Ques­tion­ing the risky as­sump­tions be­hind Muskrat Falls


The busi­ness case for Premier Kathy Dun­derdale’s Muskrat Falls deal is based on three very risky as­sump­tions.

The first as­sump­tion is that de­mand for elec­tric­ity is go­ing to in­crease dra­mat­i­cally. Ac­cord­ing to Ms. Dun­derdale and Nal­cor, 40 per cent of Muskrat Falls pro­duc­tion, or two ter­awatt hours a year, will be im­me­di­ately needed on the is­land, start­ing in 2017, in or­der to re­place Holyrood and meet con­sumer de­mand.

The sale of that power is also be­ing used to wholly fi­nance the plant at Muskrat Falls and the trans­mis­sion line to the is­land. But here’s the rub: 40 per cent of Muskrat Falls’ pro­duc­tion is more than dou­ble what we take from Holyrood now. Over the last decade, our re­liance on Holyrood has been de­clin­ing al­most an­nu­ally.

Last year, it pro­vided about 11 per cent of Nal­cor’s to­tal elec­tri­cal pro­duc­tion on the is­land and even then it was only needed dur­ing the five or six cold­est weeks of win­ter. For the rest of the year, there is a vast sur­plus of power on the is­land from hy­dro­elec­tric sources such as the hy­dro plants at Bay D’Espoir and Cat Arm.

While Ms. Dun­derdale and Ed Martin of Nal­cor claim we will need all of that 40 per cent of Muskrat start­ing in 2017, they haven’t ad­e­quately ex­plained why our de­mand is go­ing to in­crease so much.

True, the nickel re­fin­ery at Long Har­bour will be in op­er­a­tion by then, but as stated above, there is al­ready enough sur­plus en­ergy on the is­land to ac­com­mo­date it, ex­cept for five or six weeks a year.

What’s trou­bling is this: What if Ms. Dun­derdale and Mr. Martin are wrong and our de­mand doesn’t in­crease enough to use all of the pro­duc­tion com­ing from Muskrat? We will still have to pay Muskrat’s to­tal pro­duc­tion cost.

The dif­fer­ence is, the per unit cost charged to each house­hold will then be much higher than the 14.3 cents per kilo­watt hour that is es­ti­mated now. The rev­enue stream to Nal­cor will not change, but the amount we pay as in­di­vid­u­als will go up dra­mat­i­cally if Ms. Dun­derdale’s de­mand pro­jec­tions are wrong.

The peo­ple of this prov­ince should note that since 1992 our pop­u­la­tion has de­clined by some 80,000 peo­ple. It has since lev­elled out, but is not in­creas­ing at a rate that would sup­port the en­ergy de­mand pro­jec­tions be­ing claimed by Ms. Dun­derdale and Nal­cor.

In ad­di­tion, we have the fastest aging pop­u­la­tion in Canada. Our work­force is shrink­ing, mean­ing that over the amor­ti­za­tion pe­riod of this pro­ject, there will be fewer work­ing adults to pay taxes to cover the debt on Muskrat Falls. At the same time, in­creas­ing num­bers of peo­ple will be mov­ing onto pen­sions as their chief means of sup­port and will be un­able to af­ford ex­or­bi­tant in­creases in the cost of heat­ing and light­ing their homes.

Sec­ond pit­fall

The sec­ond as­sump­tion un­der­ly­ing this pro­ject is that it will come in on bud­get of $6.2 bil­lion. That’s a big as­sump­tion. Re­cently, Cana­dian Press ob­tained one of the so-called in­de­pen­dent au­dits of this pro­ject con­ducted for Nal­cor.

It is ap­par­ent from read­ing it that just weeks be­fore the pro­ject was an­nounced last fall, Nal­cor did not have a good han­dle on the ac­tual costs of the pro­ject. It was also ap­par­ent that Nal­cor of­fi­cials were un­der con­sid­er­able time pres­sure to come up with new num­bers to jus­tify the Muskrat pro­ject af­ter a sud­den and un­ex­pected po­lit­i­cal de­ci­sion to switch from a full lower Churchill pro­ject that would have in­cluded ex­port­ing power from Gull Is­land, to one that sees New­found­land con­sumers as the only pay­ing cus­tomers.

Here’s some­thing else to con­sider: In 1998, when this prov­ince and New­found­land Hy­dro pro­posed to build an 800 megawatt power line run­ning 1,125 kilo­me­tres from Labrador to Sol­dier’s Pond on the is­land, the es­ti­mated cost was $2.2 bil­lion. Fast for­ward now to the present and Nal­cor wants to run a 900 megawatt line of sim­i­lar length, also to Sol­dier’s Pond, but says the cost will be $2.1 bil­lion.

Ask your­self: how it is pos­si­ble to build a big­ger line for less money to­day than it would have cost 13 years ago. Over that pe­riod steel prices have in­creased, cop­per prices have gone up and labour costs have risen sub­stan­tially.

Re­cently, a sim­i­lar type hy­dro­elec­tric plant be­ing built in Bri­tish Columbia was re­ported to be some $2 bil­lion over bud­get. In fact, stud­ies show most hy­dro­elec­tric projects of this type run sig­nif­i­cantly over bud­get. The chances that Muskrat Falls will come in on bud­get are slim to none. It is very likely to run over bud­get, es­pe­cially if the cost es­ti­mates were rushed.

The con­se­quences are clear. If Ms. Dun­derdale’s and Mr. Martin’s cost es­ti­mates for Muskrat Falls are wrong, the per unit cost for elec­tric­ity charged to users on the is­land will be sub­stan­tially higher than the 14.3 cents per kilo­watt hour they are pro­ject­ing now.

Risk No. 3

The third as­sump­tion that Ms. Dun­derdale and Nal­cor are mak­ing is that in­ter­est rates will not go up. In the House of Assem­bly this past spring, the Lib­eral Op­po­si­tion asked both Premier Dun­derdale and Fi­nance Min­is­ter Tom Mar­shall what the in­ter­est charges will be on the loans to fi­nance Muskrat Falls.

Nei­ther one of them would an­swer the ques­tion. How­ever, in one of sev­eral brief­ings with Nal­cor of­fi­cials, Mr. Martin told the Op­po­si­tion mem­bers and staff that the es­ti­mated cost of fi­nanc­ing Muskrat Falls is $800 mil­lion to $900 mil­lion on top of the con­struc­tion cost.

The chances of in­ter­est rates go­ing down over the bor­row­ing pe­riod at­tached to this pro­ject are neg­li­gi­ble. It is more likely that in­ter­est rates will go up. In­fla­tion in some world mar­kets, such as China, have econ­o­mists pre­dict­ing that it is only a mat­ter of time, per­haps six months or so, be­fore base in­ter­est rates rise. When that hap­pens, all other in­ter­est rates will go up too, in­clud­ing those at­tached to fi­nanc­ing a megapro­ject such as Muskrat Falls.

Again, if in­ter­est rates rise dur­ing the bor­row­ing pe­riod of this pro­ject, the over­all cost of build­ing and pay­ing off Muskrat Falls will in­crease sub­stan­tially. That means the per unit cost of elec­tric­ity charged to the New­found­land con­sumer will also in­crease sub­stan­tially and weigh in at much more than the 14.3 cents per kilo­watt hour that Ms. Dun­derdale and Mr. Martin are fore­cast­ing.

The bot­tom line for New­found­land and Labrador res­i­dents is that the Muskrat Falls pro­ject con­tains un­ac­cept­able fi­nan­cial risk. Un­like all pre­vi­ous in­car­na­tions of pro­posed lower Churchill projects, in which the tar­geted cus­tomers were the tens of mil­lions of peo­ple liv­ing in New Eng­land and On­tario, the only iden­ti­fied pay­ing cus­tomers for this pro­ject are some 240,000 house­holds on the is­land of New­found­land.

Mr. Martin has ad­mit­ted that we, the elec­tric­ity con­sumers on the is­land of New­found­land, are the only iden­ti­fied buy­ers of this en­ergy. He has con­firmed that there is no other stream of rev­enue from any other buyer that Nal­cor can take to the bank to fi­nance this pro­ject. So any in­creases in the cost of this pro­ject will be borne en­tirely by the tax­pay­ers of this prov­ince and en­ergy con­sumers on this is­land, who are one and the same peo­ple.

If any of the three as­sump­tions be­ing made by Ms. Dun­derdale and Nal­cor are wrong, the fi­nan­cial ef­fect will be ex­tremely bur­den­some. If two or even three of the as­sump­tions are wrong, as is very pos­si­ble for the rea­sons out­lined above, the fi­nan­cial ef­fect on this prov­ince will be calami­tous.

Re­cently, Me­mo­rial Univer­sity econ­o­mist Wade Locke pre­dicted that start­ing next year the Gov­ernme n t o f New­found­land and Labrador is fac­ing a decade of deficits rang­ing as high as $1 bil­lion a year over the next 10 years and that our pro­vin­cial debt will sky­rocket un­less we take dra­matic ac­tion. And that’s with­out the cost of Muskrat Falls fac­tored in.

If we pro­ceed with Muskrat Falls and it turns out the as­sump­tions be­ing used by Premier Dun­derdale and Nal­cor are wrong, this prov­ince will face a debt cri­sis equiv­a­lent to that now be­ing ex­pe­ri­enced in Greece, where the gov­ern­ment can no longer pay its bills and ba­sic ser­vices such as health care and ed­u­ca­tion are in im­mi­nent dan­ger of col­lapse.

Is that the fu­ture you want for you and your fam­ily?

I ad­vise ev­ery­one to ex­am­ine this deal on Muskrat Falls closely. Time is run­ning out. It is be­ing rushed for­ward for of­fi­cial ap­proval by Novem­ber 30 this year.

When a po­lit­i­cal can­di­date shows up on your doorstep this fall, of what­ever po­lit­i­cal stripe, please ask whether he or she has read the Term Sheet on Muskrat Falls and where the per­son stands on the pro­ject.

Un­like the Churchill Falls fi­asco, this time we are un­der­tak­ing an his­toric mis­take with our eyes open. If this deal is as dis­as­trous as I be­lieve it is, we’ll have no­body such as Brinco or Joey Small­wood to blame it on. The blame will rest squarely and fully upon all of us as New­found­lan­ders and Labrado­ri­ans.

That is not the kind of legacy I want to leave my chil­dren.

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