended.

I took those numbers from a

Nalcor document called “Muskrat Falls Serving Island Only In-Service,” which tracked “island demand” for electrical power from 2018 to 2067, and showed increases of those percentages.

Earlier this week, Nalcor officials pointed out that the power increases referred to in that document are meant to refer to the increases in the amount of power needed on the island from Muskrat Falls during those years (in other words, the power demand from the project), rather than the increase in overall power demand.

The real numbers

Nalcor is forecasting that power consumption on the island will continue to rise as part of its financial matrix for the project, but it says a more accurate figure for the total increase in demand for the province would be nine per cent over the first 10 years, and a 14 per cent increase in demand by the time the 15-year mark rolls around.

It’s a significant difference, and an error on my part that’s well worth clearing up.

That being said, the detailed numbers on island power demand used to support the Muskrat Falls development are fascinating: over the next 50 years, the utility is forecasting a steady increase in power demand, an increase that will top out at a 52 per cent increase in power consumption by 2060.

Going backwards for almost the same number of years — 40, to be exact — you can see a steady growth in power use, but at the same time, at least 12 years where power consumption actually fell.

And the concerns I raised in last weekend’s column still apply: with Muskrat Falls power coming into the island grid at a cost of 14.3 cents per kilowatt hour, the only thing that makes the project work is if island power prices leap upwards for consumers.

The provincial government has argued that the increase in power prices is inevitable — Muskrat Falls or no Muskrat Falls, power rates will be at least as high as they will be with the project going ahead.

At the same time, the provincial government has admitted other jurisdictions will not see the same increases.

How have they admitted that?

Setting a price

By saying that they expect they will have to sell Muskrat Falls power at a lower price than the 14.3-cent-per-kilowatt-hour mark outside the island.

Here’s Premier Kathy Dunderdale from the House of Assembly on Monday: it’s a long quote, but for contextual reasons, I’m going to include it all.

“Mr. Speaker, I am going to try and explain something very complex as clearly as I can. Mr. Speaker, the cheapest energy that can be provided to the people of Newfoundland and Labrador is 14.3 cents a kilowatt hour. That is as cheap as we — we cannot bring it in from Nova Scotia cheaper, we cannot bring it in from Quebec cheaper, we cannot build it any cheaper in Newfoundland and Labrador; 14.3 cents still gives Nalcor a nine per cent internal rate of return, so we are still making money.

“Mr. Speaker, Nova Scotia needs power. They need power and they can provide it to themselves for 10 cents or 11 cents a kilowatt hour. They are not going to buy it from us, Mr. Speaker, for 14.3, so we have to go into the market and sell at what the market can bear.”

That’s pretty clear in a number of ways. First of all, residents of this province, because they have no options, will have to pay full price for electrical power, a price that other buyers will not have to pay. Nalcor will recover the full cost of power, plus its allowable rate of return, from customers in the province because that’s the way the legislation works.

Nalcor will also bring in revenues from selling discount power off-island — but the revenues from that sale may or may not bring down power rates for consumers in the province: Dunderdale will only say that decision will be made later.

What’s also interesting is that, as power rates rise, the returns to Nalcor will rise. Remember the line “14.3 cents still gives Nalcor a nine per cent internal rate of return, so we are still making money”?

How is that nine per cent “rate of return” not essentially a tax?

That’s an interesting thing all by itself: consumers will see power rates jump, but out of that jump, a provincial utility will reap substantial rewards — out of the 14.3 cents that you and I will pay for Muskrat Falls power, 1.3 cents will apparently be Nalcor’s rate of return.

“Our money,” to paraphrase Dunderdale, but not in “our” pocket — instead, in the government’s.

There’s more.

Don’t forget that, whether the overall increase in electrical prices is the 100 per cent the Liberals are arguing it will be, or the lower rate being pitched by the Tories (they’ve said 37 per cent in the next six years), there will be a corresponding percentage increase in the amount of HST collected on power sales. There are windfalls to be made here, but not by consumers.

And the anticipated power rate increases are the most terrifying for regular folks. How will average homeowners keep up with increasing costs, and how will provincial businesses remain competitive, especially if they compete extra-provincially with companies in provinces where power rates will be much lower?

How are we going to compete with customers of the La Romaine project in Quebec, for example, which will produce close to twice as much power at 6.4 cents per kilowatt hour?

Electrical power price increases may be unavoidable — the bulk of the burden, though, is going to be carried by power users in this province, even as power from here is sold more cheaply elsewhere.

And there’s not a thing we can do about it.

Russell Wangersky is The Telegram’s editorial page editor. He can be reached by email at rwanger@thetelegram.com.