Why Muskrat Falls Could Make Newfoundland Hate Us

I’ve been trying to educate myself on the Muskrat Falls issue and if I’ve learned nothing else, my fellow Nova Scotians, I’ve learned this: Newfoundlanders are probably going to hate us by the time this thing is through.

Yes, all that resentment currently focused on Quebec, which has been buying power at below-market rates from Labrador’s Churchill Falls hydroelectric plant since 1969 (under the terms of a deal which, I should note in passing, the Supreme Court of Canada has agreed to look at) could soon be directed our way.

It’s not even strictly fair — Nova Scotia didn’t sign an advantageous deal with Nalcor, the Newfoundland crown corporation overseeing Muskrat Falls, Emera did. But the Newfoundland commentators I’ve been reading don’t always make a distinction between “Emera” and “Nova Scotia,” and given the role played by the Nova Scotia Utility and Review Board (UARB) in securing Emera’s deal, they may have a point.

 

Lower Churchill

So how did we get here?

Well, it’s a story that begins with the original Churchill Falls hydro project but explaining that history and how it feeds into current events is beyond both the scope of this article and its author’s abilities. Fortunately, Newfoundland PR and policy expert Ed Hollett has explained all in a two-part series on his blog, The Sir Robert Bond Papers.

What I’ll say, for now, is that the idea of a Lower Churchill project had been kicking around for years and was to have consisted of two complexes — the larger Gull Island and the smaller Muskrat Falls. In Hollett’s version of events, there were a couple of times over the years when the project actually seemed on the verge of happening as a joint venture between Newfoundland and Quebec, but it never did. Enter Newfoundland Premier Danny Williams (for whom Hollett has little sympathy). Williams tried, unsuccessfully, to find a buyer for Lower Churchill electricity before declaring in 2010 that Newfoundland would go it alone and construct the smaller of the two facilities, Muskrat Falls.

Critics questioned pretty much everything about the rationale for building Muskrat Falls, from Nalcor’s projections for future domestic electricity demand (which were felt to be exaggerated), to the lack of consideration given other options, to the question of water management. (This last is a big one and hinges on whether Nalcor will be able to ensure sufficient flows from the Upper Churchill to allow Muskrat Falls to produce at capacity. Nalcor says it will be able to do so under the terms of the Water Management Agreement established by Newfoundland’s Public Utilities Board in 2010. Critics, however, say a 2016 Quebec Superior Court ruling upholding Hydro Quebec’s right to schedule power production at Churchill Falls effectively removes control over water flows from Nalcor.)

None of these concerns was in the air in 2013, when Nalcor announced it had inked a deal with Emera (the power conglomerate formed with the privatization of Nova Scotia Power in 1993) to build and co-own (for 35 years) the transmission infrastructure necessary to service the project. Under the terms of their agreement, which was apparently 20 months in the making, Nalcor would own 100% of the transmission lines in Labrador between Churchill Falls and Muskrat Falls; Emera would own 100% of the Maritime Link, running from Granite Canal to Cape Ray, NL, then under the Cabot Strait before popping up in Point Aconi, NS; and the two would co-own the Labrador-Island Link (LIL) from Muskrat Falls, under the Strait of Belle Isle, and across the island of Newfoundland to just outside St. John’s.

The two signed 13 legal agreements which would leave Nalcor owning 51% of the transmission lines and Emera 49%.

Source: Emera (Click to enlarge.)

 

LIL

Construction of the Maritime Link has been going along tickety-boo, which the brilliant public relations people at Emera have brought successfully to the attention of the Canadian Press and CBC Nova Scotia and the Cape Breton Post, among other news outlets. What fun for a company more often in the news for its CEO’s outsized compensation or its “sluggish” response to power outages to get share fun facts like these with breathless reporters:

According to Emera, each cable weighs 5,500 tonnes and, together weigh more than the Eiffel Tower. The line will be the longest of its kind in North America.

“It’s one big piece of cable,” said Rick Janega, the president and chief executive of Emera Newfoundland & Labrador, the parent company of NSP Maritime Link, which owns the project.

Reporters are apparently not permitted to write about the Maritime Link without noting that it’s both on time and within budget. (Whether Nova Scotians are sufficiently impressed to pay $326 million towards the transmission system before Muskrat Falls begins generating electricity, remains to be seen.)

Other aspects of the Muskrat Falls project, however, have been plagued by problems (and I’m not even touching on the issues of methyl-mercury, or the RCMP’s arrest of a Newfoundland journalist  covering Muskrat Falls protests, or a Labrador woman’s incarceration in a men’s prison for saying she could not promise to obey an injunction against protesting at the work site).  No, I’m just talking about delays and cost over-runs such that, to maintain the 51% Nalcor/49% Emera ownership structure, Emera has had to put more money into the Labrador Island Link. Instead of owning 29% of the LIL, as originally planned, Emera now owns 59%.

Newfoundland Premier Dwight Ball revealed Emera’s increased ownership to the Newfoundland House of Assembly in March, while reminding members, “None of this was my idea.”

As The Telegram explained:

The part of this that’s causing real consternation for the government is that contractually, the LIL pays a rate of return of 8.8 per cent once it comes into service.

Basically, this means because Emera owns a bigger percentage of the power line, it’s entitled to a bigger chunk of the profits.

Interestingly, Emera investors apparently found out about the increased ownership stake in LIL before Newfoundland MHAs did — the updated number is in this October 2016 power point presentation to Western Canadian investors (click on the image to enlarge it):

Source: Emera Investor Presentation. Western Canada Investor Meetings. Oct 20-21, 2016 (http://investors.emera.com/Cache/1001215695.PDF?Y=&O=PDF&D=&FID=1001215695&T=&IID=4072693)

Source: Emera Investor Presentation. Western Canada Investor Meetings. Oct 20-21, 2016 

 

Surplus electricity

Any way you slice it, Emera has the Charlie Sheen role in this deal — winning.

The Halifax-based firm was to pay about $1.5 billion to construct the Maritime Link (it’s now quoting a figure closer to $1.7 billion), a sum which represented roughly 20% of the total capital costs of the Muskrat Falls project, which were initially estimated at $6.2 billion and are now expected to clock in around $12 billion. In return, Emera would get 20% of the electricity generated by Muskrat Falls. As Uncle Gnarley (Newfoundland blogger and businessman Des Sullivan) explains:

Muskrat Falls is forecast to produce 4.9 terawatts (TWh) of power. Of that amount 40% (1.79TWh) is reserved for island needs, 20% (.895 TWh) for the Nova Scotia Block, a condition of building the Maritime Link, and the balance 40% (1.79 TWh) is defined as “market-priced” power.

As a condition for approving the deal between Emera and Nalcor, Nova Scotia’s UARB insisted Emera also have access to that “market-priced” or surplus power to ensure the deal represented the cheapest option for Nova Scotians. Here’s how Sullivan explained it in 2013:

In case you are unsure, this “surplus” power is the ‘juice’ Premier [Kathy] Dunderdale, [Nalcor CEO] Ed Martin and [Natural Resources Minister] Jerome Kennedy, all at various times, said would be available for the New England market, for Labrador Mining including Alderon, for industrial development within the Province and to meet the forecast increase in domestic demand .

For clarity, what we call “surplus power” is called, by the UARB “Nalcor market-priced Energy”.  The “blended” price is achieved by taking the Nova Scotia Block (20%) and giving that Province access to the cheap “Nalcor market-priced Energy”.  This “blended” price is now the price of Nova Scotia’s participation in the Muskrat Falls Project. It is also the price NL must pay if it is to receive the Federal Loan Guarantee.

The Nova Scotia Block will already cost their ratepayers less than half the rate, Newfoundlanders will pay for Muskrat Falls power. But, the UARB wants to lower the cost further.

Nalcor reluctantly  acquiesced to this (to secure the Federal Loan Guarantee), agreeing to commit to Emera up to 1.8 TWh of the surplus electricity, or an annual average of 1.2 TWh.

Here’s Andrew Younger, then Nova Scotia Energy Minister, explaining why that was a good thing:

Last Friday…the Utility and Review Board ruled that the project agreement will proceed and made it clear that Emera and Nalcor shareholders take on project risks, not ratepayers.

In opposition I raised risks to the project like water management, non-delivery, and availability of surplus energy. The previous government said ‘don’t worry,’ despite it not being enshrined in the agreement. Through the actions of the UARB and our government, these issues are now addressed so the risk of these issues is no longer on ratepayers.

That sounds great — except that Nalcor is a provincial crown corporation. Its shareholders are the ratepayers of Newfoundland.

And it’s not clear that Nova Scotian ratepayers are so well protected either. We were told participation in Muskrat Falls would allow us to meet our goal of 40% renewable energy by 2020. Muskrat Falls is not now expected to come online until Q2 2020. Dalhousie University energy professor Larry Hughes told the CBC in June 2016 that if that goal is missed, Emera will face fines and will have to continue buying more expensive energy longer than expected:

“If [the project] doesn’t come in on time, they will roll the cost into the rates,” Hughes said.

“Nova Scotia Power and its shareholders have been quite safe all along,” Hughes said. “The risk has been to Nalcor, the risk has been to Nova Scotia Power’s customers, and there has been minimal risk to Nova Scotia Power.”

Like I said, anyway you look at it, Emera is the winner in this deal.

 

Ridiculously low

While we Nova Scotians have been marveling at the wonder cable, Newfoundlanders have been marveling at the revelations of an anonymous former senior Nalcor engineer.

Speaking first to Des Sullivan of the Uncle Gnarley blog and then to CBC Newfoundland’s Rob Antle and Anthony Germain , the engineer, who worked on the Muskrat Falls project, says Nalcor’s initial cost projection was “ridiculously low.”

“The unit prices used to generate the estimate were far too low and did not represent the reality of harsh construction environment of central Labrador,” the engineer said.

“The risks were vastly understated and the contingencies absurdly low.”

The engineer — whose identity CBC News has agreed to protect, because he is not authorized to speak publicly about his work on the project — believes that “the purpose of this estimate was not to generate an estimate for project implementation, but secure project sanction.”

The Mystery Engineer is calling for a forensic audit of Nalcor.

Meanwhile, another Newfoundlander, Cabot Martin, a policy adviser to premier Brian Peckford and one of five lawyers who have formed 2041 Energy Incorporated to protest Muskrat Falls, is wondering if Emera realized Nalcor’s initial numbers were off.

Martin thinks such knowledge could be grounds for canceling Emera’s “vast and bewildering web of contracts” with Nalcor, which may be wishful thinking but does raise an interesting point: Emera has been basking for months in the glow of accomplishing an “engineering marvel,” under harsh conditions, on time and on budget. A company capable of such a feat would presumably have been well placed to judge Nalcor’s cost projections. Did those numbers raise any red flags in the Emera board room?

Of course, while Emera has been basking in Nova Scotia, its reviews have been less glowing on the other side of the Cabot Strait. According to Martin, Emera is “a corporate name that, it is safe to say, residents of this Province will come to invoke with the same virulence as ‘Hydro Quebec.'”

Ouch.

But at least he’s making a distinction between “Emera” and “Nova Scotia.”

 

 

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