Muskrat Falls risks should be limited

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The Muskrat Falls project could bring benefit to Newfoundland and Labrador if its risks were reduced. Muskrat Falls is part of a major hydropower resource in northeastern North America, and it can provide reliable power at a predictable price for decades.

This positive conclusion must be tempered by the need for an in-depth review that would protect the province’s electric customers from bearing an overly large burden of risk and also give them the chance to benefit from the project’s success. These are my recommendations in a recently published analysis of the project.

Both proponents and opponents may have misread the meaning of these recommendations. Proponents seem to worry that an in-depth review would be intended to kill the project, while opponents appear to hope that it would do just that. Neither is correct.

A regulatory-type review, either carried out by the province’s Public Utilities Board or a special panel appointed by the government, could provide objective assurance about this large project, whose impact will be felt in Newfoundland and Labrador for decades to come.

It would go beyond the extremely long-range projections of consumer benefit on which the project is now based and set limits on the amount of the customer’s risk of higher rates.

Because all regulation is a delegated legislative function, the ultimate decision on the project will remain with political officials, who would accept or reject conditions set by the panel just as they will accept or reject any conditions put on the federal loan guarantee.

Currently, the focus is on whether Muskrat Falls provides more benefit to the province than the alternative of retaining units now in service and making incremental, local additions to the mix.

Proponents make such a narrow analysis, while opponents want to debate it before a regulatory body. But it misses the potential value of the project to the Atlantic-New England region, which could provide Newfoundland and Labrador with revenue offsets to the costs of the multibillion-dollar project.

One major risk comes from holding 40 per cent of the Muskrat Falls output for short-term sales, which might be more profitable than long-term sales. Nalcor advocates keeping this power available to support future industrial development. These policies may increase potential value, but both also increase risk.

Such policies may make sense for an investor-owned company, where the danger of miscalculation falls on shareholders who chose to buy its stock. Nalcor wants to act in the same fashion, but it’s not in the same position.

Nalcor is part utility, serving as the principal supplier of power in the province. The relationship of any utility to its customers should be regulated. The opinion of one outside expert like Manitoba Hydro International is not a substitute for that oversight and does not offer customers enough protection.

Nalcor has only one shareholder, the provincial government, acting for its taxpayers. While it is true that they have empowered the government to act for them, people in the province could be involuntarily put at risk.

A review can protect ratepayers and reassure taxpayers. It need not mean that the decision on moving forward with the project is given to experts rather than political institutions, though that is frequently the practice elsewhere.

And such a review would not necessarily slow down the project. The Nova Scotia utility regulator will examine ratepayer-related aspects of the project, and its process should take about the same time as one in Newfoundland and Labrador.

To be clear about this approach: by putting a cap on costs that can be imposed on customers and by taking into account sales of Muskrat Falls power outside of the province, a regulatory-type review can improve the chances of the long-run success of the project.

A review could replace projections based on an unrealistic 50-year period with a shorter-term analysis. By using revenues from long-term, off-system sales to replace these projections, Muskrat Falls’ benefits could be both greater and more secure.

The proposals in my paper are mainstream and consistent with the standards and practices applied to utility capital projects across North America. If Newfoundland and Labrador is to be connected to the continental grid by this project, it may want to consider playing by the usual and accepted rules of its new world.

My paper has been criticized on the grounds that its publisher, the Halifax-based Atlantic Institute for Market Studies, is conservative. AIMS has never exercised any control over the substance of my writing, and all my papers are peer-reviewed. I have decades of experience in the electric utility sector in Canada and the United States, and that experience informs my conclusions. Therefore, I believe the paper should be judged only on its merits.

Gordon Weil is an energy market expert and author of the recent paper “The Muskrat Falls Hydro Project: Opportunities and Risks.”

Organizations: Public Utilities Board, Manitoba Hydro International, Atlantic Institute for Market Studies

Geographic location: Newfoundland and Labrador, North America, Atlantic-New England Nova Scotia Newfoundland and Labrador.To Canada United States

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Recent comments

  • Cyril Rogers
    October 23, 2012 - 11:25

    Bring on the referendum and the PUB full review. I welcome any opportunity to force the government to truly open this project up to proper scrutiny. Right now, the ordinary ratepayer assumes ALL the risks and gets NO SAY. When all critics are dismissed as "Naysayers", it is impossible to get the ear of government.

  • Winston adams
    October 22, 2012 - 11:36

    John, interesting that you now say that sales to Nova Scotia or to the USA is a red herring, as these things you always in the past listed as side benefits. They are now so silly that you are back to only the "we need the power on the island argument" And that argument is slipping and never was strong. Any demand increase is so small that a good customer efficiency program will reverse and kill the dmand for decades. Please comment on "bringing efficiency to the energy equation " piece, if you dare? So silent on that John, as it shows how silly your last argument is- that we need the power- like ducks! Here is the flaw in the expert arguments you cite- they say that benefits from technology change has reached a saturation point. This is a factor when considering the forecast calculations. Yes, there is some point to the saturation argument as to the the building shell construction, but even this has room for improvement. Their big error, if you can call it that, is not considering advances in heating technology.Yet they correctly identify that heat is the driving force for any new demand- but then ignore efficient heating and what it does to demand. Not in their calculations John. Big ,big mistake John. And you don't wish to acknowledge it John. Why?

  • Maurice E. Adams
    October 22, 2012 - 11:32

    www.vision2041.com Muskrat Falls REFERENDUM Poll Results Todate:----------Sanction 0%,,,,,,,,,,, Defer decision pending full PUB review 33% ,,,,,,,,,,,,,,,,, Referendum 50%,,,,,,,, Referendum pending a full, comprehensive PUB review 17% ------------ HAVE YOUR SAY.......... This is a RATEPAYER website established as a public service.

  • PJ Stamp
    October 22, 2012 - 11:21

    Mr. Weil is to be commended for having produced a very useful, insightful analysis of the Muskrat Falls issue. I entirely agree with what I see as his two principal conclusions: (1) that the proponent has not adequately addressed the myriad risk factors associated with the project; and (2) that, once DG3 numbers and related financing details have been determined, the entire project should be re-submitted to the PUB for an indepth, unrestricted assessment. It would be irresponsible of any government to sanction such an enormous public undertaking without subjecting the underlying assumptions, including all relevant market, technical, financial, economic and legal considerations, to full regulatory examination. There is an aspect of Mr. Weil's analysis, however, which requires some clarification. One benefit that he ascribes to the regulatory review process is the protection of ratepayers from the risk of onerous rate increases. He and others have acknowledged that this is among the important issues which the Nova Scotia government has referred to its URB in respect to that province's participation in the project. It is entirely possible, for example, that the URB could set limits on the extent and nature of project driven rate increases that could be passed along to Nova Scotia ratepayers. If such limits and criteria were established, then ostensibly it would be up to EMERA to decide whether its involvement in the project was still feasible within those parameters, and in effect whether its shareholders were prepared to accept the associated financial risks. The situation confronting Newfoundland ratepayers, however, is not directly comparable to that of Nova Scotia. Unlike EMERA, NALCOR is not a private company and with the exception of EMERA's limited involvement, it will be the Newfoundland taxpayer that ultimately assumes all technical, market and financial risks associated with the project. Despite any measures that the PUB might adopt to protect ratepayers, any shortfall in revenues would still have to be satisfied by NALCOR and/or government. Whether they came from NALCOR reserves or directly from the provincial treasury, all supplementary contributions to Muskrat would ultimately be borne by the taxpayer. Indeed it is the prospect that ratepayers - for what ever reason - might not bear the full amortization costs of the project or that the provincial treasury might be unable to make up the difference, that gives rise to the need for a federal loan guarantee. Without such guarantee, the perceived risks of the project from the perspective of international lenders could justify a much higher rate of interest, and consequently of course detract from the overall project economics. Given therefore that Muskrat, as proposed, is almost entirely a Newfoundland taxpayer financed initiative, the identification, measurement and mitigation of project risks is not a responsibility that can be taken lightly. Mr. Weil and others are right to conclude that the degree of independent scrutiny to which the project has been subjected to date is not commensurate with those perceived risks, nor with the prospect that adverse events - however improbable they might seem at the moment - could seriously undermine the fiscal integrity of the province at some point in the future.

  • Norman Andrews
    October 22, 2012 - 10:14

    Dunderdale says that Muskrat Falls power is needed for mining in Labrador. If this is true, where how much of this power will be left for Newfoundland & for export? Personally, I believe that very little or none of MF Power would be left over for Nfld. or export, especially with the rapidly expanding mining operations in the BigLand. May I propose that the media ask this question to the powers that be. Thank you.

  • John Smith
    October 22, 2012 - 09:52

    When I first read the AIMS report several weeks ago the thought I had was that this guy does not have a full understanding of this project. First of all you can completely elliminate Emera, the cable, the sale of power and the loan guarantee from the equation...and the deal is still the lowest cost option. We live on an island in the North Atlantic ocean, with an isolated sysytem. We need increased sources of power, and muskrat is the best way to get that power. By a factor of 2 billion dollars. For the Navigant, PUB and MHI reviews the sale of power to the mainland and the loan guarantee were not even included.Forget about Nova Scotia...completely...it is a red herring. No matter what happens there we will still need the power, and muskrat will still be the lowest cost way toi access it. That is the important point Mr. Weil seems not able to comprehend.

    • Give the public some credit
      October 22, 2012 - 10:39

      ''...the deal is still the lowest cost option''. Yeah, if the choices are ''do nothing'' or build Muskrat Falls - and given the uncertainty of oil prices, even that's not so certain anymore. Keep on shilling, John Smith, somebody is getting their money's worth out of you.

    • david
      October 24, 2012 - 09:43

      Actually, the lowest cost option is "do nothing". And by far, the smartest.

  • Winston Adams
    October 22, 2012 - 09:24

    Personally, I think a referendum at this stage is not the way to go. One might think the critics here and elsewhere represents the majority. I think not. Most people are confused by this whole MF affair. And those who are confuses and concerned that we may have to ration power will vote for the government plan. Sure, there is a growing oposition to MF. But I would estimate only 30 percent would oppose MF if a referendum was called today. Has there been a poll on that question? Only the PUB can fully air this and ALL alternatives must be on the table.

  • Eli
    October 22, 2012 - 08:59

    Don't miss the point here guys. A major independent review is warranted. My problem with a "polically appointed" panel is it would be skewered to favour the deal regrdless of the findings.

  • Maurice E. Adams
    October 22, 2012 - 08:45

    Want to read more on lack of ratepayer protection? Want to vote on a REFERENDUM? See www.vision2041.com

  • Maurice E. Adams
    October 22, 2012 - 08:25

    Want to read more on lack of ratepayer protection? Want to vote on a REFERENDUM? See www/vision2041.com

  • Maurice E. Adams
    October 22, 2012 - 07:48

    Ratepayers NOT PROTECTED -- WHY NOT?

  • Ken Collis
    October 22, 2012 - 07:33

    Good story, but until government announces that all proceeds that come from the project will be used to pay off the debt, and not deposited into the general government coffers, I, and many people I talk to, will still think that the plan is for ratepayers to pay the bill while government reaps the rewards. This is too much like a major tax increase for me to stomach. The arguement that what benefits government will also benefit taxpayers doesn't wash.