Let's call this what it really is — a tax

Russell
Russell Wangersky
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“Mining is an energy intensive industry, and it is important to understand the possible power requirements

of these Labrador developments, based on current publically available estimates, and information from the companies involved,” says the provincial government in one

of its latest studies, all of which miraculously support the need for Muskrat Falls power. “A reliable, competitively priced supply of power is essential for these projects to advance.”

Now, I’ve been out of the province for a while, and blessedly away from the spin and counter-spin of all things Muskrat. And if anything, the Muskrat world is more confusing than ever: just take a look at Jerome Kennedy.

Last spring, he was basically calling the opposition a bunch of idiots. Now, he says, those same idiots are the only people this province needs to examine and debate the technically complex Muskrat project, and that bringing independent experts into the mix would just confuse things.

It’s something like having someone hand you a contract to sign, telling you “you’ll understand this stuff better than any old lawyer would.”

The government is clearly ramping up its PR engine over the project, spitting out reports faster than a long-haired cat coughs up hairballs.

But the reports are more notable for what they don’t say than for what they do.

Read the tea leaves — I mean,  the reports — and you’ll see some interesting hints.

One of the things you’ll notice is that it sure looks like we’re going to have a special set of power rates for miners.

“Government is developing an industrial rate policy for Labrador,” a report on electricity and mining says.

“The proposed rate policy will provide reliable and competitively-priced electricity for existing

and new industrial customers in Labrador. IOC and Wabush Mines currently obtain power at less than $5/megawatt hour (Mwh) based on agreements relating to the Twin Falls power facility, which expire in 2014. Competitive pricing on power is particularly important in the Labrador Trough, where developing projects are competing for investment against those in directly adjacent Quebec.”

Watch that $5 per Mwh number: power from Muskrat Falls will cost $7.6 per Mwh, and that’s before the costs of power lines to connect the Muskrat generation to the Labrador grid. The way it’s phrased right now, the suggestion seems to be that the $5/Mwh number is somehow “fair” pricing for miners.

But there’s a strong argument to be made that IOC and Wabush Mines are a special case, and that anyone else trying to pile on at that price is simply a carpetbagger.

You have to think about why IOC and Wabush Mines have their rate. It has to do with the fact that the companies were granted water rights years ago, and built their own Twin Falls generating station, well before the Churchill Falls project.

When the Upper Churchill was being designed, it became clear that, if the water from Twin Falls was diverted into the Smallwood Reservoir, it could be much more effectively used to generate electricity.

The companies agreed to hand over their legally granted water rights in exchange for receiving power at comparable rates. (Another part of the deal was that Newfoundland Hydro had to keep the Twin Falls plant in working order, all its systems packed in grease and basically ready to go at the flip of a switch if the deal failed somehow, something Hydro’s done for years.)

Other companies seem to suggest they deserve the same deep-discount rate for power, even though the industrial rates in the rest of the province are considerable higher. (Which is, perhaps,

why the province is “developing an industrial rate policy” for Labrador. Chances are it will not be the $6 or $7 per Mwh that island industrial customers are used to.)

And maybe those other companies would have a case — if they had a fixed asset they built themselves, and commensurate water rights, to trade back for that benefit.

Problem is, they don’t.

They just want cheap power.

And the provincial government apparently wants to help with that.

“Competitively–priced power for development will facilitate industrial development in Labrador for which the province will realize significant benefits. These benefits are estimated in the 2012 report ‘Economic Impact Analysis of Iron Ore Mining Industry in Labrador 2011-31’ by Wade Locke Economic Consulting, and include mining tax, corporate tax, employment, indirect taxation and impact on service industries.”

One essential thing to keep in mind is that lower prices for mining companies will, in fact, allow those companies to grow their profits, employ workers and pay taxes and royalties to the provincial government.

The other thing it will do — especially if the mining companies pay substantially less than you and I do for their “competitively-priced” electrical power — is mean that we will essentially be subsidizing their profits (and the “profits” obtained by the provincial government in the form of taxes and royalties) with every single electrical bill we pay.

So why not call the impending increase in the cost of power what it really is?

It’s a new electrical tax to be split between already-wealthy mining firms and the provincial government.

If mining companies need power, let them pay for it.

We’re already giving them premier access to a non-renewable resource.

Do they really expect us to ice that cake for them, too?

Think of it this way: what’s the difference between selling power to Hydro-Québec at deep-discount prices and seeing them resell it for a profit, and selling deep-discount power to mining companies so they can sell the resulting iron, once again for a profit?

Either way, we’re the patsies.

 

Russell Wangersky is The Telegram’s

editorial page editor. He can be reached by email at rwanger@thetelegram.com.

Organizations: Wade Locke Economic Consulting, Hydro-Québec

Geographic location: Labrador, Muskrat Falls, Twin Falls Quebec

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Recent comments

  • ginn
    November 06, 2012 - 11:10

    Pied Piper Russell is leading the crowd of naysayers in order to save us all from being freed from the Quebec monopoly. I guess this nis Transcontinental policy.

  • GINN
    November 05, 2012 - 08:23

    If a member of a political caucus (especially a tory) promotes a policy, the media are quick to immediately quick to label it as a "party position". Since the Telegram and all print media in this province are owned by a large Quebec conglomerate, can I impugn that this column is Transcontinental policy driven? No matter how much Russel can deny this , that is how the liberal media manage to smear a lot of politicians and parties. I am not saying that Russell is influenced by his masters, or maybe I am?

  • McLovin
    November 04, 2012 - 20:12

    Is Wade Locke the only economic consultant in Newfoundland?

  • Winston Adams
    November 04, 2012 - 17:24

    Russell, if increased power bills for all of us is a tax increase, then decreased power bills to all of us would be a tax decrease? Or call it an efficiency bonus? Look at it this way. The government uses our taxes to implement efficiency in thier own buildings, saving 50- 60 percent on energy use. Why can't we do likewise for the residential and commercial sectors? The USA is supposed to be more capitalistic , and we more socialist, but it is the other way around . They are doing 10 times more to help the residents and business in energy efficiency. And energy efficiency is a viable alternative to the non economic MF power. Me thinks we are little changed from the merchant class control as in the last century here. Is it a crime to help the residents and small business to adapt and do a change over to efficient heating? Again , I ask,where is Nalcor's analysis to show this is not the best and least cost option for island consumers? The silence on this is deafening.

  • David
    November 04, 2012 - 14:38

    Listen people, you get what you vote for and the sad thing is, this same crowd will probably be voted back in the next time around.

  • Maurice E. Adams
    November 04, 2012 - 13:51

    TYPO:--- That should have read $92 million average oil costs for Holyrood, and $6.1 billion AFTER 2041 instead of $8.4 billion.

  • Maurice E. Adams
    November 04, 2012 - 13:10

    If you check out the graphs on www.vision2041.com you will see that in the first 25 years (up to 2041), captive island ratepayers (our generation) pay Nalcor a total of about $14 billion related to Muskrat Falls. In the second 25 years (2041-2067), captive island ratepayers (our children and grandchildren) pay Nalcor about $21 billion related to Muskrat Falls.......that is how rates are kept down somewhat (as Nalcor says) --- "in the early years"........that is ---- at the expense of our own children and grandchildren..........Not only that, but Nalcor would have you believe that operating costs for large hydro is low or almost next to nothing. ....... www.vision2041.com also shows that not only is debt servicing and operating costs over the 50 year period about $14.5 billion, but $8.4 billion is AFTER 2041 and operating costs alone are about 4 times higher in the 5th decade (for our children and grand children) than in the 1st decade (for us) --- operating costs alone rises from about $50 million annually to about $200 million annually...... You will also see that while over the 10 years between 2001-2010 oil for Holyrood cost on average $92 per year ---- on average, over Nalcor's 50 year Muskrat Falls take or pay contract period on average captive island ratepayers will pay Nalcor $700 million per year (about 8 times more than the 10-year average cost of oil for Holyrood)....... Of course, this says nothing about the fact that if island demand is less than Nalcor forecasts, each ratepayer will have to pay even more in order to meet the debt servicing requirements.

  • Winston Adams
    November 04, 2012 - 12:47

    Even better, when efficient heating is applied to both space heating and hot water, with power reduction of 60 percent for these two components( heat and hot water is 80 percent of the house total) , the result is that the monthly average bill drops to 104.00 instead of 200.00. Then when comparing it to 261.00 , the 261 per month is 2.5 times 104.00. So why are we not shouting for energy efficiency?

  • Winston Adams
    November 04, 2012 - 12:17

    Something to ponder: if a power bill now is 200.00 month and according to the Calculator , with MF power in 2018 goes up 31 percent that = 261.00 per month. With efficient heating and the same comfort, the power bill will be down 35 percent from present levels to 130.00 per month. From 130.00 to 261.00 , that is 100 percent difference. No small difference for the average home, or business owner.

  • Con O'Brien
    November 04, 2012 - 10:37

    They will also be able to sell , I mean give away, the unused power , of the 40% portion that the rate payers are committed to on a take or pay deal! Mr Maurice Adams is so right! When we are all dead and gone future generations will have to pay for the folly of this project, as the first phase of the financing payment scheme is deliberately kept low to make the present day public believe it's a good deal! This needs a regulated review like the people of Nova Scotia are being afford by their government! Anything less only breed more uncertainty in a project that could handcuff us financially for generations! We are going to run close to a $1 billion deficit due mainly to falling oil prices, and bad oil price forecasting! Meanwhile we are contemplating taking on $10+billion to build a Mega Hydro Dam at Muskrat Falls, so NL residents can make rich miners richer! PS. I hope they didn't base the Muskrat Falls report conclusions on the the $124.00 per barrel oil they used to prop up the budget! That would not instil much confidence to the accuracy of all these expensive reports, the the PUB will never see!

  • Winston Adams
    November 04, 2012 - 10:28

    I suggest that posters and editorials use power prices per kilowatt hour, as it is more meaningful to the average reader. Most know that we now pay 11.1 cents per kwh for our energy. If you say we are paying $11.10 per Megawatt hour, it is the same thing, but not generally understood. Engineers generally refer to megawatt hours as large generators produce alot of power, and industrial customers buy in bulk. It would be good to keep the discussion in layman language. And it may avoid the decimal point error, which is easy to do.

  • Maurice E. Adams
    November 04, 2012 - 07:24

    Yes, Thank you for clarifying the typo. It is interesting to note also, that the $76 / MWh was for 2010$, and that number (as I understand it) is now $87 for the year that Muskrat Falls is scheduled to come on stream (2017) --- and that compares to the TRUE 2017 'cost of service' cost of $214. .........So, from a layperson's perspective, the difference between the $214 and $87 costs gives you an indication of how much we are pushing OUR costs and debts unto our children and grandchildren........ The full amount has to be paid over the 50 year period and Nalcor has confirmed in writing that it is NOT "foregoing" its return on equity, but merely "deferring" it to future generations. Hence, Nalcor's claim that rates are stable "in the early years"....... Why should my children and yours, for 50 years, have to pay to provide near-zero cost power to mining companies ---- when it was our children and grandchildren instead that were supposed to get the benefit of near-zero cost power in 2041 --- not locked into an unneeded, very high cost Muskrat Falls contract until 2067?

  • Russell Wangersky
    November 04, 2012 - 07:05

    The posters are absolutely right: the correct number for Muskrat Falls power is $76 per megawatt hour, or 7.6 cents a kilowatt hour, which only goes to show even more the huge disparity between electricity prices. Misplaced decimal point - my error. Russell Wangersky

  • Maurice E. Adams
    November 03, 2012 - 18:37

    Excerpt from www.vision2041.com :--- It appears that where The Telegram article shows $7.6 per megawatthour (MWh) as the cost to ratepayers to produce Muskrat Falls power, it seems that the article should have read $76 per megawatthour (compounded 2% annually) which would be more than 15 times the $5 price that the Telegram article mentioned that mining companies might pay --- and that does not take into account that if the production cost were priced the industry standard way (cost of service) --- where costs are NOT back-loaded on our children and grandchildren, then the cost just to produce Muskrat Falls power (not including transmission) would be $214 per megawatthour (MW) --- more than 42 times the $5 price that this Telegram article suggests might be paid by the mining companies. That also gives you an idea of HOW MUCH MORE we ourselves, our children and our grandchildren will have to PAY LATER. This whole scheme is more akin to a lease than a mortgage. By far the bulk of the money to come out of the pockets of captive island retepayers ARE IN THE LATER YEARS ---- MANY "BILLIONS" MORE THAN IN THE EARLY YEARS. The early year lower price is the WORM to get ratepayers hooked, to get them to buy into this scheme. Excerpt from Nalcor's Submission to the PUB (March 2, 2012) "Nalcor has proposed a constant dollar base price of approximately $76/MWh in 2010$ for Muskrat Falls power, which when escalated at two percent annually ... provides an 8.4 percent IRR (rate of return) to the shareholder. In addition to providing consumers with stable rates for Muskrat Falls power in the early years of operations...." So "stable rates" are in the "early years" ---- what about the later years? Also, see this answer from Nalcor (PUB-Nalcor-46 Muskrat Falls Review) Question: If “cost of service” (“COS”) pricing were applied in determining the power purchase price, what would be the power purchase price paid by Hydro to Nalcor for Muskrat Falls power and energy in the first full calendar year of supply? (in other words, if costs were paid more like a mortgage --- NOT back-loaded on our children and grandchildren--- my comment, not part of the question) Answer: "Nalcor has prepared an annual cost of service model in response to the question posed. The financial parameters in this model were set to provide an internal rate of return of 8.4% for the Muskrat Falls investment. On this basis, the cost of service in year 1 would be $214 /MWh declining with each year thereafter as the Island sales base grows and the return on rate base declines." ------------ (note that when paid off more like a mortgage, costs GO DOWN, year after year, not UP, and that $214 per megawatthour cost is 42 times the $5 price mentioned in the Telegram article that the mining companies might pay). Using Nalcor's proposed take or pay payment method, toward the end of the 50 year payment period costs of Muskrat Falls power for our children and grandchildren would be about 10 times higher than if the cost of service (COS) method were used. Using the COS method (instead of Nalcor's method) WE would be looking out for the best interest of our children and grandchildren --- not transferring OUR costs to THEM. So please note, that using the COS method, "as the Island sales base grows and the return on rate base declines .... the cost of service in year 1 would be $214 /MWh declining with each year thereafter..." (not going UP). I WOULD SUGGEST THAT IF "WE" CANNOT AFFORD THE TRUE COST ($214) PER MEGAWATTHOUR IN THOSE EARLIER YEARS ---- WE SHOULD NOT BE OFF-LOADING ABOUT 2/3RDS OF THOSE REAL COSTS ON OUR CHILDREN AND GRANDCHILDREN

  • Maurice E. Adams
    November 03, 2012 - 16:22

    I think Nalcor's documents say that "base costs", that is, the "power from Muskrat Falls" will cost $76 per MWh ---- not $7.6 dollars per MWh (more than 15 times the $5 price quoted for the mining companies).

  • Maggy Carter
    November 03, 2012 - 15:01

    Good editorial Mr. Wangersky.

  • Cyril Rogers
    November 03, 2012 - 13:50

    The true motivation for Muskrat Falls has been to supply power to these mines from Day One but we are only recently beginning to see the significance of that aspect of this development. Had that been the rationale, in the first place, and had the mining companies committed to supporting the development financially, I would have had no major problem with it, as long as we, the people, were not left on the hook for it. Right now, though, these people are expecting to get cheap power while we get the shaft. It would be interesting to know if they have approached Quebec Hydro for power since the infrastructure is already fairly close to where these development will occur, unlike Muskrat Falls, which is much further away.

  • Maurice E. Adams
    November 03, 2012 - 13:25

    I stand to be corrected, but shouldn't the cost of production be $76 per megawatthour (MWh) and not $7.6 per megawatthour? That would make the costs to island ratepayers to produce the energy 13 times more than what mining companies would be required pay, not 1.3 times more?

  • Ed. A.
    November 03, 2012 - 12:32

    ratepayers in this province are being hit with a double whammy, first we have to pay for nova scotia's electricity users and now we have to pay for the mining industry so they can make more profit at our expense. this will prove to be very expensive for the ordinary electricity user in this province. it is outright lies for anyone to tell me what the price of oil will be in 2030. the other question that has not been answered is DO WE NEED THE ELECTRICITY OR IS IT JUST FOR THE MINING COMPANIES ? my suspicion is that this was started by our former premier for the mining companies.

  • Winston Adams
    November 03, 2012 - 09:35

    It seems that corparate welfare for the mining companies is more important than the welfare of the average resident . Power below cost for mining, while moving to make our island rates for residential, and local small business, double that of Man, Que, and BC. It makes one wonder if this was the plan from the start, as the exposure of this is slowing advancing as the poor economics of MF for island, Nova Scotia, and export has become evident. Indeed, this is a tax on the poor and middle class.

  • David
    November 03, 2012 - 09:30

    This isn't a tax...this is a legalized shakedown. This is government extortion, as they sell this rainbow based on implict threats of a bleak future if we don't build it....negative advertising at its worst. At least Don Corleone had principles and an accepted 'code of conduct'', even if it was ruthless.....not this crowd.