Either way, we'll pay

Russell Wangersky
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Sometimes, you kick yourself for not noticing what's right there in plain sight.

But sometimes, what's in plain sight can hide in the piles and piles of other things clamouring for your attention. And that's certainly the case with the Muskrat Falls project: there are literally thousands of pages of information out there, and that's probably the main reason why the topic gets so little traction with the public.

It's hard to understand, and there's reams of information, including studies, exhibits and vastly different and opposing opinions.

Throughout the whole debate, I've been stuck on one thing: what will the project mean for the average electrical customer and for electrical bills?

It's an issue that's been clouded by the different numbers being thrown around by the opponents and the proponents, and most people have caved in to the idea that, because power use is going to grow, we have to have new generation. And that because of that, we'll either pay a much higher rate to have Muskrat Falls power, or an even higher rate for power from other sources.

(No one, of course, wants to answer the question of what happens if, with an aging population, we can't afford to increase consumption, and, through conservation and other measures, don't end up needing that extra power.)

Still, looking at the question of the burden that would fall on the ordinary customer, I got to thinking about the province's industrial customers, and whether they would see corresponding increases in their power rates, or whether they already have firm contracts for power prices.

I thought I remembered seeing something about the power costs for Vale's Long Harbour plant, so I went back through the volumes of PUB documentation on the project.

I didn't find what I was looking for.

But then I tripped over PUB- Nalcor 149 - a response from Nalcor to a request for information from the PUB.

First, though, a moment of common sense.

Memorial University professor James Feehan, in his analysis of Muskrat Falls, has made the argument that the demand for power in Newfoundland and Labrador is artificially supported by the fact that prices are averaged out - because whether a customer buys a kilowatt hour of power produced by cheap hydro power already in place on the island, or more expensive power generated at Holyrood during peak periods, the customer pays the same price.

There is no incentive for the customer to avoid peak periods of power use that drag Holyrood onstream.

Feehan also argues that, if power prices were allowed to increase (especially during periods of peak demand), they would clip demand at those peak times. Faced with increased costs, customers would use less power or - more to the point - use it at times when it was more economical, especially if off-peak pricing was available.

Now, hold that thought. Think: when prices go up, demand goes down.

Demand, Feehan argues, could be brought down to the point where we didn't need expensive new power sources.

Now ask yourself a different common sense question: when either Muskrat Falls comes on stream or we stick with Holyrood, power prices are going to jump and customers are going to look for a way to reduce their consumption.


Simple. Money doesn't grow on trees.

Now back to PUB-Nalcor 149.

It's about the power purchase agreement that's going to be set up between Nalcor, the non-regulated energy company that would build Muskrat Falls, and Newfoundland and Labrador Hydro, the regulated utility that will buy power from Muskrat Falls and then sell the power to Newfoundland Power and other customers.

The power purchase agreement (PPA) has to be structured so that Nalcor will get the money it needs to pay for the project - but to do that, the payments have to be fixed, so the PPA is going to be based not on the power actually used by island customers, but on the power that Nalcor projects that the island will need.

What happens if the demand isn't there?

Well, it appears that whether the customers use the power or not, Newfoundland and Labrador Hydro will pay for it. All of it.

Here's what it says: "Once the annual payments based on forecasted energy deliveries have been established for a defined shareholder return, reduced energy deliveries will not change the annual payments. Therefore, for the purpose of Nalcor's (current) analysis, the purchase price for power and energy paid by Hydro would be consistent with a take or pay arrangement."

What a great deal for Nalcor.

You sell a product, but even if your customer doesn't need it or can't use it, if they don't take it, they pay full price anyway. (Manitoba Hydro International, reviewing the project, had pointed out that the PPA was a take or pay deal. What wasn't clear in the MHI report was that it was 100 per cent take or pay - that the price wouldn't change whether the power was used or not.)

Now, here's another question: what does Newfoundland Hydro do?

Well, as a regulated utility, it will pass the costs on to the consumer - leaving the consumer in the strange position of perhaps having to pay more per unit for electrical power even though they've used fewer units.

Either that, or the company can shed water from its other hydroelectric assets, using more expensive power from Muskrat Falls because using cheaper power will, paradoxically, end up costing more - because you'd have to add the price of producing the lower-cost power on top of the penalty for not using the Muskrat Falls power.

Of course, the lower-cost power produced on the island could always be sold for pennies in southern markets where the price of electricity seems to be falling with every contract signed - but that sure seems like a slap in the face for customers who also, it must be remembered, paid to build the lower-cost on-island hydro plants as well.

In other words, if you want to talk about controlling and levelling the demand for electricity for the sake of your own power bill, we'd better have that discussion before the contracts are inked and we end up having to pay for expensive power we don't even use.

Or you can just throw your hands in the air, consider new power prices to be just another government tax, and get your wallet out.

Ignorance may be bliss. It can also be expensive.

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

Organizations: Newfoundland and Labrador Hydro, PPA, Manitoba Hydro International Newfoundland Power The Telegram

Geographic location: Muskrat Falls, Holyrood, Long Harbour Newfoundland and Labrador

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Recent comments

  • sealcove
    February 26, 2012 - 10:42

    Well john smith has all the answers who the hell is paying this person, government lackey or nalcor you can be sure ignore him

  • John Smith
    February 26, 2012 - 10:20

    Like I said, both Mr. Wangersky, and the economist(lol) are dead wrong. We pay more for the power generated at Holyrood, than we do for the power generated at the islands hydro sites. The Rate stabalization formula proves that. No, I am not an employee of the government. I am just a citizen who has watched his light bill increase by 60% since 1998. I know that as long as we stay tied to oil, it will continue to increase. I know that by 2017 we will not have enough electricity for peak winter time supply, and we need to bolster our system, I know that muskrat falls is the lowest cost option. As well, I have yet to read or see, or hear one good argument as to why the development should not proceed. We spend three billion a year, every year on health care in this Province, we will borrow about 3.5 billion as a one time loan for the muskrat falls deal...just a little perspective...

  • In Summary
    February 26, 2012 - 07:54

    In summary John/Kathy wants to do the project probably because they have spent $300 Million on it already and this would make Sprung look good, one person thinks a lawyer can't turning logic inside out to please his boss and the rest are trying to find out if we need to indenture ourselves for life to have electric power.

  • Millicent G. Burton
    February 25, 2012 - 20:28

    Perhaps John Smith can tell us whether he is employed directly or indirectly by Nalcor or government?

  • Johnny Noknockers
    February 25, 2012 - 20:23

    Yeah john...so there! good feed ya muskrat!

  • MHA MuskRAT
    February 25, 2012 - 20:11

    But, do You know what the scariest thing about this whole unbelievable,. unnecessary make work project for nalco is? Not the least that at this rate the first 30 years of the project we will only be paying for lawyers fees and NALCO's Eddie KillourWAtts Bonuses. That how someone like Jerome Kennedy, someone of his caliber and credentials, can come out a say that is a deal for the people in the province. Its mind boggling! Make's someone wonder who's interest's they are really looking out for? Because it seems the gov has their minds made up, or someone made their minds up for them. Is it Dannys deal at any cost? Maybe danny didn't have the heart to go through with it because he knew. If this is dunderdales and kennedys way of trying to do what former premier Brain Peckford said he didn't have the heart to do....then its a poor strategy. I still believe that this only an exercise to keep people from talking about the house being closed...I frankly think J kennedy is to smart to accept a loousy lop sided poor excuse of a deal, for the sake of doing a deal, because there is no deal in the proposed one for our province. This excerise has gone on too long! Get back to building stadiums ye promised for a few last minute votes.

  • Economist
    February 25, 2012 - 14:06

    But, John Smith, the amount added on to the price of electrical using rate stabilization goes on to the price of all electricity per kilowatt hour, regardless of where it comes from - so whether you're getting your electricity from hydro or Holyrood, the price you pay is the same, once the rate is set. It increases when oil goes up, but it increases across the board for all electricity. That's the cost/price difference: Holyrood costs more, but there is no savings for a customer for particularly not using Holyrood peak power. There are different costs for hydro and holyrood, but consumers get one single price.

  • John Smith
    February 25, 2012 - 13:44

    Yes, the rate stabalizeation formula...when it first came into being it was referred to on our bills as the cost adjusment formula. The fuel rider, for fuel burned at holyrood, is added to our July bills for the previous 12 months of additional costs due to oil. That's the point I am trying to make. If we did not use the plant in Holyrood at all, then this additional amount the RSF, would never be added to our bill. Mr Wangersky stated that we pay the same for hydro as we do thermal...and that is wrong. Whether it is calle rate stabalization, or cost adjusment, it is the same thing. A cost, passed on to consumers to pay for the extra cost of oil burned at holyrood.

  • Counterpoint
    February 25, 2012 - 13:28

    Peak-power pricing schemes are not currently necessary in small markets such as NL which has an abundance of cheap hydro-electricty. This may not be the case in the future as the price of oil used to generate electricity in Hollyrood is forecast to rise - you need only look to the ongoing development and exploration activities of companies in the know such Mobil-Exxon and Husky to infer that. Wangersky also mentions that "lower-cost power produced on the island could always be sold for pennies in southern markets where the price of electricity seems to be falling with every contract signed...". That too is a bit of a red herring... perhaps electricity prices may be falling in the U.S. now (are they really?), but what about when the U.S. economy starts growing again and demand for energy begins to increase? Hydro-carbons are non-renewable and will eventually run out; meanwhile it's getting more expensive to locate and develop new reserves, which will also put upward pressure on petroleum prices. The costs of energy will increase whether it be oil-fired or hydro, however, as Dr. Locke deduced, hydro-electricity from MF is the best option economically. Also, it will not subject to the same pricing volatility experienced by world oil markets. No local markets for any excess hydro-electricity produced? Use it to attract industrial manufacturing and stimulate local economies like Quebec did with Upper Churchill power. Meanwhile the clock is ticking down on the Upper Churchill contract, and NL will have an Anglo route to bring energy to the U.S. while no longer being held geographic hostage by Quebec.

  • Economist
    February 25, 2012 - 13:23

    **John Smith *** Wouldn't mind an url for that. I believe you are referring to cost adjustments due to changes in oil prices for Holyrood (the rate stabilization program, most recently used by NLH to raise rates.) You will note that nothing in the rate stabilization program breaks out different prices for power from more expensive sources so that users can buy power from off-peak hours instead. Check your bill yet for the differential prices? Didn't think so. They don't exist.

  • John Smith
    February 25, 2012 - 13:00

    Wow...an economist. Forgive me if i'm not up to your intellectual level. However, I will refer you to the PUB site, the section Re. the Cost Adjusment Formula. Read that...economist. Then write back.

  • Cyril Rogers
    February 25, 2012 - 11:59

    JOHN...you are misinterpreting Mr. Wangersky's statements about price from hydro sources vs Holyrood. Ultimately, the customer pays the same price even though Holyrood power is more expensive to produce, by means of the adjustment formula. His key premise, which you seemed to miss, is that we will have to pay for power from Muskrat Falls..........whether we end up needing it or not. The NALCOR projections of power needs will likely be dramaticially overstated, due to further population declines down the road. We already have the oldest population the country and they are not going to increase our numbers. Their children and grandchildren have gone to mainland Canada and that is a hard reality some people can't accept. Therefore, it stands to reason that we will be more likely to need less power in future. The increases on the Avalon will be more than offset by the declines in rural areas. As Mr. Wangersky stated, we should look at other options, including conservation and peak power consumption.

  • Economist
    February 25, 2012 - 11:59

    Ahh, **John Smith**, if your arguments are the level of intellectual skill of those defending Muskrat, we are in really big trouble. I won't try to explain demand-side pricing, right off the top because you clearly won't get it. But I'll point one thing out: you are hopelessly confused about the difference between price and cost. Power from Holyrood costs more than power from existing hydroelectric sources (that's the cost) but the price that consumers pay is the same per kilowatt hour regardless of where the power comes from or what it costs to produce (that's the price). The demand side argument is that consumers should pay the real cost of individual sources of power - if Holyrood has to be turned on to meet demand needs, power users should pay the full price for each kWh. In off-peak times (when Holyrood isn't being used) they should pay the price of production from existing hydroelectric sources. Customers then move to cheaper, off-peak use. If you don't think that you pay the same price regardless of source, take out your power bill and try to find the spot where you pay NLP or NLH different rates based on source of supply. Write back when you find it.

  • John Smith
    February 25, 2012 - 11:31

    That is blatantly wrong. We do NOT pay the same price for power generated with hydro, and with Holyrood. Go to the PUB site, and look up the Cost Adjusment Formula...every year around august we get the cost adjusment formula added to our bills. It makes up for the cost of burning oil. The last figures I saw stated that it costs about 16.9 cents a KWH to produce power at holyrood. This cost is passed on to the consumer via the CAF. So we really don't pay 9 or 10 cents a KWH, as you have to factor in the CAF. So your premise is wrong...as we do pay substantially more for the power we get from Holyrood.

  • Townie
    February 25, 2012 - 09:36

    So what happens to the unused power? It can't be or won't be dumped on the ground at the end of the line. You seem to imply that it will mean down time for on island generating units, but can they not produce, and should they, if the power is not needed. Will Nalcor be selling what we have already paid for to someone else?