Debating Sovereignty Implications of Muskrat Madness

On Friday, Jan 13, I was a guest on VOCM radio’s “Open Line with Paddy Daly” in Newfoundland and Labrador

Paddy Daly’s style of talk radio assumes that his listeners are following the details of a wide array of complex stories on public policy and that Paddy can attract their attention to his show by testing his guests against his own views. Paddy is among the most well-informed independent authorities in Canada on the topic of Muskrat Falls.

He and I have spoken with each other frequently enough that he is very familiar with my weakest arguments. Quite properly, he focuses on those. Because of the expectation that his listeners are familiar with the background, Paddy will sometimes skip some details, although the intention behind his question is almost always clear. Particularly to assist those who might be new to the Muskrat story, I have added background notes for some of the comments in my exchange with Paddy.

53:20 Introduction

Q – As a guest on previous VOCM shows going back to January 2012 with host Paddy Daly, Adams has never had an encouraging word to say about Muskrat. (Adams first complained about Nalcor not having rights to store energy at Upper Churchill, as the Muskrat Falls project design required. Adams’s opinion was confirmed by the Quebec Superior Court in August 2016.) Paddy opened the discussion by asking me to defend my view that NL will see its sovereignty impaired by Muskrat Falls.

A (54:10) A lot of the cost in Muskrat is sunk. The people of NL, whether as ratepayers or taxpayers or both, do not have the resources to total cover Muskrat’s costs, which are uncertain but very large. Assuming that everything goes well with the project from here on, the cost of power is going to rise so much, that power usage in the province will drop. This drop in usage itself will further increase rates, which will cause demand to drop further. (The usage of power will not disappear completely unless the province becomes completely depopulated. Electricity, after all, is extremely valuable to consumers and is now illegal to produce independently in NL.)

Q (55:15) Conservation doesn’t achieve anything. NL must pay the lenders.

A (55:30) Agreed. Assuming every goes well with the remaining construction, the capital cost per man, woman and child would be in the order of $23,000. (At this point, I could have been clearer by explaining that capital cost is only one part of the problem with Muskrat Madness.) The economic and social harm of recovering just Muskrat’s capital costs would be unacceptable. NL will need a federal bailout.

Q (56:30) That doesn’t mean our democracy is lost. There is a long way between needing a bailout and losing our sovereignty.

A (56:55) In order for Muskrat to operate as Nalcor has designed it from the get go, Nalcor must enter into an operational and financial deal with HQ to use its assets. Such a deal is required to ensure that Muskrat can deliver full capacity in winter. Nalcor’s scheme for Muskrat from the beginning relied on using Hydro Quebec’s assets. Getting access to the assets required to make Muskrat fully functional will be expensive. The service NL needs from HQ is HQ’s premium product — winter capacity on demand. (HQ current has surplus energy outside of its winter peak demand period but is constrained on capacity at peak.) No official parties in NL are acknowledging the necessary relationship between Nalcor and HQ and the costs for NL ratepayers that relationship implies. The value of Muskrat is vastly over-rated by official NL. There is no admission of what the real cost consequences for consumers will be.

Q (58:17) What does that mean? NL consumers have to repay the investment cost in Muskrat less any revenue from out-of-province sales. Isn’t that the limit of NL’s problem?

A (58:45) Ratepayers in NL will have to cover not only the capital cost of Muskrat but also the costs of obtaining from HQ winter on-demand capacity. The cost of Muskrat is both the capital cost plus compensation to Hydro Quebec.

Q (59:10) That’s a hypothetical.

A (59:12) For people wanting to examine the Muskrat contractual problem with Hydro Quebec in more detail, I highly recommend the recent evidence at the PUB analyzing the Quebec Superior Court decision produced by Philip Raphals on behalf of the Grand River Keeper. (A more detailed discussion of the Raphals evidence is here.) The upshot of the Raphals evidence is that the Water Management Agreement is irrelevant, contrary to the claims of official NL from the beginning of Muskrat Madness. The true cost of Muskrat for NL consumers will be the sum of the capital cost plus an operating cost. The overall impact is far higher than even the critics of Muskrat Madness have recognized to this point. That extra operating cost arises from the cost implications for HQ of NL using its assets.

Q (1:01:05) What asset are you talking about?

A (1:01:10) The winter delivery capacity that NL needs from HQ will be drawn from HQ’s entire pool of generation resources.

(1:01:30 My attempt to summarize) The cost consequences of Muskrat are much worse for NL consumers than now recognized. Nalcor and the NL government must settle with HQ. Until that settlement is scoped out, there is no way to know how much can be saved by cancelling Muskrat today.

Q 1:02:30 (Paddy explains his view that sunk cost should not guide the decision on whether to continue with the project, rather the decision should be based on the costs that might be saved by cancelling now. Paddy complains that a clear picture of the money that might be saved by cancellation is not available from official NL and should be.) “Sunk cost has long been a fallacy where economic decisions are concerned.” (Paddy acknowledges that I might have a point about costs associated with compensating HQ.) “But how does that impair NL’s sovereignty?”

A (1:04:15) I associate myself with the forceful argument Paddy has made in warning against allowing sunk cost to drive decisions on going ahead.

I would like to hear arguments from those who believe that a federal bailout of NL will not be required.

Q (1:05:30) A bailout does not constitute a loss of sovereignty.

A (1:06:10) My argument around the coming impairment of NL’s sovereignty hangs on my expectation that a federal bailout will come with strings attached.

Q (1:07ish) Paddy makes an interesting point at the close that NL is going to have to find partners for the Muskrat project to be able to complete it.