Muskrat Falls debt burden? $15,600 per person

Published on July 5, 2014

With Nalcor’s announcement of the updated costs for Muskrat Falls on June 26, the Muskrat Falls project has broken the $10 Billion threshold.

The Newfoundland and Labrador components (including generation, the Labrador Island transmission link, the Strait of Belle Isle crossing and the transmission lines from Churchill Falls to Muskrat Falls) have broken the $8-billion limit.

Further escalation beyond the $8-billion threshold is inevitable, given that we are at an early stage in construction.

The DG 2 capital costs were established in 2010 at $5 billion and these costs were hiked in October of 2012 to $6.2 billion. With the announcement last week, the new cost projection is $7 billion, an increase of 40 per cent in less than two years.

These data do not include allowance for funds used during construction (AFUDC, which is principally interest during construction) and other financing costs identified by Nalcor. These amount to $1.2 billion, bringing the total cost to $8.2 billion. AFUDC on the $800 million in cost escalation also adds a further $130 million, bringing the total to $8.33 billion. The $1.8 billion ($1.6 billion plus AFUDC) for the Maritime Link brings the total to $10.13 billion.

Our 2014 population is 525,000 and forecasts reveal likely continuing decline.

This burden works out to $15,600 per person, which is approximately equal to our per capita public debt, which has also been increasing with recent budget deficits.

To argue that borrowing for this capital project will not impact on our financial position is preposterous.

We have a narrow, fragile resource-based economy which has to support this doubling of our public debt. The fiscal limits facing this province are real.

Our province is responsible for sharing cost overruns on the

$1.8 billion (including AFUDC) Link with Nova Scotia. Overruns on the Maritime Link beyond $1.8 billion must be added to the $8.33 billion to calculate the actual cost to Newfoundland and Labrador ratepayers.

Furthermore, the amount of revenues expected from export sales will not come close to recovering full costs.

The unit costs of this project compare badly with several projects currently under construction in Quebec and Manitoba. Comparisons with Churchill Falls are most invidious. Adjusting for inflation, the unit cost of Muskrat Falls power is 10 times that of Churchill Falls.

If the Public Utilities Board concludes that Holyrood will continue to be needed to supply emergency power after interconnection with Muskrat Falls, then the cost will mushroom even further.

In that event the Muskrat Falls project would not have been the least-cost option even when the choices were limited to Muskrat Falls or the isolated Island alternative.

What does all of this mean for ratepayers?

It means that dramatic rate increases are in store for all of us. This will lead consumers to substitute other forms of energy.

When this happens the viability of this project will be placed in jeopardy.

The fundamental proposition that underlies our stance toward Muskrat Falls is that the cost per kilowatt hour will be out of line with other jurisdictions and we will be locked into the highest rates on the continent, doubling by 2020.

If you fast-forward into the future, for three generations, you may find that inflation will eventually lighten the burden, but for quite a long time the weight of the albatross on our children and grandchildren will be crushing.

While some may be “comfortable” with these numbers we expect ratepayers will not share this level of “comfort.”

Ron Penney is former provincial deputy minister of justice and former city

manager for the City of St. John’s. David Vardy is former clerk of the Executive Council and former chairman of the Public Utilities Board.