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.
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.