The province and the federal government have announced a restructuring of the financing of the Muskrat Falls project, one which builds upon a Public Utilities Board (PUB) report on mitigation released only two days before.
The restructuring plan calls for dividends from Muskrat Falls to be forgiven.
Details are sparse, particularly on how the province will be able to absorb the costs arising from its investment of $4 billion in equity and the accumulated interest during construction (known as AFUDC) which bring the province’s investment closer to $5 billion.
The PUB report accurately confirms that few realistic mitigation opportunities exist, either through higher revenues or reduced costs.
However the report is incomplete.
The PUB failed to expose the flawed business case, which rested on contrived demand estimates and fictitious “dividends” and one which cannot be cured by financial tinkering.
While dividends flowing from the project were fictitious, the $5 billion in provincial equity creates a very real and significant cost, which the report fails to identify and to include in project costs.
The report understates the costs, accepting Nalcor’s $726-million estimate of revenue requirements without challenge.
Instead, revenue requirements will exceed $1 billion.
The report does not provide an estimate of the likely change in demand and revenue if rates were to increase to 22.89 cents/kWh. This requires an analysis by the board of the underlying demand assumptions and their development of scenarios based on plausible load growth values. The likely finding from such an analysis is that such a rate would cause a “death spiral” in our power system.
Without energy demand there can be no dividends. The demand projections at sanction were contrived and the prospect of dividends was unrealistic.
After doubling of capital costs and collapsing power demand the “dividends” are mythical. Yet the costs of $5 billion in interest and loan repayment are real and have been left out.
The largest single “rate-mitigation” measure in the report is the forgiveness of dividends by the province, dividends never likely to exist. The PUB accepted Nalcor’s $726 million estimate of 2021 costs, or revenue requirements, knowing that they do not include the cost of borrowed funds which will bring the revenue requirements close to, if not above, $1 billion in 2021, and increasing thereafter. It is becoming increasingly clear that a replacement for the Holyrood thermal plant will be needed for the purpose of system reliability after interconnection with Muskrat Falls which will add $250 million in costs. In all likelihood costs will rise even further when the lawsuits are settled, synchronous condensers are repaired and the software issues resolved. Two years ago Nalcor was using $808 million as its estimate of 2021 revenue requirements and the official capital cost estimate has not been changed, making the $726 figure suspect.
More than half of the mitigation identified in the report is comprised of forgiveness of dividends by the province. The PUB should have developed its own cost estimates to measure the cost of the provincial electrical power system before Muskrat Falls and full system cost when the project is completed. This should include all costs, including the cost of servicing and repaying provincial equity, amounting to more than $200 million.
The report makes it very clear that increased revenues from electrification and from export sales are unlikely to have a big impact. The cost savings on offer in the report do not bridge the gap. New sources of revenue are small. Other options simply transfer revenues from taxpayers to ratepayers. The recommended options place most of the burden back on the province, which lacks the fiscal capacity to carry such a heavy load.
Governments recognize that the financial arrangements are unworkable and must be renegotiated. The bad news is that no new federal money is on the table, nothing to relieve the province’s fiscal crisis. It remains a mystery as to how rates will be maintained at 13.5 cents/kWh despite escalating costs and collapsing demand. It is not clear how a modified “cost of service” approach will reduce rates or how questionable dividends can be “monetized.”
No silver bullet here in the PUB report or in the financial restructuring!
David Vardy,
St. John’s
