“Billions in benefits to come,” says Ed Martin (The Telegram, Dec. 13, 2018). His prophesy of billions in dividends would be indeed accurate if only all of his demand projections were to come true.
If our appetite for electricity steadily grew despite the rate increases then, and only then, would the ratepayers provide all the billions of return on equity about which he continues to brag! The problem is Martin miscalculates how much electricity people are going to use, particularly at a dramatically increased price.
We do not have a “command and control system” whereby ratepayers are commanded to generate twice as much revenue from higher rates after interconnection with Muskrat Falls. Nor can we conjure up on command an 8.4 per cent return on equity. Already we have witnessed a levelling of demand.
The new CEO at Nalcor has dramatically reduced Nalcor’s forecast for electric power demand and is projecting an anemic growth from 7 TWh to 7.5 TWh between 2021 and 2040. This increase of 500 GWh compares with Nalcor’s 2012 forecasted increase, at the time of project sanction, of three times that amount or 1.5 TWh, and from a higher base. Nalcor had anticipated growth of 1 TWh from 2012 to 2021. Up to 2018 there is no evidence that this will happen. When the CEO of Newfoundland Power presented to the Muskrat Falls Inquiry he said that NP’s load is declining by one per cent annually. The rationale for Muskrat Falls has vanished, if it ever existed!
Total energy sales are likely to be 30-50 per cent lower than Ed Martin banked on. That translates into a huge loss of revenue. Martin’s forecast for growth was unmatched in the North American utility industry — Martin and Nalcor had absolutely no basis for counting on such a high growth rate in local electricity demand. Even Stan Marshall’s reduced forecast remains too optimistic.
How much can ratepayers pay in increased rates? The reality is little or none.
Half of our ratepayers can hardly afford their electricity bills today. Increasing their rates causes other direct economic losses and demands on government for income support. Among those who can afford to pay, many will shift to energy substitutes, particularly for space heating, driving down the demand for energy.
Increasing both power rates and power sales at the same time defies the first law of economics, which call for sales to fall when rates rise. Newfoundland and Labrador Hydro won't come anywhere near to doubling its revenue in 2021 to match rising costs. Operating losses are likely to grow. The reality of today is that the costs will vastly exceed revenues, producing losses, not dividends. How can there be such a disconnection between the former Nalcor CEO and the reality of 2018?
What will be the source of the billions in dividends? They have to come from our pockets when we pay our power bills. Those bills must cover other costs as well, including interest on debt, repayment of principal, operating costs and fuel. Despite historically low interest rates, debt servicing cost will be large, with $7.9 billion in federally guaranteed debt, $800 million from Emera and $4 billion borrowed by the province.
Ed Martin is in complete denial of reality to say that the economics of the project remain sound when Nalcor’s latest forecast reveals that the 2012 load forecast was grossly inflated. These things are not conjecture — they are facts. When applied across the 50 years needed to pay off Muskrat Falls, the total liabilities placed on the government will run deep, into the tens of billions: the exact opposite of Martin’s claims of tens of billions in benefits.
Ed Martin’s extravagant claim of billions in future benefits does not stand up to scrutiny. His claim ignores the negative impact arising from our financial obligations to repay borrowed money and to cover other costs. While Muskrat Falls reduces our fuel cost it brings with it the obligation to service even larger interest and repayment costs. Muskrat Falls creates a new financial obligation to pay four dollars in capital costs for every dollar in fuel savings!
Muskrat Falls will not be self-supporting let alone generate billions in benefits. Indeed, it is highly questionable if it can recover enough in rate revenue even to cover operating expenses, let alone to repay borrowed capital and to pay annual interest charges.
Ron Penney and David Vardy