Since the last provincial election, there has been a barrage of written comments regarding construction of the Muskrat Falls hydro project. While the interest in provincial affairs is in itself admirable, some of the comments appear to be contrary to that of experts working at Memorial University and Nalcor.
If memory serves me well, these experts have work experience in a variety of disciplines. In addition, experts from Manitoba Hydro also provided a second opinion. Many included individuals who have 30 to 40 years experience in their respective fields.
It should be noted the members of the province’s Public Utilities Board, while knowledgeable, are not experts in the energy sector. In order to express an honest opinion, the PUB would also need consult with an outside expert such as Manitoba Hydro.
In general, the basic conclusions reached were: the province will require additional energy if it is to meet future projected demand; energy generated from hydro projects is, in general, the most cost-effective method; the Muskrat Falls hydro project is capable of generating sufficient energy to meet future provincial demand; and revenues realized from the sale of energy in excess of provincial needs can be sold to assist in the pay down of the initial capital costs. So why has so many people expressed concern with construction of the Muskrat Falls hydro project?
The major concern, by far, appears to be related to costs, including: the high initial capital cost of the project, an assumed increase in provincial debt and the suggestion that there will be a substantial rate increase in energy cost to consumers. Should the implementation of a public project, such as the Muskrat Falls project, be based solely on cost?
Vale Inco is a privately owned firm. The prime objective of a private firm is to increase the asset value of the firm and/or pay out a reasonable annual rate of return to shareholders. The Vale Inco project at Voisey’s Bay and Long Harbour is estimated to cost more than the costs required to construct the Muskrat Falls project.
The initial price paid for the privilege for the mining rights at Voisey’s Bay was $4.3 billion. The projected costs to construct the hydrometallurgical plant at Long Harbour is approximately $2.9 billion. An Innovation Centre was to be constructed at Memorial University costing approximately $20 million. In order to be viable, the Vale Inco project(s) needs to generate sufficient revenues from sale of its mining products to: amortize its initial costs at Voisey’s Bay and Long Harbour; finance its annual operating and maintenance costs; pay royalties and taxes, etc. Profit occurs when total revenues from the sale of mining and processing operations exceeds total expenditure. The measure of efficiency for privately owned projects then is profit and/or the rate of return on capital investment.
The Muskrat Falls project is a publicly owned project where the owners are the citizens of the province. A publicly owned project may be defined as one that is authorized, financed, and operated by a government agency such as Nalcor. Public projects provide utility services such as: water, sewage disposal, electric power, etc. The prime intent then for construction of a public project is to provide a service not for citizens to obtain a profit.
The purpose for construction of the Muskrat Falls project is to ensure that energy users in the province have and will continue to have a reliable supply of energy to meet both existing and future energy demand. U.S. President Barack Obama recently stated that governments should not govern from crisis to crisis. Crisis situations can best be offset through the use of good planning methods and that are upgraded on a continual basis.
If the rate of return on capital investment is a measurement of efficiency for a privately owned project, what factors can be used as an indicator of efficiency for a publicly owned project?
Publicly owned projects are often called self-liquidating projects. In most cases they are not meant to earn profit but are administered to earn sufficient revenues to pay off expenditures over a specific period.
Consequently, the indicator “rate of return” is not applicable for publicly owned projects. Therefore it is very difficult to quantify the economic benefits received from publicly owned projects.
In addition to the fact that it provides essential service to residents, construction of the Muskrat Falls project will provide a number of benefits for residents of Newfoundland and Labrador. The question is: how do you quantify them in monetary terms?
Listing the benefits
The benefits include, but are not limited to, the following:
• Providing the lowest costs for clean renewable energy for residents and businesses.
• Ending the dependence on oil and unstable electricity prices. (The cost of gasoline, a derivative of crude oil, has increased at a compound rate of over 6.2 per cent since 1969. The cost of water to generate energy at Muskrat Falls is zero dollars.)
• Providing long-term stable electricity rates for generations of Newfoundlanders and Labradorians. (The estimated economic life of a dam is approximately 100 years.)
• Creating employment during the construction phase of the project and employment during the continual operation and maintenance period over the economic life of the project
• Increasing the interest of heavy electricity users to relocate to areas adjacent to the energy sources. (The number and duration of power outages will decline proportionally as the distance of users from the power generating source(s) decreases.)
• New industries will provide new opportunities for employment; additional employment will encourage population growth; a larger population will ultimately require an increase in the service industry and much-needed revenues will flow to the provincial coffers. (The provincial and national economies are a function of its prime industries. Check the multiplier effect that the mines at Labrador City and Wabash has on the entire Canadian economy.)
• Revenues will be received from the sale of energy to Nova Scotia interests; energy that is in excess to our needs. (The Maritime link is to be constructed and financed by Nova Scotia interests. Revenues received can be used to pay down capital expenditures)
• Energy is a product, as is iron ore, oil and gas, wood products, etc. Surplus energy can be sold on the international market.
• The Maritime Link will provide an alternative route for energy export. After the Upper Churchill Falls contract has expired, this alternative route will provide leverage in future negotiations for the sale of Upper Churchill energy. (If an alternative route is not available why would Quebec Hydro negotiate?)
• In a scenario where insufficient energy is available to meet 100 per cent of demand, available energy would first have to be distributed to those in greater need and remainder on a proportional basis. (Are consumers willing to do without energy during periods of energy shortages? What costs are consumers willing to pay for higher-priced energy?)
In general, the comments written above are an attempt to clarify some of the differences inherent between private projects and public projects.
But let’s get real.
None of these comments, nor those written for and against construction of the Muskrat Falls project, have little meaning in reality. Our civilization is, with few exceptions, solely dependant upon some form of energy. A loss of energy will, in time, leave us dead in the water. Residents of Badger, Toronto, Quebec and New Brunswick are witnesses to our dependency on electricity. Gone are the days of potbelly stoves, chopping wood for the stove, kerosene lamps, travel by dog team, outhouse visits, trips to the well for water, etc.
The harsh truth of the matter is that many of us, currently living in Newfoundland and Labrador, would not survive winter if sufficient energy was not available.
Instead of criticizing the integrity of the professionals at Nalcor, shouldn’t we be thankful that they had the fortitude to investigate the need for additional future energy and provide solutions to the problem?
Dave Short writes from St. John’s.