Putting a term sheet in perspective

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On Friday, the prime minister, with the premiers of Newfoundland and Labrador and Nova Scotia, signed a term sheet for a Muskrat Falls loan guarantee, leaving the details yet to be determined. What was clear from the prime minister was that the federal loan guarantee will await the sanctioning of Emera’s commitment, so that Muskrat Falls will be a fully “regional” project.

Under the agreements signed between Nalcor and Emera in July 2012, Emera will have until July 2014 to make a final commitment to this project. The Nova Scotia Utilities and Review Board (UARB) has not yet received an application.

Why is our government rushing to sanction this project, recognizing that the loan guarantee is conditional upon participation by our Nova Scotian partners, who are not yet ready to make a final commitment? We are told that this will reduce the financing cost by $1 billion.

If that loan guarantee does not materialize, the burden on the ratepayer will be greater, in the amount of $1 billion. How can the government of Newfoundland and Labrador make a decision to sanction Muskrat Falls without the federal loan guarantee, which could take until July 2014, and also without the final legal agreement?

There is no question that ratepayers need regulatory protection, but why has our government placed this decision in the hands of the UARB of Nova Scotia? Yes, the Nova Scotia review will provide added transparency but the UARB is not mandated to protect this province’s ratepayers.

Why do we need a regulatory review? A full regulatory review is mandatory due to the large scale of the project and the risk it entails for ratepayers. Another reason, of equal importance, is the monopolistic structure of our power industry. There is no competition from other service providers. In these monopoly situations the Public Utilities Board (PUB) has a mandate to protect ratepayers and to ensure, as far as possible, that ratepayers are not disadvantaged by the lack of benefits that would otherwise be afforded them by competition.

Ratepayers in this province depend on their own PUB for protection from excessive rates. Yet, the “take-or-pay” power purchase agreement between Nalcor and Newfoundland and Labrador Hydro will be outside of the jurisdiction of the PUB. The N.S. UARB will not protect our ratepayers from excessively high rates. The estimated capital costs of this project have increased from $6.2 billion to $7.4 billion, but this does not include allowance for funds used during construction, previously estimated at $1.2 billion. Nor does it include cost escalation on the Maritime Link, now estimated at between $1.3 billion and $1.5 billion.

Taking the lower estimate

($1.3 billion, escalated from $1.2 billion) the overall project cost is now $8.7 billion and we expect that it will escalate beyond $10 billion. The loan guarantee will be capped at $6.3 billion, leaving our province exposed to the full cost of overruns.

The prime minister’s announcement on the loan guarantee places our fate squarely in the hands of the N.S. UARB. The good news is that there will be a regulatory review. But it will be in another jurisdiction and will not concern itself with the rates charged in our province. It will not substitute for a full regulatory review by this province’s PUB. Only a full, transparent and independent regulatory review here, as is being conducted in Nova Scotia, will suffice to inspire confidence in this project. Have we passed the point of no return? Is the financial commitment so enormous that government cannot turn back, without the loss of political capital?

Consider what has happened in Manitoba where two hydro projects are being developed by Manitoba Hydro: the Keeyask and Conawapa projects, whose capital costs were estimated at more than $13.4 billion. These projects have been referred to a sub-panel of the Manitoba PUB. In the words of the minister: “The purpose of the Needs For And Alternatives To review is to provide an independent assessment of the need for new generation and to compare the benefits of building new hydro generation to alternatives such as natural gas.”

The membership of the sub-panel is to be announced, along with detailed terms of reference, in the new year. We urge the government of Newfoundland and Labrador to take similar action.

We believe that the government’s performance will be judged on whether they have done the right thing and for the right purpose. A government that has the wisdom to reassess its course in response to changing world energy conditions will gain approval from an informed public. It is not too late to do the right thing, which is to refer the Muskrat Falls project back to the PUB.

Ron Penney is a former deputy minister of justice and former city manager, City of St. John’s; David Vardy is a former clerk of the Executive Council and chair of the

Public Utilities Board.

Organizations: Public Utilities Board, Nova Scotia Utilities and Review Board, UARB of Nova Scotia Newfoundland and Labrador Hydro Maritime Link Manitoba Hydro Manitoba PUB Executive Council

Geographic location: Muskrat Falls, Newfoundland and Labrador, Nova Scotia Manitoba

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Recent comments

  • Bob K.
    December 05, 2012 - 12:38

    With respect guys, give it up. The robbery has already taken place. All that's left is for the government to ditch the mask, gun, and getaway car.

  • Scott Free
    December 05, 2012 - 12:20

    There is no real deal; the devil is in the details. Prorougie Steve ensured that there are conditions and stipulations tied to the guarantee that the province will never be able to meet or satisify; thus, giving the Feds numerious options for outclauses. There are more loopholes in the non-guarantee than you'd find at a hoola-hoop competition.

  • Exotic Cars for Everyone
    December 05, 2012 - 11:58

    Emera will join this project no doubt, they have shareholders they MUST be accountable to and the fact that by hooking up a 1.7 Billion dollar extentsion cord they have the potential to make 10 Billion in 35 Years. Funny because US, the people of the province have to pay 10 Billion in 57 years. Thats full price for 40 % of the energy. The loan will only cover the bonuses from muskrat as far as I concerned. This is not dea a good deal! But it will flood out 10 billion of our own money for spite and not for need. THose mine could be open for 8 years and close again. The MHI report was a tool that the PUB was trying to use to make decision of a megaproject with no info coming from Nalcor with old faulty numbers. This report is what our governmnet wants to bet our money on! The taxpayers must be eating into the oil profits and jerome kennedy will change any laws that were in place that will try and make dunderdale and her entourage accountable.

  • W Bagg
    December 05, 2012 - 10:58

    maurice, John, why don't you guys just MSN messenge so we don't have to skip over the junk

    • Frank
      December 06, 2012 - 14:40

      Well said. Every article on Muskrat is just a p+++++g match between these two

  • Winston Adams
    December 05, 2012 - 09:07

    Maurice,Nova Scotia already have thier Efficiency Corp, and will consider other low cost options. They have little hydro , so efficiency can't do for them what it can do for us, as we only need about 12 percent from efficieny and wind to go 98 percent green. Even if Hydro Quebec gave us power for free, efficiency is a cheaper option than bringing power from Labrador. That is arithemic. Is there an error in that analysis?

  • Maurice E. Adams
    December 05, 2012 - 08:46

    I note that the Nova Scotia public review board will be considering 3 options --- the maritime link, wind, and a power purchase from Hydro Quebec. On my website (www.vision2041.com) and recently on VOCM Backtalk with Paddy Daley, I argued that Nalcor has not "looked at" whether a power purchase agreement with Hydro Quebec for 25 years would in fact be, by far, the lowest cost option. I suggest, based on Nalcor's own media releases, (see my website) that a power purchase from HQ could save island ratepayers up to $26 billion dollars over 50 years..... Kennedy said in the house that Nalcor had not even spoken to Hydro Quebec about how they could save island ratepayers 10's of billions of dollars and save government billions in equity and increased debt. That is the elephant in the room that nobody wants to talk about --- not even the opposition parties. ------ Why not? Who is putting the best interest of island ratepayers first? ---- Not Nalcor----- Not government. Muskrat Falls is NOT in the best interest of ratepayers ---- then who?

  • John Smith
    December 05, 2012 - 08:33

    We gave the PUB 15,000 pages of information, hundreds of exhibits, millions of dollars, extensions....yet no conclusion. The PUB went out and sought an independant reviewer...they chose MHI...not government...not Nalcor...but the PUB chose MHI. When the deal was first proposed, and the term sheet signed in 2010, there was no talk of a loan guarantee....it was still a gleam in Haper's eye...a chance to get a few votes for no cost. The bottom line is we will need the power, and Muskrat is the lowest cost option.

    • Red
      December 05, 2012 - 09:32

      John you've gave us about 15,000 pages of information as well but there is no substance to any of it. Now I know you work for government. Did you ever do long assignments in school John? It is what is contained within the pages that counts not the amount of B.S. If a government appointed board doesn't trust the people that put them there then why should the public?

    • Little Man Dan
      December 05, 2012 - 13:20

      GET DOWN JOHNNY....get off me, you lapdog lackie; you're a backbencher and will always be a backbencher; you paid Tory wag.

  • Cold Future
    December 05, 2012 - 06:58

    Government cannot have PUB review the Muskrat project.If the people were made aware of the costs to consumers and subsidy required to sell power at discounted rates on the mainland, the most gullible amongst us would not be in favour of proceeding.