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

Published on July 26, 2013

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