LETTER: A fix for the Muskrat Falls debt

The spectre of sky-high electricity rates due to the cost overruns of Muskrat Falls is looming over the residents and businesses of Newfoundland and Labrador. We are facing the prospect of the doubling of electricity rates from $0.11 to $0.22 per kilowatt hour, in effect, paying for Nalcor’s poor planning, management and oversight of the Muskrat Falls project.

I do not believe that is the responsibility of the ratepayers to cover the losses and debts incurred by a private company. The practice of privatizing hydro profits but socializing the losses is unacceptable and goes against basic tenets of capitalism. The company and its investors took a risk on a project and they lost. They should have to pay for it; that’s the risk you take as an investor and a company — your investments don’t always work out.

As such, I propose the following solution to pay for the debt that does not rely on electricity ratepayers to bail out the supplier.

For the purpose of the demonstration and easy math, let’s assume that the current rate is $0.10 per kWh and it will double to $0.20 per kWh. Let’s also assume that the average household consumes 1000 kWh per month.

What I propose is that the ratepayers pay the new rate, $0.20/kWH, except that $0.10 of that is actually a loan from the ratepayer, used to buy 20 year bonds from Nalcor, using Nalcors infrastructure as collateral in the event of default.

So over the course of 1 year:

• 12 months x 1000 kWh x $0.20 = $2,400/year paid to Nalcor

• $1,200 is revenue to Nalcor for the electricity consumed by the ratepayer.

• $1,200 is used to buy bonds from Nalcor and is owed back to the ratepayer within 20 years.

These bonds bear a 0 per cent interest rate to the ratepayer and create no additional cost to Nalcor.

Over the course of 20 years, the ratepayer holds Nalcor bonds worth 20 x $2,400 = $48,000.

Since Nalcor is still receiving the $0.20/kWh, there is no impact on their cash flow and Nalcor is able to cover the cost of its debt to its lenders by replacing it with debt to ratepayers in the province. The ratepayer is protected by securing their loans against Nalcor’s distribution infrastructure. In effect, the ratepayers would own the equipment until such time that the bond is paid out.

So far however, ratepayers are still paying $0.20/kWh, which diminishes their cash flow, since they cannot “spend” the money they’ve tied up in bonds. There is a solution for this, too.

Banks could then come in offer a line of credit product that allows ratepayers to “borrow” against the value of their bonds, at interest. 

For example, let’s say that after one year, our ratepayer has $1,200 in bonds purchased. The ratepayer could go to their bank and set up a line of credit account with a value of $1,200, secured by their bonds in Nalcor. The line of credit would grow to $48,000 by the end of year 20. 

The bank has security in the bonds, backed by the physical assets of Nalcor. The bank also earns interest revenue from the line of credit accounts.

The ratepayer is able to access the value held in their bonds immediately, leading to no effect on the ratepayers cash flow, while at the same time helping Nalcor cover the costs of its debts.

Nalcor’s cash flow is unchanged and their debt simply switches from being held by private lenders and institutions to being held by the ratepayers of the province.

But most importantly, Nalcor remains responsible for paying for the debt incurred from Muskrat Falls and those costs do not get downloaded to the ratepayers. The ratepayers help Nalcor by replacing their loans at interest with bonds bearing no interest, saving Nalcor money. Nalcor helps the ratepayers by taking responsibility for their bad decisions and execution of the project.

Ben Wiper

Main Brook