More questions answered on Muskrat Falls

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This letter is in response to questions posed by Messrs. David Vardy and Ron Penney in their letter to the editor in The Telegram on April 19 (A reply to Nalcor’s chairman of the board).

First and foremost, I want to emphasize to the people of the province that Nalcor Energy was created to develop our energy resources for the benefit of Newfoundlanders and Labradorians — Nalcor is the people’s energy company.

Nalcor welcomes questions from the public, has answered hundreds of questions on the Muskrat Falls Project and has posted recent questions and answers on the project’s website ( www.muskratfalls.nalcorenergy.com), under newsroom section.

I invite the public to visit the website and read the wealth of information that is available on the project.

Muskrat Falls will meet our province’s growing electricity demand with clean, reliable energy for generations to come.

Decades of studies and analyses exhausting potential alternative energy sources have continually shown that this project is the lowest-cost way to meet our electricity needs.

The business case for developing Muskrat Falls and the Labrador-island link is as sound today as the day it was announced in November 2010.

The economics of the project have never relied upon any additional revenue being generated through the sale of energy from Muskrat Falls that is surplus to our needs.

Surplus energy not needed in our province will be sold outside the province for profits and returned to the province for the benefit of Newfoundlanders and Labradorians.

It is unfortunate that Vardy and Penney fail to understand the role of the auditor general in our province. While safeguards are in place to prevent financial harm to the company, the auditor general has unfettered ability to review information on Nalcor’s business operations and to report to government.

Following are answers to specific questions raised by Vardy and Penney in their letter. In the interest of space, I’ve attempted to be brief.

What will be the cost of Muskrat Falls power to retail customers on the island?

Rate projections were presented in 2012 and are available online at: www.powerinourhands.ca/pdf/Electricity_Rates.pdf. With Muskrat Falls, electricity rates will be stable over time and will be lower than if we continued to be an isolated system relying on burning oil to generate electricity. Final rates will be determined upon the completion of the project.

What is the revised capital cost estimate for completion of the project?

Nalcor firmly believes that transparency, project oversight and the release of information to the public is critical, and we understand people’s desire to know how we’re progressing on the project. It’s important to find the right balance of providing the public with cost information on the project and protecting the interest of electricity customers and our shareholders by not incurring financial harm. We’re still in the process of negotiating and awarding some large contracts for the project and a cost update will be provided as soon as that process concludes. By not releasing contract value and cost information, we are able to maintain our negotiating position with contractors and ensure we continue to get the best possible outcome for customers. All in due course.

How will the project be financed if project costs exceed the limit imposed for the federal loan guarantee?

The guaranteed debt amount is capped at $5 billion. Costs above this amount will be funded through equity or additional non-guaranteed debt in accordance with the provisions of the November 2012 federal loan guarantee agreement which remains available on the newsroom/reports section on the project website. With respect to equity, it will be provided solely by Nalcor/government of Newfoundland and Labrador (GNL) for the Muskrat Falls and Labrador transmission assets components of the project, and by Nalcor/GNL and Emera in proportion to their ownership interests for the Labrador-island link. This is in accordance with the provisions of the equity agreements and the Newfoundland and Labrador development agreement, also available online.

Why did we commit energy to meet the needs of Nova Scotia at rates below full cost when the original rationale was to serve ratepayers in Newfoundland and Labrador?

Nalcor’s agreement with Emera for 20 per cent of the power from Muskrat Falls for 20 per cent of the cost has not changed. Through this arrangement Nalcor has secured transmission access to and through the Maritime provinces that will enable export of surplus energy from Muskrat Falls. The additional energy access agreement (EAA) secured in November 2013 enables the sale of energy that is surplus to our needs to Nova Scotia at market prices and is not directly tied to Muskrat Falls. Under the EAA, Nova Scotia Power will be provided the opportunity to compete for Nalcor's surplus energy that is offered only when it is not required in our province. The power sold will be at the best prices that Nalcor would have obtained if the power had been sold in markets in the U.S. Profits from surplus power will benefit Newfoundlanders and Labradorians.

In the event of project delay, disruption of generation or transmission, how much will Nalcor have to pay Emera in damages?

There is no compensation associated with a delay. This is addressed in the energy and capacity agreement also available on the project website. The commitment to provide energy to Nova Scotia starts with commissioning of the third generating unit at Muskrat Falls and continues for 35 years from that event. For disruptions of generation or transmission, replacement energy to make up for missed deliveries will be provided to Nova Scotia after the interruption has ended.

What recourse does the federal government have in the event of default?

Similar to any secured lender, in the event of a default that cannot be cured under the provisions of the project finance arrangements, the federal government has the ability to exercise its security interest and assume control of the financed assets.

What commitments have been made to the federal government for which the province is liable?

The province has agreed to maintain the conditions necessary for the project to be built and costs recovered from electricity customers, thus maintaining the certainty required for the federal loan guarantee. This is addressed in the intergovernmental agreement which is also publicly available on the project’s website.

Why did the province enshrine the monopoly power of Nalcor and limit free trade in electrical power, thereby contradicting the province’s long-standing position on free trade in electricity?

Bill 61 provided the certainty Nalcor required to achieve competitive financing terms for the project by demonstrating to the federal government and lenders that there was a guaranteed customer (Hydro) and revenue stream to service the project debt. Open access on the provincial electricity grid is not impacted by Bill 61 and this bill does not change Hydro’s obligations to provide open access for interprovincial electricity transmission, as required by market rules and reciprocity obligations where Nalcor/Hydro operate. Franchise rights similar to those granted to Hydro in Bill 61 are common in other jurisdictions that have open transmission access.

I encourage Messrs. Vardy and Penney to review the report of the independent engineer (MWH Canada), which provides an excellent overview of the status of the project, along with the processes used by Nalcor for project management, and cost and schedule management. MWH Canada will continue to provide regular progress reports which will also form part of the government of Newfoundland and Labrador’s oversight of the project.  

Ken Marshall is president — Atlantic region, Rogers Communications Inc., and chairman of the Nalcor Energy board of directors. He writes from St. John’s.

Organizations: Nalcor Energy, Nova Scotia Power, MWH Canada Nalcor/Hydro Rogers Communications Inc.

Geographic location: Muskrat Falls, Labrador-island, Newfoundland and Labrador Nova Scotia

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  • Cyril Rogers
    May 14, 2014 - 12:27

    My questions to Mr. Marshall and to any readers, with reference to the cost of burning oil versus the cost of building Muskrat Falls are these" (1) How much hydro do you expect to generate in an average year at Holyrood and on what do you base your assumptions? (2) The clear trend for consumption has been for only marginal increases at best in the past decade and more, so how much would oil prices need to increase by to account for 8-10 billion dollars of capital expenditures, as compared with Muskrat Falls? (3) How much extra consumption would there need to be in order to cause the kinds of price increases that would amount to an equivalent cost for oil over 50 years? (4) How much , in fact, will the MF project cost over that period when you factor in interest costs? Will it be 15 billion that has to be paid back? 20 billion? (5) With the loan guarantee for only 5 billion, what will be the interest rate and total costs to the government in order to complete the project? Assuming a final cost of 10 billion dollars, an additional 5 billion that will have to be borrowed and paid back at a current rate of 5 to 6 percent for such loans. This adds another 250-300 million dollars a year for decades so will the final payout on all of the capital expenditures and interest costs could exceed 20 billion dollars. These assumptions are based strictly on the continued consumption of oil….. and fail to take into account any energy conservation that could mitigate projected increases, plus newer forms of energy that could be cheaper than supposedly expensive oil. A huge weakness in the propaganda effort by NALCOR and the government was in their elimination of other possible options in order to justify their only desired option. That exclusion alone is not worthy of an honest assessment of the province's energy needs and points to the lazy or corrupt thinking that went into justifying this project.

  • Cashin Delaney
    May 12, 2014 - 15:54

    The portion of the letter up to the AG-referencing turn of phrase, "unfettered ability", is a free advertisement for Nalcor. This displays a very wise frugal sense of open-source corporate branding for a company not known to spare expense. However, I don’t think Nalcor is being cheap in this method. I believe they are more interested in denying others a voice, rather than saving advertizing budget. You see, when Mr. Marshall sprawls 280 words of vague cheerleading and self-congratulatory content at the beginning of a 1200 word letter, he can effectively squeeze dissent from visibility. A letter to the editor is 300 pages by The Telegram’s own flexible guidelines. My point is, without a becoming a victim to the same hubris, is that all this bartering for financial social license eclipses the root physical problems that are the North Spur, and Methyl Mercury. As far as monopoly goes, Marshall is conflating a crown energy monopoly with a corporate hydro monopoly. We are not SNC, kind Sir, and we are not a secret nation. Please reduce the length, and increse the directness of your letters, or submit them as full-page advertisements, along side all the other unbelievable zero-down financing deals on automobiles. Edsel or Duesenberg? Depends on which side of the class divide you sit; drivers or passenger seat. Muskrat Falls feels like that movie Death Proof (2007), the one by Tarantino with the black ’70 Chevy Nova SS. This project is "death proof" like Stuntman Mike’s car is….. only for the driver(s). Are we, the consumer, in the crash box? From Death Proof: Why is your passenger seat in a box? Well, this is a movie car. Sometimes when you're shooting a crash the director wants to put a camera in the car, you know, shoot the crash from the inside. That's where you put the camera. They call it a crash box. Here. There you go. You know, when you asked to drive me home you didn't mention your car didn't have a passenger seat. Yeah, well, actually, I didn't ask to drive you home. You asked me for a ride and I said yes.

  • There are too many Scroundels in the Newfoundland and Labrador political System!
    May 12, 2014 - 12:49

    # Corporate Psycho And that is the problem, there is always someone in the system who is immoral enough to keep the corruption rolling. It is the reason the province of Newfoundland and Labrador has not been able to get its Unemployment Rate below 12 1/2 per cent or create an economy for the 65 years that it has been part of Canada. The natural resources that have been developed from the province over that time were monumental and amongst the most coveted in the world. We today find our resources, both natural and human, percolating in most places of Canada and other parts of the World creating great economies , but our politicians, both Federal and Provincial didn't seem to want to allow the province of Newfoundland and Labrador to prosper economically. I think the urge for them to have created their own vibrant personal economy was and is now so great, combined with the fact there were and are the lobbyists who were and are waiting in the wings, more than willing takers of the resources that were developed over the past 65 years.

  • Corporate Psycho
    May 11, 2014 - 18:52

    He will look after Danny's interests at all costs. That's who put him at the trough.

  • Bill Coaker
    May 10, 2014 - 17:19

    What would be better for your own credibility down the road Mr. Marshall is if you had simply shut-up and said nothing. Your non-answers, nonsense and bafflegab convinces no one who has even a cursory understanding of economics and finance. As for the role of the AG's, you'll excuse me if I take the word of two of this province's most senior civil servants. As time goes on, this is destined to get more ugly and far more uncomfortable for those - like yourself - who have been its promoters from day one.

  • The democrat
    May 10, 2014 - 10:20

    Interesting commentary on Bill 61. what Mr. Marshall fails to state is that in other jurisdictions there are open calls for new sources of generation to ensure the lowest cost alternative. Even in quebec the retailing arm of HQ will put out tenders for new generation. The generation arm of HQ will respond to this tender, but so too other companies. In Newfoundland there was no such process. MF was validated by a substandard screening study, which excluded many options which would have likely resulted in lower cost, but were definitely lower risk. The most obvious was to build the LIL and purchase upper churchill energy for 20 years from Hydro Quebec. What MR Marshall now seems to imply is that HQ will now be able to wheel power over the LIL and sell to NOva Scotia? Of course nalcor will follow the price to the bottom, and nova scotia comes out the clear winner. Meanwhile our prices will double by 2020. Prices will only be stable (unit rates) only if the demand also grows 1% a year in a very regular basis. Warm winters, and low demand, will result in higher unit rate costs because the payments to the banks must still be made.

  • Maurice E. Adams
    May 10, 2014 - 07:02

    It is misleading to suggest that the only additional energy that will be sold to NS is that which is determined to be "surplus" . The Energy Access Agreement requires that up 1.8 terrawatts of energy must be sold to NS (IF they want it) within the 25 years (I think it is) up to 2041.......... Nalcor only has flexibility to provide more or less each year --- but over the 25 year period, the total must be provided, one way or another. Where will that energy come from if Hydro Quebec has the water management rights? That issue is still before the QUEBEC courts. If MF can't produce the power due to drought, to Quebec's water management issues, or otherwise (weather/reliability issues), etc., NL ratepayers are on the hook for damages, to pay for their power purchases elsewhere or to build other generation to make up the difference.

  • Ken Collis
    May 10, 2014 - 06:23

    Your answers to the first two questions are really 'We don't know yet.' I guess. The statement made saying that Muskrat would be less expensive than oil burning is most likely true, but what about other generating methods and consumer power reduction schemes?