Providing accurate information on Muskrat Falls as requested

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I write in response to Gerry Goodman’s letters to the editor in the July 9 and 18, editions of The Telegram.  In late June, Nalcor Energy provided a capital cost update for the Muskrat Falls project which is $6.99 billion.

This is based on 98 per cent of engineering now completed and contracts awarded or through advanced evaluation for more than 90 per cent of project costs.

Similar to other construction projects in the province and around the world, we are experiencing changing market conditions in an extremely active construction industry.

As a result of these factors, combined with planned design enhancements for the project, capital costs for the Muskrat Falls project have increased by around $800 million since sanction in December 2012, or around 13 per cent, not an increase of one third as Goodman stated.

These cost changes are being offset by other savings of approximately $300 million net present value which was negotiated through our financing arrangements.

While nobody wants to see an increased cost estimate, the level of variability between estimates at sanction, where we had approximately 40 per cent engineering complete, and our current budget, with engineering and procurement practically complete, is within the range expected for a large-scale project.

Some of the information Goodman references in his letter is taken from early analysis of the Muskrat Falls project and before sanction in December 2012.

In particular, ratepayers will not be paying the 20 per cent rate of return nor will equity financing be 100 per cent as Goodman stated.

The total cost of the Muskrat Falls project is made of up of the facilities capital cost to build the generating plant and transmission equipment, the cost of financing to borrow money, and a return on the equity provided by Nalcor/government of Newfoundland and Labrador and Emera.

The cost of equity is estimated between 8.4 per cent for generation (which is a fixed internal rate of return typical for a regulated electrical utility) and 8.8 per cent for transmission (the current regulated return on equity approved by the Public Utilities Board).

For both project components, the cost is based on the percentage of equity and debt and, along with facilities capital costs, is passed to Hydro and on to ratepayers with no additional return being earned by Hydro.

The Muskrat Falls project remains the least-cost way to meet our province’s electricity needs. While the capital cost of the project is substantial, financing terms are extremely attractive, and the annual cost of financing and operations is very attractive compared to remaining an isolated island system as we are today.

Even though we are developing this resource first and foremost for our province, we also recognize that there will be sufficient excess power to provide for power exports.

The value of these export sales is currently estimated at close to $3 billion in nominal value over the life of the project, which will all be returned to Newfoundland and Labrador.

An important point that Goodman fails to acknowledge is that with Muskrat Falls we are investing in a provincial asset that Newfoundlanders and Labradorians will own.

No longer will we be paying to purchase fuel to burn at the Holyrood plant.

We will have a 100-year or longer asset that will generate significant value and cash flows for our province for many generations of Newfoundlanders and Labradorians, and be able to reliably meet our own electricity needs.  

While Goodman calls this a “tax grab,” the government of Newfoundland and Labrador is investing equity in this project and will receive a reasonable return on its investment, all of which is included in the electricity costs to ratepayers.

This money will used by the government to invest in our province from improving the province’s infrastructure, funding health care and schools, to reducing our debt.  

 

Gilbert Bennett

Vice-president, Lower Churchill Project

St. John’s

Organizations: Public Utilities Board

Geographic location: Newfoundland and Labrador, Holyrood

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Recent comments

  • Nichol
    July 22, 2014 - 11:52

    The comments made by Mr. Bennett in his letter conveniently ignore the fundamentals of the electricity marketplace, and, as usual concentrate on things such as construction cost increases and the usual party line of the least cost option, equity advantages etc. etc. All these may be worth talking about if the fundamentals of the project were sound in the first place. We keep hearing about the export potential. Who are these export customers in a marketplace flooded with surplus electricity? What prices are they willing to pay vs. the cost of producing MF power? For that matter, what is the expected cost of power production from MF? We know from published reports that power from Romaine River, the Quebec Hydro project of nearly double the size of MF (1550MW, $6.2B) was expected to cost about $0.0600/KWh. Muskrat Falls power will have to cost much more than double that. We need to remember that MF is a very high cost, isolated project, with a relatively low production capacity. The projected cost of MF power has not been published, but it is not rocket science to do some basic comparisons. Where can we possibly sell the high cost power that MF will produce? It just makes no sense. MF power cannot be sold, unless at a highly discounted price, both to NS and any potential export customers. The cost of this discount (subsidy) must come directly from the pockets of the NL ratepayers, who have been LEGISLATED to pay all the costs of the project. These subsidized prices must apply to 60% of the project capacity (20% to NS in return for the ML and the 40% export block). This market condition alone is enough to stop or delay any project for a re-think.....anywhere except at Nalcor it seems. Such a fundamentally flawed business model has only come about by the purely political driven motive 'to build around Quebec at any cost', and the draconian legislation, (including the removal of the PUB from the process), of a very strange Provincial Government in NL. MF power prices will be set by Cabinet, we were told! Banana republic strategies at best. Where are the players today...Williams, Dunderdale, Kennedy, et al. Disappeared all! The changes in the marketplace and lower wholesale electricity prices were well known 8 or 9 years ago when MF planning was well underway. This change in the market was brought about by huge production increases in shale gas, which made the use of NG fueled electricity generation much more economical. These market changes seem to have been ignored. This same Government defines unprecedented prosperity as spending at least $18B in oil revenues, then running 3 consecutive deficit budgets ($500M this year alone). No, Mr. Bennett, your increasingly defensive positions on MF and Nalcor in general will never change the sad realities of a project fundamentally flawed years ago. Churchill Falls reversion is only 27 years away. All we needed to do was upgrade and use our heads until then. Instead, you justified this ill advised project by grossly inflating island demand for electricity, which is really the only market which will be paying the full costs of the project. The ratepayers need to remember this at the ballot box next year. The next Government must then review the leadership of Nalcor.

  • Maggy Carter
    July 22, 2014 - 10:57

    @concerned makes some important points. There are additional concerns: (1) what portion of the contracts, which Bennett says represent 90% of project costs, are based on fixed unit pricing versus total fixed pricing? (2) it is misleading to say capital costs overruns are offset by reduced costs of debt servicing (an operating expense); (3) the characterization of funds provided by government as 'equity' is a misnomer. It presupposes the province has a stash of cash sitting around net of its debt obligations. NL does not. We are carrying about $9 billion in debt, among the highest per capita of any province in Canada, and despite our offshore revenues we are still running an annual deficit. So the idea that government has equity to invest is an illusion. So why would government simply not direct NALCOR to borrow the balance of what it needs (i.e. above and beyond the $5 billion secured with the federal guarantee)? Because the interest rate NALCOR would negotiate on that additional funding would be under 5% (a small premium over the 3.48% on the initial tranche). That would reduce NALCOR's operating expenses and hence the rates that need be charged homeowners. But it would deprive government of a tax grab. Instead the province will borrow the money itself at the 4% level and demand a net return from NALCOR of almost 9% per annum on those funds. It has already announced its intention to borrow another billion this year. (4) A major benefit of Muskrat from Mr. Bennett's perspective is that Newfoundlanders will own it. Yes we will own it and collectively we are responsible for the debt on it. Ownership sound nice as long as it puts money in your pocket - not takes it out. We own a substantial part of the Upper Churchill. That ownership has done very little for us to date. We own the Abitibi plant in Grand Falls. So far that ownership has cost us as much as a half-billion. As economists would say, it has a negative value. But most of all, ownership brings risks. It is the risks associated with Muskrat that Mr. Bennett does not - can not - address.

  • Dood
    July 22, 2014 - 10:53

    Gilbert, how many safety managers has Astaldi gone through?

  • Maurice E. Adams
    July 22, 2014 - 10:17

    Nalcor's 2011 Media Presentation (slide #34) shows that over 50 years the nominal debt servicing and operating costs alone for Muskrat Falls is MORE THAN $14 BILLION (see www.vision 2041.com). How does that compare to the less than $3 billion in revenue from export sales. The same slide also shows another $20 BILLION (over and above the debt servicing and operating costs) --- all of which come out of the packets of NL ratepayers. That alone is largely a $20 BILLION TAX GRAB. We could have bought all the power we needed to get us up to 2041 from Quebec for about 10% the cost.

  • EDfromRED
    July 22, 2014 - 09:45

    Nalcor reeks of duplicity and hidden agendas. They seem like a shadowy organization who give the orders to all the Puppets in the PC Party. The defeat of the PC's next election I believe will swiftly lead to shocking headlines as to how the public purse has been used and abused by such shady PC Party institutions as Nalcor...covered up for now by Bill 29.

  • concerned
    July 22, 2014 - 05:56

    Several corrections to this 1) At project sanction there was almost 60% of engineering complete 2) The life of the subsea cable is 50 years not 100 yrs. 3) The IE said that Nalcor greatly underestimated the maintenance cost to maintain the generating facility 4) The 167 MW of peak delivery to NS will likely mean that the people of Newfoundland will need to invest in additional peak generation to meet the peak demand. This will reduce the 3 Billion net benefit to the people of the province 5) The entire amount of surplus power could have been sold through Quebec under existing agreements 6) The return that the government makes from the people of Newfoundland is a tax. Muskrat Falls is a tax grab. The fundamental difference in my view and that of Mr. Bennett, is that I do not consider just beating the rates that would exist by continuing to burn oil as being an acceptable reason to proceed with this project. Nalcor's decision making process was flawed.

  • concerned
    July 22, 2014 - 05:50

    Correction Mr. Bennett. At project sanction you had almost 60% of the engineering complete. The project was sanctioned in December 2012. The January 2013 online report referenced 60% complete. See online http://muskratfalls.nalcorenergy.com/wp-content/uploads/2013/05/LCP-Monthly-Benefits-Report_Jan2013.pdf