Muskrat Falls and the price of failure

Posted on May 29, 2024 | By Ashley Fitzpatrick | 0 Comments

 

A photo taken for the Muskrat Falls Oversight Committee, from before construction of the Muskrat Falls dam and hydro power station. (File photo: www.gov.nl.ca/MFoversight/)

The current leadership in the Government of Newfoundland and Labrador has shared in detail how all the debt incurred to complete the Muskrat Falls Hydroelectric Project will be paid off. Well, almost.

Atlantic Business Magazine has been reviewing the province’s plan for “rate mitigation” to keep the costs of the wildly overbudget hydro project from overwhelming ratepayers and the province as a whole, since a related announcement on May 16. And while there is significantly more clarity on the plan for managing the immense project debt, with measures that individually were no small feat, all of the details—of exactly who pays what, when, with what money—are still not available, especially looking beyond 2030.

In some cases, the unanswered questions are something bureaucrats and politicians alike openly acknowledge. The approach settled on to date by the Liberal government has reshaped the debt over time and is dealing with immediate costs by making use of known public revenue. It covers part of the overall debt, again covering only through 2030.

At the same time, details and a deeper understanding outside of government of, say, what’s hitting government coffers versus individuals directly is becoming masked by political rhetoric in the province. We’ll come back to that.

A handful of people who have followed the project in close detail from the start and whose names are by now familiar to locals also tell Atlantic Business Magazine what is released doesn’t show clearly enough all of the nitty gritty. There have been expressions of concern about any deferral of payment of principal on the debt, the accrual of interest over time and risk of adding to the overall cost paid by people of the province—ratepayers and taxpayers, with different implications on each side. They have questions on specifics of the near-term spending and say they are still working through phone, email and Access to Information requests to get the answers they need from Hydro and governments. They’re looking for a complete picture on finer accounting details that can be difficult to grasp.

“If you are having difficulty with it, my inbox confirms we are not alone, …”

—Des Sullivan

“If you are having difficulty with it, my inbox confirms we are not alone,” said Des Sullivan, who has followed the Muskrat Falls Project construction and related political decisions, publicly commenting on his Uncle Gnarley blog. Among other things, he said he is personally planning closer review in the coming days of a provincial-federal entity now but not originally involved in the financing of the Labrador-Island Link (LIL) transmission line (one part of the overall power project).

Hydro owns and operates the LIL. The federal government is helping with LIL debt. Nova Scotia-based Emera Inc. also holds an equity interest in the LIL — now a backbone of the Newfoundland and Labrador electricity system. On Tuesday, it announced a deal for sale of its interest for $957 million in cash up front. The interest is being taken up by global investment firm KKR. As proposed, the firm will also pay the $235 million Emera still owes on the line. In return, KKR can expect quarterly payments looking forward. The value or total estimated value of the deal over the remainder of the 50-year LIL contract was not disclosed but has been requested. The deal is expected to close on or about June 4.

Sullivan’s comments to Atlantic Business Magazine came before that announcement. He said, apart from the ins and outs of LIL financing, he also has questions about the yearly revenue requirements for Newfoundland and Labrador Hydro on the whole of the Muskrat Falls Project and openly wonders about the plan for covering project debt post-2030.

Former chair of the Board of Commissioners of Public Utilities (PUB), province’s electrical utility regulator, David Vardy, said he is following up on a few fronts and has filed an Access to Information request to update some of the details available to him. Still working through what is available, he offered no comment yet for the record.

All of which is to say: if you’re in Newfoundland and Labrador and trying to understand the financing in detail, even people steeped in the subject still have questions at this point.

Let’s start with what’s known.

Total cost and mitigation talk

The Muskrat Falls Hydroelectric Project includes the hydro dam on the lower Churchill River in Labrador, transmission infrastructure linking the facility to the far more powerful Churchill Falls plant upstream, plus the LIL with its connection to the island of Newfoundland and roughly 1,100 kilometres of transmission line and related assets. The cost of the project—to ratepayers, taxpayers, all current provincial residents and future generations—are only at the start of being fully understood and absorbed. That’s because the final costs demand not just higher power rates and therefore higher electricity bills but also public accounts and provincial government spending.

While not everyone who worked on the power project failed in their roles, it was a product of failures on many levels. It started during the initial review as a proposed development and continued through to latter stages of construction. A Commission of Inquiry marked some failures at the political level, in the bureaucracy, in the provincially owned energy corporation and everywhere where people in the province and country had a right to expect better.

The main thing to grasp right now is the scale of the resulting financial problem. The project was declared complete with final commissioning in April 2023. The all-in cost (i.e. total money spent) is about $13.5 billion. The public estimate was just $7.4 billion at sanctioning, when the green light was given by the provincial government for moving ahead with financing and full construction. From that starting point, the project ran $6.1 billion over budget.

 

The completed power plant at Muskrat Falls on the lower Churchill River. The Muskrat Falls Project also includes transmission assets, connecting this facility to Churchill Falls upstream and linking Muskrat Falls to the island grid, with project assets reaching into the eastern portion of the island of Newfoundland. (File photo, courtesy of Newfoundland and Labrador Hydro)

In 2018, then-Newfoundland and Labrador Premier Dwight Ball committed to rate mitigation, or government actions to spare ratepayers some of the burden of repayment—not that there was much choice. As Consumer Advocate Dennis Browne repeated through recent years, pointing to statements from Memorial University of Newfoundland economics professor Jim Feehan and others, electricity rates can only go so high before people land in a state of energy poverty and look to cut their electricity usage or for alternatives to the main grid. Losing people from the system can snowball, driving up rates for those left. That’s additional to the already problematic cost increases.

In April 2019, the government issued a plan titled: “Protecting you from the cost of Muskrat Falls.” In truth, by that point, there was no means to keep people in Newfoundland and Labrador from being negatively affected as both ratepayers and taxpayers.

The Ball plan set out a series of items that promised to cover the first full year of project costs (expected 2021 but delayed), or a total of about $726 million. Components included applying $200 million in revenue within Nalcor Energy to Hydro bills, money that would otherwise potentially be paid as a dividend to government and go to provincial accounts and ultimately help cover provincial debt, program costs and public infrastructure. In the plan, another roughly $50 million would come from Hydro revenue from exports of surplus electricity and put towards the rate problem. Similarly, that money could otherwise have been kept in Hydro for utility use or paid to government as a dividend. Nearly $180 million was to theoretically come from reduced fuel costs at the Holyrood Thermal Generating Station, plus Hydro revenue not associated with Muskrat Falls. The equivalent of $15 million was supposed to come through fuel switching in provincial public buildings. There was more.

It was all to, in the end, keep power rates paid at the household level at a target 13.5 cents per kilowatt hour in 2021 (versus an expected 22.9 cents forecast if no action was taken by government)

A major piece was a $200 million a year gap the province didn’t know how it would pay. The government planned to “collaborate with the Government of Canada” to address it. It was all to, in the end, keep power rates paid at the household level at a target 13.5 cents per kilowatt hour in 2021 (versus an expected 22.9 cents forecast if no action was taken by government).

There is no update available covering all of the components included in the Ball plan.

In July 2021, the federal and provincial governments jointly issued an update on rate mitigation and the gap in money versus debt identified in the earlier piece of work. An agreement in principle was struck between the governments. The federal government would issue a third federal loan guarantee covering $1 billion in project spending. In addition to stretching out repayment, it saved some money in financing costs and so total cost for the project. The federal government also agreed to a $1 billion direct investment in the Labrador-Island Link transmission line. Very specifically, the offer was for a maximum $150 million a year in direct funding for repayment. The third piece was agreement by the federal government to transfer federal royalties from the Hibernia offshore oil project to the province (from “net profit interest” and “incidental net profit interest” returns). The estimate there was roughly $3.2 billion would be available from the transfer through the end of the life of the oil project.

With all of the extensive federal spending, the idea was bills would rise at a rate more in line with what the public, broadly, expected when the majority of people supported the Muskrat Falls Project plan as it was presented to them.

The federal commitment was no small thing. It’s worth noting, back in 2019, former provincial PC leader Ches Crosbie had dubbed it “funny money that will probably never materialize.”

Hydro’s new 2.25% cap

The most recent update on rate mitigation came in the wake of the commissioning of the final components of the project. Government and Hydro officials say that milestone was required to move everything under the 2021 agreement to an operational plan, covering annual payments in detail.

The provincial cabinet signed off on fresh orders for Nalcor Energy, the provincially owned energy corporation the province has yet to definitively terminate, and the now-in-control and also publicly owned Newfoundland and Labrador Hydro. The orders essentially amount to protections for ratepayers otherwise facing a sudden and devastating jump in their bills.

Meanwhile, the bones of the 2018 and 2021 announcements can still be seen today. There are federal funds injected into the LIL. And at least until 2030, oil money will spare people the worst of a possible direct bill, as it is poured into the financial hole—roughly $740 million owed every year—at the energy corporation that now needs to be filled. Oil money from the province’s stake in offshore oil projects will be used for the Muskrat Falls bill. The plan is for the province to forego taking dividends from Nalcor and Hydro, ordering the utilities to apply the revenues to the electricity infrastructure debt.

Since the province won’t see those revenues it was otherwise expecting, the federal revenue from Hibernia is being transferred into the provincial treasury, not directly into Hydro. By all response to date, there is nothing requiring that money to then be put into Hydro and also applied to electricity rates. The suggestion is it will be used to help cover the gouge to provincial accounts instead, in the loss to the province of dividends otherwise expected from oil and electricity export sales.

 

Newfoundland and Labrador Premier Andrew Furey and Quebec Premier Francois Legault take questions from reporters outside of the House of Assembly in St. John’s in February 2023. The premiers said they were entering new discussions around Churchill River power. Those discussions involve the price paid for power exports from Newfoundland and Labrador as well as possible future developments. Both have the potential to offer Newfoundland and Labrador new income, as oil revenues are forecast to decline in the coming years. (File photo, courtesy of Government of Newfoundland and Labrador)

Ratepayers—individuals and businesses—aren’t off the hook by any means. They will continue to pay. However, all of the rest was set with the need to keep the cost increases people face manageable, at least in theory.

Many things can drive up Hydro costs over time. By government order, Hydro will only be able to seek a maximum of a 2.25% increase on its power price through 2030. That percentage will be the most it can seek from ratepayers both for Muskrat Falls and significantly for all of the rest of its operations, in terms of any increase in what’s charged to domestic customers in order to cover the utility’s expenses. The utility will be left to swallow costs beyond what it can pay for with the regular, 2.25% raises, meaning additional debt within Hydro (ultimately public debt) could be possible if the utility doesn’t keep its overall costs in check.

Other rate increases and post-2030

Hydro president and CEO Jennifer Williams has been open about the utility’s view of need for additional power on the local grid, on top of what was added through the Muskrat Falls build. The current rate mitigation plan only applied through 2030, or partway through Muskrat Falls repayments. It’s notable for many reasons, not least of all because the province’s system sees utilities begin to recover their costs through power bills as their new assets come into service.

Williams said she expected, given the time required for decisions on new power sources and construction, be it an additional turbine and generator at Bay d’Espoir or new combustion turbine at Holyrood power plant, the largest possible expenditures for Hydro would not be an issue until post-2030. However, all bills for new facilities and equipment will have to be paid eventually. That means factoring into rates post-2030.

Also post-2030, it’s a standing question as to what will be available through public revenue streams like the offshore oil projects (as production is scheduled to fall off over time). In theory, the province may have other sources of revenue it can consider applying to Muskrat Falls’ long-term costs by then. Alternatively, expected revenues may not materialize, leaving a gap again for a new financial plan to address. It isn’t as simple as saying today that Newfoundland and Labrador or Hydro can take on more debt, given the province’s debt servicing costs are already beginning to crowd out annual departmental spending. And as economists Wade Locke and Doug May pointed out in a recent public presentation and discussion of public accounts they held in St. John’s, the province is already expected to be rolling over large amounts of existing debt at much higher interest rates and so higher overall costs in the next few years.

In a public presentation and discussion held at the Elk’s Club in St. John’s on April 3, economists Wade Locke and Doug May spoke on “Examining the Impact of Confederation with Canada on Newfoundland and Labrador After 75 Years.” This was a single slide of many shown in the evening, wherein the pair among other things highlighted the province’s debt costs. When it comes to kicking the proverbial can down the road on public debt, Locke sad, “we need a smaller can or a bigger boot.” Locke pushed back against jumping to the suggestion the province hasn’t been given a ‘fair share’ by the federal government. (Screen capture from slide set titled: “Newfoundland and Labrador in Debt in Perpetuity, Inevitable?”)

It’s similarly important to emphasize the fixed, 2.25% annual additions through 2030 to be paid on customer rates only speaks to the allowable increase to what Hydro charges for power. It’s expected to increase every year on the cost of Hydro supply. Hydro has some direct customers. However, that supply is mainly purchased in bulk by Newfoundland Power, the main distributor of electricity on the island interconnected system.

The supply costs are a core expense for Newfoundland Power but not the only expense. The utility also has less in assets than Hydro but an extensive system of infrastructure of its own, with power line limbs and branches, plus small production facilities. There are costs to maintain it and for new additions. Newfoundland Power rates are set through a process separate from Hydro.

All told, the hike for residential power rates on the main grid could be 10.5%.

On July 1, while still making its way through review, the expectation is Newfoundland Power customers will see a 2.25% rate increase flow through to them to cover the increased costs from Hydro but also increases through Newfoundland Power (they’re done on the same day often to try and avoid too many changes to billing). All told, the hike for residential power rates on the main grid could be 10.5%.

Beyond there, Newfoundland Power has a general rate application, applicable to 2025-2026, seeking approval of an additional 5.5% rate increase. If approved, it would be effective July 1, 2025. It would come on top of another 2.25% for Newfoundland and Labrador Hydro supply that year.

$740 million a year

There continues to be a lot to consider when it comes to Newfoundland and Labrador, power rates, power demand and paying off Muskrat Falls in the years ahead. It shouldn’t be lost on anyone the scale of the public money being spent to cover the project bill now, even as overall rate hikes remain a point of contention.

The Liberal government has repeatedly recited the $740 million figure in the last few weeks in lamenting the burden of the Muskrat Falls Project construction. The use of the $740 million figure in comments as specifically a government cost was raised by Atlantic Business Magazine at the time of the latest technical briefing and press conference on rate mitigation, pointing out the risk of misuse. That’s because $740 million is the annual cost Hydro needs to cover, not the government-direct cost.

Another way to think about it is, under the standing plan, the annual cost is being covered through three, main components. The first is customer rates. It will provide less than 10% each year (an estimated $65 million this year, with the July 1 hike). The second component is the new financing arrangements including about $150 million a year from the federal government into the Labrador-Island Link. The third and largest piece is for Hydro to otherwise handle, by dumping in oil and electricity export revenue.

But there is no scenario offered to date where the public treasury will have to carry $740 million every year. The province won’t be getting dividends from Nalcor/Hydro. On the other hand, it is expected to receive an additional $150 million to $200 million a year from the federal Hibernia transfers to 2040.

It is correct at this stage to say, as communications staff stated in a one-line response to detailed questioning: “A total of $740 million is required annually to cover the costs of the Muskrat Falls Project.”

It is not correct to say $740 million would otherwise be in government’s hands to spend on programs and infrastructure, as suggested in comments from members in the province’s House of Assembly.

 

A Liberal Party of Newfoundland and Labrador advertisement, run on social media. Atlantic Business Magazine has pointed out the cost is partly covered by ratepayers and the alternative to project payments would not be $740 million kept in public accounts for the provincial government to spend freely, making both this and other public statements misleading. Ministers who have offered similar comments have continued to do so and, to date, despite repeat requests, no one has directly addressed the call out. (Screen capture from X).

As the premier stated in Question Period on May 16: “We could hire 5,000 new teachers today but guess what? Speaker, $740 million, which is what it would cost, is going towards rate mitigation.”

Similarly, on May 16, Energy Minister Andrew Parsons responded to a question by in turn asking: “…can you imagine what we could do in this province for seniors, mothers and children, if we didn’t have to spend $740 million this year on Muskrat Falls.”

And later in the same Question Period: “I would say to the members on the other side: Please tell us what we should have done with that $740 million, besides keeping Newfoundlanders’ and Labradorians’ rates down because of a mess that was left to us.”

The true amount should be reiterated so people understand government’s portion of the annual expense, but it’s not $740 million being redirected every year from program and infrastructure spending. Stating this way also risks governments ignoring or disrespecting the cost and contributions of ratepayers. Seeing the true split also reiterates the limits in what ratepayers can contribute.

As an end note on this, there was no response from government communications staff to Atlantic Business Magazine’s specific request in follow-up to confirm the nuance and ultimately political misstatements.

To be sure, the bills now are difficult for a relatively small population of ratepayers and taxpayers. But as pennies are counted and plans are made going forward, the details and nuances will be important to any kind of informed debate around energy cost management, especially looking at new spending and post-2030 plans.


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