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In his letter of Jan. 19 “Some thoughts on rate mitigation for the uninitiated” Andy Wells appeals to the uninitiated that the Muskrat Falls project is a bad project, hoping that the uninitiated will accept the figures he quotes as accurate. The initiated know that his quoted figures are very much exaggerated.
Firstly, Andy does not give evidence that the cost of the Muskrat Falls project is $14 billion; the currently accepted figure by Nalcor is $12.7 billion.
The money owing on Muskrat Falls may be lower than its cost, depending upon how much money the provincial government has already put into the project. In the 2015 provincial budget speech (2015_Budget_Speech.pdf, page 33 and iii) government said it would put an equity investment of $760,000,000 into Nalcor and over a total investment period of 10 years, the provincial government will have invested $3.1 billion into Nalcor. So the money owing may not be $12.7 billion but $9.6 billion.
Secondly, Andy quotes “there are $3 billion of assets “used and useful” in our power system,” without giving evidence for $3 billion. The estimated cost of the Upper Churchill Plant in 1964 was about $1 billion. (See https://www.gov.nl.ca/publicat/royalcomm/research/Churchill.pdf). In today’s currency this would be in excess of $8 billion.
Thirdly, Andy estimates the operating costs of Muskrat Falls project to be about $1 billion annually, with interest and equity costs of about $750,000 annually. Financing $12.7 billion at 3.5 per cent requires an annual interest cost of $444,500,000 (https://investorrelations.gov.nl.ca/default.aspx). The 3.5 per cent rate is based on a recent bond issue by the provincial government. Subtract from the latter figure an estimated savings of about $171,400,000 (http://www.releases.gov.nl.ca/releases/2012/nr/1116n07.htm) for not using Holyrood plant and net income to the government from Nalcor Energy of $118,100,000 (2018BudgetStatements.pdf, page v). The net operating costs, excluding maintenance, reduces to a manageable $155,000,000 annually.
Fourthly, demand elasticity is not large over the short term. Dr. Jim Feehan in his presentation to the Wessex Society on January 2019 suggested that there may be appreciable demand elasticity over the long term, perhaps decades.
For houses (or buildings in general) that are heated directly by electricity to switch to alternate fuel sources such as oil, propane, or heat pump requires a sizeable input of capital for conversion. Oil heat requires a furnace, chimney, copper pipes or duct work and considerable property renovations, from which it may take many, many years for the owners to recover costs.
If all buildings which are heated electrically were to convert to alternate heating sources at the same time, contractors would be swamped with requests, which would take years to accomplish.
Propane heat requires similar renovations. Installing a heat pump does not require a chimney but requires copper pipes and/or duct work.
Contractors building new houses would automatically install electric heating to sell a cheaper house thus avoiding thousands of dollars of expense by not installing a chimney, furnace, pipes, heat pump and/or duct work.
Fifthly, in last Thursday’s Telegram Premier Dwight Ball changed his thoughts on rate mitigation, and is quoted as saying “We’ve made a commitment that rates will not double and we will remain competitive.”
This is not the same as saying that there should not be any extra cost burden to the taxpayers and rate payers of the province as a result of Muskrat Falls coming on stream.