Muskrat Falls a ‘clear and present danger’ to province’s financial future

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By Ron Penney and David Vardy

Two major announcements on July 22, 2013 impact on the wisdom of continuing the massive public expenditures on the Muskrat Falls project. One announcement came from the Nova Scotia Utility and Review Board, with respect to the Maritime Link connecting Newfoundland with Nova Scotia. The second came from Hydro-Quebec’s application to the Quebec Superior Court on Churchill River water management.

An extremely risky project has now reached the point where the risk is unacceptable and poses a clear and present danger to the long-term fiscal viability of the province.

The Nova Scotia Utility and Review Board did not approve the application for the Maritime Link as it was presented by the applicant, despite some media reports to the contrary.

The applicant was Nova Scotia Power Maritime Link Inc. (NSPML), a fully owned subsidiary of Emera Energy. Instead the application was approved with substantial modifications.

The original application has been described by the board as following the “20 for 20 principle,” with 20 per cent of the power from Muskrat Falls obtained from Nalcor in exchange for the Nova Scotia utility Emera and its subsidiaries bearing 20 per cent of the capital and operating costs.

The “20 for 20 principle” was resoundingly rejected by the board in its decision. Substituted in its place by the board was approval for a completely different proposal, one in which NSPML and its Nova Scotian customers would have access to 60 per cent of the energy for considerably less than 60 per cent of the cost, probably closer to 20 per cent than to 60 per cent.

When the board compared the Maritime Link with other alternatives, it found the net present value of the cost for the Maritime Link was not always the lowest. It could only pass the least-cost test with substantial modifications, requiring the firm commitment of an additional third block of low-cost energy, to be supplied by Nalcor Energy or some alternative supplier.

This new “20 for 60” principle is the basis on which the board has approved the application.

The board has told NSPML to renegotiate the agreement with Nalcor energy to secure not only the 20 per cent block but to firm up the availability of the “market-priced energy” and to negotiate a firm price for this additional 40 per cent block.

The board has offered to hold an expedited hearing to deal with the enhanced application once Nalcor or some other supplier agree to the terms identified by the Nova Scotia board.

The 40 per cent block of market-priced energy is the subject of contention.

Unless the agreement is renegotiated, the existing proposal from NSPML fails the board’s criteria which call for it to confirm that the Maritime Link will supply power at a lower cost than other alternatives. The board could not approve the application without the additional block of “market-priced energy” because it could not pass the least-cost test, in comparison with other alternatives.

Without a larger commitment of energy from Nalcor Energy it will continue to fail this test.

Will Nalcor accede to this request?

Nalcor Energy has indicated its commitment to use the second 40 per cent block of Muskrat Falls power to serve its market both on the Island and in Labrador. Nalcor Energy cannot accede to the board’s requirement to firm up access to this second block for use in Nova Scotia; nor can it sell firm power at a spot market price.

It would be indefensible for Nalcor Energy to sell firm power in Nova Scotia at a small fraction of the price charged to ratepayers in Newfoundland and Labrador.

To enter into such a long -term contract at fixed prices would be to repeat the mistakes made with the Upper Churchill.

The condition imposed by the Utility and Review Board in Nova Scotia has rightfully been rejected by Nalcor and the Newfoundland and Labrador government. Premier Kathy Dunderdale is prepared to make additional power available subject to recall to meet needs in Newfoundland and Labrador. However, this will not meet the condition stipulated by the Nova Scotia board.

The next question is: can the full Muskrat Falls project proceed without the Maritime Link? Since the federal loan guarantee is predicated on the interprovincial link, we now need to know how this will affect the federal government’s commitment to a loan guarantee.

In addition, Hydro-Quebec, also on July 22, filed for a declaratory judgment with respect to its access to Upper Churchill power under the 1969 power contract and the contract which renews the contract for an additional 25 years beyond 2016.

This filing before the Quebec Superior Court calls into question Nalcor’s ability to manage the flow of water on the Churchill River, thereby putting the entire Muskrat Falls project at risk.

Hydro-Quebec is asserting its rights under the power contract to have full management control over the flow of water on the Churchill River.

Without the co-operation of Hydro-Quebec the water flow cannot be optimized, placing in doubt the ability of Nalcor to produce the full 824 megawatts of power when it is required in the winter months.

How can the project be financed under the cloud of uncertainty created by this court case, which will take many years before the result is known?

At the hearing before the Nova Scotia board, the applicant made it clear that any water rights issues were the responsibility of Nalcor Energy.

If Nalcor cannot meet the commitment to provide power to Nova Scotia it will be in breach of its contract and liable in damages.

The province commenced this project without invoking the oversight of its own Public Utilities Board and did so before the Nova Scotia Utility and Review Board could review the application for the Maritime Link.

It also did so without certainty about our ability to manage the water of the Churchill River. The added risks arising from the outcome of the Maritime Link application and from Hydro-Quebec’s filing in the Quebec Superior Court are enormous.

People should now realize that the Muskrat Falls project will divert our newfound resource revenues away from health, education, roads and other public services and place the province’s credit standing in jeopardy.

Surely the Government of Newfoundland and Labrador must reassess its commitment to the Muskrat Falls project in light of these two major developments.

Royal commission or task force needed

We call upon government to place a hold on this project until an independent review can be undertaken by a royal commission or task force composed of independent legal, financial and energy experts charged with recommending the most prudent course of action to mitigate the future exposure of the province to risk associated with the Muskrat Falls project.  

Ron Penney is a former deputy minister of Justice and former St. John’s city manager. David Vardy is former clerk of the Executive Council

and former chairman of the Newfoundland and Labrador Public Utilities Board

Organizations: Maritime Link, Nova Scotia Utilities and Review Board, Hydro Quebec Nalcor Energy Quebec Superior Court Emera Energy Nova Scotia Power Maritime Link Public Utilities Board

Geographic location: Muskrat Falls, Newfoundland and Labrador, Nova Scotia Churchill River Iceland

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Recent comments

  • Alec C
    July 26, 2013 - 15:32

    Both Ron Penny and Dave Vardy have worked countless years for NL and are offering their experiences and knowledge in regards to Muskrat Falls. If three court cases and UARBs new ruling isn't enough to force NNLPCs to slow down and re think/evaluated MF neither body are serving NL citizens. Considering the daily pressers from MF proponents they have failed to update the kWh COST for NL residential ratepayers. As it stands now the min pricing remains at the DG#s 16.4 cents kWh - in itself an astronomically high rate. Does MF represent the lowest cost option for NL residential ratepayers hasn't ever been answered on a standalone basis. Nalor has erroneously included potential markets into replacement of Holyrood. Nor has Nalcor adequately separated projected industrial demand with residential demand for NL. +50% residential power bills increase ISN'T reflected in Nalcor's assumed demand projections. Is the 40% Avalon block based on X$ V GWhs? - EX residential demand drops 10% are ratepayers going to see a 10% increase as a result? Forget about long term PPAs with industry/NS - what measures are being implemented to safeguard residential ratepayers in NL? Has Deep Lake power being sold on the grid for winter been answered or has it been shuffled to unanswered/unaccountable pile hidden behind rhetoric and false bravado? 335MW remaining on the ML being sold at rates FAR lower to NL residential ratepayers isn't something even 80% Danny could pull off. Cost of ML + $4B 35 year PPA for NS = 60% of MF rated capacity. Remaining 40% of MF (330MW) $6B+ over 50 years. 12% rate of return for Crown-Monopoly Nalcor is +50% increase, why should NL ratepayers be forced to endure such a grandiose unjustifiable profit increase? Various talking heads are using the NNLPC defense of 'don't worry we got it covered' terms of the original MF-ML have been severally compromised. Also when people say 'spoken to lawyers' please name them or its pure conjure and hearsay. NNLPCs need to be more forthcoming instead of looking like guilty dogs whom just ate the cake. Get your messages straight - Monday Ed Martin non committal - Wed Dunderdale we will meet UARB conditions. Full 824MW has always been a pipe dream for MF even under the best of circumstances - a full 30% off Tom Adams water flow calculations (and this was pre WMA cases). As for developing Gull Island to meet future demand NL will have access to 20000 GWH of electricity available in 2041 from UC.

  • Tismeby
    July 26, 2013 - 15:23

    I agree that the two events this week are very disconserting with respect to this project and I hope they are quicly resolved in the best interests of this province, however is pushing the stop button on the project going to achieve anything positive? The province has probably already spent in the order of 1.5B on work to date and have probably committed 2-3B in contracts for supply of equipment and services. To put a halt to this now will only result in massive law suits plus what has been spent to date and all you wind up with is a partially finished project. Then on top of that it sets us back to ground zero with respect to how do we deal with our energy supply. We have a serious issue that has to be dealt with. Sitting back doing nothing is not an option!! Do we pay billions to refit Holyrood along with the hundreds of millions a year in operating costs, do we put billions into wind turbines, perhaps we could throw billions into a nice dirty coal plant. We need to do something about our energy supply in this province and hydro electricity is hands down the best way to go. In my opinion lets get this thing finished to enable us to shut down Holyrood and have a reliable cost effective power supply for the next century.

    • a business man
      July 28, 2013 - 13:43

      Great post. I agree that MF has moved too far along to be stopped. I am happy about this because it means NS will get cheaper power. I want NS to get cheaper power because it I have business interests in NS. Frankly, I hope NS uses the fact that MF is so far along to extract the best possible deal for its citizens and businesses. As a NF citizen and taxpayer, I vote for subsidizing NS power use because it is good for ME. I would be happy if NL citizens were forced to pay for NS to have free energy from NL until the end of time. I am using my NL vote to beneift NS because it is good for ME. I am looking out for MY own best interests, not for NL's. That is not my job.

  • Ben Turpin
    July 26, 2013 - 15:20

    When looking at a situation like Brazil's Belo Monte in comparison; http://en.wikipedia.org/wiki/Belo_Monte_Dam We see the same pattern of behavior. A plan made during a 1975 dictatorship. Bulldozing through environmental reviews and offering little transparency to the public. Aboriginal protests. Lack of economic viability and lack of interest from private investors, so up to one-third of the project's official cost to be financed by incentives using public money. 18,700 direct jobs created, with additional 25,000 indirect jobs, but only a fraction of the direct jobs will stay available after the project’s completion, likely causing economic disaster rather than economic prosperity. External researchers indicate that the majority of the energy output will be relegated towards the aluminium industry, and will not benefit the people living in the area. James Cameron made a movie about the Belo Monte Dam project. Same guy who made the one about an unsinkable boat. Maybe the British-Inuit Metis who are downstream of Muskrat Falls need to reach out to Hollywood for some advice.

  • says it all
    July 26, 2013 - 14:35

    Looks like someone's been reading too many story books, a "clear and present danger" indeed.

    • Tony Rockel
      July 26, 2013 - 16:27

      Looks like someone's got his head in the sand.

  • I Agree with Phil Earle.
    July 26, 2013 - 14:21

    PHIL EARLE, you are accurate in your synopsis of the province of Newfoundland and Labradors roadblocks to economic success erected by Ottawa over the past 64 years, despite our province's great endowment of wonderful natural resources and our prime geographic location that contains a large area of valuable Atlantic Ocean waters and the air space above that have also proven very profitable to Ottawa. I will also add Sir that your statement is absolutely correct, that our government should never be creating and facing such problems as Muskrat Falls Project is now presenting it. Your suggestion that our government leaders should instead be addressing the root cause of Newfoundland and Labrador’s problems in Ottawa, problems we have lived with since joining Canada in 1949, problems that are so obvious they are staring both our provincial and federal government in the face and are demanding to be fixed immediately. All that is required is for the Ottawa Government to provide the same type of equality and sustenance that it has offered the other 9 provinces, most of whom did not hold the same valuable assets that the province of Newfoundland and Labrador does and it has more than freely shared with the rest of Canada, to its own economic detriment, ever since it has been part of the Canadian Federation,.

  • Jon Smith
    July 26, 2013 - 13:25

    It is very likely that Quebec's rights under the 1969 contract will stand. Muskrat project must take into account any impacts. If Nova Scotia wants any more than the initial giveaway the project to deliver power across the gulf must be stopped. The present planned subsidy to the mainland ratepayers is more than enough. No more giveaways.

  • Eli
    July 26, 2013 - 12:49

    My comment was for Business Man.

  • phil earle
    July 26, 2013 - 12:31

    Thank you Mr Penny and Vardy, and the 2041 group for this clear present summary of the dangers and difficulties implicated by this weeks news releases from Hydro-Que and Nova Scotia on the Muskrat Falls Project. Perhaps there’s a dozen or so people in the province like you who have done their utmost, giving their time and energy for the benefit of the people of this province, in presenting honest explanations of the ever unfolding Muskrat Falls Project drama, it’s potential ramifications and their affect on the future of our province and people. Some time ago I understood from Danny Williams that his government tried to find a way for Muskrat Falls power to flow through the Hydro-Que power grid as it would allow for MF electricity to be sold in New England for a profit to NL. But this plan was rejected by Que. It was only then that our government decided to go the Martine route via the island of Nfld. The unfolding saga since then, with power line across the straights, least cost options of electricity to the island, Holyroad operations and activities, federal loan guarantees, Emera contract for transmission line across the Cabot straight and 30 year free or cheap rate to Nova Scotia, etc., etc, and the whole plan now of how Nalcor is proceeding and plans to proceed with the development of MF’s (which is of course not available to us) is the direct out come and affect of HQ’s decision not to cooperate with NL and the MF Project. Every scenario of the unfolding of the development of MF’s since HQ’s refusal to permit power into its grid from MF’s has been influenced by that decision. All the twists and directions Nalcor and our local government have taken to bull ahead with MF’s has been so because the best option and direction for MF’s power development was removed by Que. What has and is happening because of HQ’s action is that those pushing for MF’s in the province have gone ahead with the objective of developing the project at all costs. An attitude of ‘you never know what you can do until you try”!! What multi billion dollar business in the world operates in this Manner? The nightmare, Alice in Wonderland, approach to the operations of MF’s development by Naclor and the Nl government is a result of the simple fact that the NL government has allowed and put themselves , driven themselves into hostage by Quebec. Quebec has not put us into hostage over the MF’s project the Nl government and Nalcor have put the province, our people and their future there! NL was held captive and ransomed, bought and sold by Canada and England in the confederation of 1949. We have been trying to stand up ever since with half of one leg, but the Dominion don’t want us upright,. Strong and independent. They have for 64 years done what is in their power to destroy our success and even our right to pursue success. Do I have to say any more then to mention how Canada treated us with regards to, Churchill Falls, our great Grand Banks Fishery, our air rights, our ore wealth in Labrador, our oil, etc. And now MF’s power/ Que/ HQ/ Federal loans and financing is, and will be, another mega Billions of dollars project that will devastate our province and people for decades. Since confederation Nothing has changed for us in NL in the struggle of developing our resources for the benefit of our selves now or in the future. The actions of our NL government on pushing ahead on MF’s is an attempt to show Canada and the world, and perhaps themselves, that NL is now capable of developing itself like other provinces in Canada and countries of the world. But this is an illusion, a hope that cannot come to fruition until NL is on an even , fair footing economially and governmentally like the other provinces in the federation of the union. Our government should never be creating and facing such problems as MF’s is now presenting in the first place, they should instead be addressing the root cause of NL’s problems in Ottawa, problems we have lived with since joining Canada. If such federal policies and mistreatment of us were addressed and resolved do you think for example the MF’s Project would be unfolding anywhere near in a way as it is now? Perhaps the thought and need of MF’s power for the province would never, in that case, have entered in the minds of our government in the first place? P earle

  • FINTIP
    July 26, 2013 - 10:48

    Kathy Dunderdale's pitbull terrier, the pseudonymous JohnSmith, again attempts to deflect attention away from the meat of the matter. She/he can repeat ad infinitum that HQ's rights are restricted to power and not the water used to produce it, but ultimately of course it will be the courts that will decide that issue. We know from history how that is likely to go. That said, Vardy/Penney are not prejudging judicial outcomes - any more than is Brian Pickford. They are simply pointing out that, legal merit aside, the prospect of another Newfoundland smack-down by the Supreme Court of Canada constitutes a risk that a province of this size, political clout and financial wherewithall cannot afford. The impact of such a judgement on a project just completed or nearing completion could be catastrophic. Dunderdale also disclaims any relationship between Muskrat, our provincial deficit, our credit rating and our fiscal integrity. Already the project adds to our deficit by virtue of the financial transfers from the treasury to NALCOR and will continue to do so until a comprehensive longterm financing structure for Muskrat is in place. Only if that borrowing program subsumes all project costs including construction interest and bridge financing can Dunderdale then claim there is no direct impact on the deficit. That will not, of course, obviate the huge indirect impact on the deficit that will continue for decades. The latter stems in part from the fact that borrowing costs for all other government initiatives will have risen in lieu of Muskrat. Even more disconcerting is that it will reflect the direct risk exposure to Muskrat that the province will carry for the next half century. The federal loan guarantee - assuming the Province can manage to hang onto it - will likely cover as little as half the total project costs. The Government of Newfoundland and Labrador will be the guarantor for the balance. It is to preserve that $6 Billion federal guarantee, which is critical to its costs of borrowing, that the Province is getting ready to instruct NALCOR to capitulate to Nova Scotia's UARB. That will mean abandoning any upside profit potential on the export of the 40% bloc of surplus power. In all of this it will be the lowly Newfoundland homeowner who will pay through the nose for an unseemly high cost of electricity. Any portion of its amortization that the ratepayer proves unable or unwilling to shoulder will be transferred to taxpayers in general at a later date. There is one final point I have made and others have made in the past that bears repeating. It is that in one important respect Muskrat is not just as bad as the Upper Churchill - it is worse. While the Upper Churchill deal was essentially a complete give-away of a great hydro-electric resource to Hydro-Quebec and a cabal of international carpetbaggers, the Province itself carried only minimal financial exposure in the event that it had failed. In contrast, Muskrat constitutes an enormous risk to the longterm fiscal integrity of the Province and its citizens. That is the point that sensible people - people with no axe to grind - are trying to impress on this secretive, fixated, arrogant and - we fear - inept and irresponsible administration. But sadly I think it's 'damn the torpedoes - full steam ahead'!

  • Just Sayin
    July 26, 2013 - 09:43

    John Smith, I believe you are wrong.... and that HQ can, by their contract maximize the use of water in the reservoir for their production of power at the Upper Churchill. And as such the water downstream in the river at Muskrat Falls is subject to HQ use. To intergrate the two, to make MF viable, would require the consent of HQ, and perhaps a fee, and MF output will be second in priority to HQ needs. You think we can F.... with the existing contract by saying we will allow you your block of power on an average monthly basis, or some other contrived scheme? I expect the courts will knock it down. It is too cute by half. It's a scheme that will be exposed. Sounds dumb to me, to think it could succeed. Who is the architect for this ... Gilbert Bennett, Danny Williams? Who? We will be fortunate if our Nfld Court here upholds Cabana's challenge, as this decision should come soon. So Vardy and Penny are spot on......STOP THE SQUANDER OF PUBLIC FUNDS, NOW. RIGHT NOW.

  • Maurice E. Adams
    July 26, 2013 - 08:12

    Excellent article. Informative and clear. Well done.

  • Just Sayin
    July 26, 2013 - 08:12

    Yes, HOLD THE HOLE, Gilbert Bennett's hole, as big as a pyramid, already squandered 700 million. That's 10 tomes the cost of Frank Moores hole in the 70s. One should do their homework before undertaking big useless sinkholes.

  • John Smith
    July 26, 2013 - 07:27

    The province has not agreed to any long term contract for the sale of power. The court case by HQ has no basis in reality, as HQ has rights to a bloc of power, and not the water running in a river in our province.This project will not add to any deficit, and will be financed thus not affecting any day to day spending in by the province. Everything in the above letter is speculation, conjecture, and innuendo... which is what we have come to expect from these gentlemen...but why?

    • Tony Rockel
      July 26, 2013 - 09:05

      "Speculation, conjecture and innuendo," Mr "Smith"? I think not! From the amount of bluster coming out of the Dunderdale bunker, it's evident that the PCs and NALCOR are in full panic mode. Too bad they never did their homework before wasting a billion dollars of taxpayer money.

  • a business man
    July 26, 2013 - 07:02

    Personally, I support MF because it is good for my business interests outside of Newfoundland. I am a taxpayer and citizen, and I have the right to support MF even if it is bad for Newfoundland. When voting, I do not vote for what is best for Newfoundland, I vote for what is best for me. MF is good for me, so I support it without reservation.

    • Joe
      July 26, 2013 - 12:17

      I don't think it is rational to bankrupt the province just to create a living for unskilled and uneducated business people. This is the failing of the incompetent Dunderdale Government.

    • Eli
      July 26, 2013 - 12:18

      U escape from your cage again?