Power bills could crush economy: experts
Will Newfoundland and Labrador's 'screwup' on Muskrat Falls cost the entire country?
Eleven men in dark suits huddle around a gleaming boardroom table.
It’s May 12, 1969, and executives with Hydro-québec and Churchill Falls Labrador Corp. are signing a contract that would become an enduring source of rancour, lawsuits and finger-pointing in Newfoundland and Labrador.
Now experts say the intergenerational grievance stemming from that one-sided deal could end up costing the entire country.
The Muskrat Falls hydroelectric dam — a $12.7-billion boondoggle wrapped in redemption, to some — risks crippling Newfoundland and Labrador if Ottawa doesn’t step in.
“This is an existential threat,” says David Vardy, a retired senior civil servant in Newfoundland and former chairman of the provincial utilities regulator.
“If we face bankruptcy, it’s a risk to the sovereign state of Canada.”
It’s a fiasco federal leaders have largely sidestepped during the election, providing instead only vague reassurances to work with the province.
Yet even the rosiest projections have the Canadian government contributing $200 million a year for decades in so-called rate-mitigation measures, which observers fear could rankle an increasingly fractured country.
“It’s a big number to ask the rest of the country to pay for your screwup,” says Todd Mcdonald, founder and president of Energy Atlantica.
“It was a completely high-risk endeavour, but the province stripped the regulatory board of its oversight power and rammed the project through.”
But given the federal government backstopped the 824-megawatt project’s debt, it has few choices but to lend a hand.
“Muskrat Falls will have such a severe impact on power costs in Newfoundland that by 2021 a federal bailout will be necessary,” says independent energy adviser Tom Adams.
It’s a painful situation in a province that just over a decade ago trumpeted a new era of economic independence from Ottawa. The end to equalization payments in 2008 was a triumphant departure from its “have not” status for the first time since joining Canada in 1949.
The spectre of once again being considered a “poor cousin of Confederation” — as then finance minister Tom Marshall put it before tabling the historic provincial budget — is a source of frustration for many in Newfoundland.
To grasp the unbridled hubris that propelled Muskrat Falls forward despite early and repeated warning signs requires an understanding of the 1969 Churchill Falls contract.
‘BADLY STUNG’
Fifty years ago, when officials from Quebec and Newfoundland gathered to sign the now-infamous contract, the energy landscape in North America was dramatically different.
The future of electricity generation was largely thought to be nuclear, and the Churchill Falls generating station was a risky, costly endeavour.
Hydro-québec agreed to shoulder a lot of that risk. In exchange, the utility was guaranteed a low fixed price for electricity.
That price is such a small fraction of its market value that some economists say it’s barely distinguishable from being free.
The Quebec utility has been reselling much of that Labrador power to the northeastern U.S. at a massive markup since.
The long-standing deal — it was automatically renewed in 2016 for an extra 25 years — has led to deep resentment in Newfoundland.
“Hydro-québec did play a large role in the original Churchill Falls construction,” says Larry Hughes, a Dalhousie University professor and founding fellow of the Maceachen Institute for Public Policy and Governance.
“But Newfoundland and Labrador felt badly stung by the agreement.”
Historian Jerry Bannister says developing Muskrat Falls and Gull Island on the Lower Churchill River was perceived as a form of deliverance from the past injustice.
“This is about redemption,” says Bannister, a Dalhousie University history professor. “It’s about payback.”
It’s also the legacy project of former premier Danny Williams.
Bannister says Williams’ goal — and that of the megaproject — was to change the “collective psychology” of the province. Or, as Williams said in his 2007 speech from the throne, to “achieve self-reliance by becoming masters of our own house” — an allusion to Quebec’s Quiet Revolution.
“We’ve tried to create a kind of a narrative of economic logic to understand the project, but it wasn’t just about economic development,” Bannister says.
“It was about cultural redemption.”
Indeed, Williams continues to defend the over-budget and behind-schedule project, despite a public inquiry being held to investigate what some call a disaster and ongoing rate-mitigation hearings to figure out how to pay for it.
“This was the ultimate way of righting the wrongs of the past, so getting revenge on Quebec was part of it,” says Bannister. “But Williams combined that with a very celebratory, triumphalist rhetoric.”
Despite ambitious hopes for the dam, Newfoundland can’t afford to pay the bill.
Without government action, electricity rates could double overnight — a measure experts say would crush the economy.
The province is already saddled with perilous amounts of debt — the highest per capita in the country. Adding the $12.7-billion Muskrat Falls bill could bankrupt the province, according to economists.
It’s a situation that has left credit-rating agencies skittish. In July, Moody’s Investors Service downgraded the province’s credit rating, citing in part the high cost of Muskrat Falls.
Last month, Premier Dwight Ball met with the federal finance minister to discuss the pressing need for rate mitigation, and came away with assurances that officials in Ottawa would “continue to work closely” with the province.
But with Canadians heading to the polls on Oct. 21, it’s unclear what direction the federal government will take.
Economist Brandon Schaufele says Ottawa has several options, including the so-called financial engineering of the debt.
“If the federal government was willing to extend the life of the debt to better match the asset, it would enable rates to come down dramatically,” says Schaufele, assistant professor of business, economics and public policy at the University of Western Ontario’s Ivey Business School.
While extending the debt has no immediate taxation cost, Schaufele says it has implications for the balance sheet of both the federal and provincial governments.
Also, he says electricity rates in Newfoundland — among the lowest in Canada — should also increase gradually over time.
“Any money used to mitigate rate increases is diverted from other sources,” Schaufele says, noting that increasing taxes to pay for electricity “distorts the economy.”
“By diverting your tax money to rate mitigation, you’re either increasing tax rates or you’re reducing services for things like education or hospitals.”
Meanwhile, Bannister says the environmental impact of Muskrat Falls must be a priority.
“Rate mitigation is one part of a much larger tragedy,” he says. “The number one issue that needs to be looked at is the impact on indigenous peoples and the environment.
“The immediate concern is the people who live there and the people who are worried about methylmercury and the security of the dam and are calling this cultural genocide.”