On Monday October 2, 2017, I testified before the House of Commons Standing Committee on Natural Resources. The main theme of my testimony was to plead with the federal government to act quickly to mitigate the harm it has caused by facilitating the Muskrat Madness project in Labrador. Recognizing the federal government’s role in causing the project in the first place when then Prime Minister Harper provided a loan guarantee for about half of the project’s cost, I called for the federal government to bail out Newfoundland & Labrador ratepayers by forgiving an amount sufficient to prevent the project from causing severe energy poverty — an amount I estimate to be about equal to the current federal guarantee. The second initiative I urged upon the federal government was to immediately bring the parties together to hammer out a negotiated energy storage solution between Quebec and Newfoundland & Labrador so that Muskrat generation can be operated efficiently.
Additional themes of my brief presentation were to plead with the federal government to respect the constitution by not meddling in the power industry through funding, to exercise federal authority over interprovincial trade to encourage free and efficient electricity trade within Canada, to eliminate a bias in the tax system favouring government ownership of electric utilities over private ownership, and to consider the federal government’s failed record in funding electricity-related research before pursuing new research initiatives. I also presented my argument that all of Canada’s electricity exports are money losers when compared against the marginal cost of generation additions. I also warned that the federal government could be vulnerable to future adverse NAFTA claims initiated by U.S.-based generators forced to compete against subsidized Canadian provincial power exports.
The complete transcript is here. Excerpted below are my opening statement and my comment on Newfoundland’s outstanding energy storage required to make the Muskrat generator operate properly.
The Natural Resources Committee’s hearing process has provided a gust of attention for the notion of a national East-West grid. While it is conceivable that an East-West grid might be further developed beyond current capacities while respecting constitutional rules around resource management, in adherence with principles of user-pay, and without imposing harm on consumers, all of the discussions promoting a national grid that I have seen ignore these considerations.
Mr. Tom Adams (Principal, Tom Adams Energy):
Thank you, Mr. Chairman, and members of the committee.
Federal electricity policy must be grounded in Canada’s Constitution. Electricity is provincial jurisdiction, not federal. Historically, electricity policy oversteps of the federal government beyond its constitutional authority have almost always harmed our prosperity. I’ll address an ongoing example, the federal loan guarantee subsidizing the Muskrat Falls project in Labrador, in a moment.
There are positive actions the federal government can and should take to enhance the long-term efficiency of electricity service to Canadians. The federal government ought to exercise its authority to promote interprovincial trade so that we can have free trade in electricity within Canada, with fair rules around transmission pricing and open access. The federal government ought to end the current discriminatory effect of the federal income tax rules that favour government-owned utilities over privately owned utilities by restoring something called the Public Utilities Income Tax Transfer Act repealed by the Chrétien government in its 1995 budget. The federal government should also commit to enhancing the availability, timeliness, and quality of economic data on the energy sector generally across Canada. This is an area where Canada lags badly behind the U.S. and the EU.
The committee asked for input on regional electricity independence. There’s already significant regional electricity interdependence, mostly between provinces and the respective U.S. neighbouring states, but also between provinces where opportunities exist. Policies forcing increased east-west electricity exchange run the risk of reducing the efficiency of overall electricity trade. The major trends now in electricity generation technology are toward smaller-scale distributed generation. Power supply is naturally a local business. Where inter-regional power transmission is justified, it’s mostly for reliability reasons.
Canada has massive transmission investments, but has experienced a long period of declining consumption. Canada’s emphasis with respect to transmission should focus on extracting best value from existing assets. There is no need for the federal government to spend any money on transmission.
What about greenhouse gases? The overall greenhouse gas intensity of Canada’s electricity sector is low by international comparison. Ontario’s coal phase-out program, which turned out to be a much greater net economic penalty than expected, provides a cautionary tale. All of the major capital projects in the power sector in recent years, justified substantially on the basis of their green credentials—I’m talking of B.C.’s Site C, Manitoba’s Keeyask Bipole III, Ontario’s FIT and nuclear refurbishment programs, Alberta’s off-coal program, and Newfoundland and Labrador’s Muskrat Falls—will all have punishing impacts on consumers.
With Newfoundland and Labrador’s Muskrat Falls there is much harm to be mitigated. Former prime minister Steven Harper’s justification for offering the federal loan guarantee, without which this project could never have started, was largely tied to greenhouse gas reductions. Even if the project can be completed on its current officially estimated cost and schedule, the province will require a federal bailout, perhaps as much as forgiving the entire amount of the federal loan guarantee recently topped up by the Trudeau government to $7.9 billion. Without a federal bailout, Muskrat Falls will cause severe energy poverty in Newfoundland and Labrador, and all the social and economic consequences that entails.
In addition, the federal government should act quickly to broker a power storage agreement between Newfoundland and Labrador and Quebec, without which the Muskrat generator will be substantially inoperable. The longer Muskrat proceeds without an energy storage agreement, the greater the risk of interprovincial conflict.
What are the opportunities for aligning federal policy with the Canadian energy strategy issued by the premiers? The CES calls for more federal research. While well-targeted and well-managed basic research would be positive, notice how unsuccessful federal government spending on energy research has been in the last many decades. The largest federal energy research project was, for 50 years and many tens of billions of dollars, the CANDU program, a technology now at its dead end. A smaller example is research on wind power to serve remote users. Decades of research have produced little beyond the need for more research.
What about Canada-U.S. electricity trade? The Canadian federal government appears to be vulnerable to NAFTA suits initiated by U.S. owners of power plants near our border who are forced to compete against subsidized exports from Canadian provincial governments hell-bent on overproducing electricity. Defending such suits would put the federal government in the awkward position of aligning against the interests of Canadian consumers.
In conclusion, in matters related to electricity, the federal government should stick to its constitutional knitting. In addition, it should mitigate the harm it is causing to the future of the people of Newfoundland and Labrador.
(During the Q&A session)
Mr. Richard Cannings:
Mr. Adams, you briefly mentioned how important it was for Newfoundland and Quebec to have some sort of agreement. I just wonder if you could expand on that as well.
Mr. Tom Adams:
Yes. Thank you for the opportunity.
The Government of Newfoundland and Labrador is constructing a hydroelectric facility that has no storage capacity on the Lower Churchill at Muskrat Falls near Happy Valley-Goose Bay. The associated transmission links that Newfoundland is constructing from Labrador to the island and from the island to Cape Breton are insufficient to carry the peak generation capacity of the Muskrat Falls generator. If Newfoundland and Labrador cannot come to a storage agreement with Quebec around storage of energy, the Muskrat project is going to dump almost all of its production in the springtime, which is the one time of the year when it has a full flow of water, enabling full production.
Newfoundland proceeded with the construction of the Muskrat Falls project, notwithstanding the fact that, subject to the 1969 contract with them, Hydro-Québec owns and controls the assets at Upper Churchill. Newfoundland has always planned on using Upper Churchill generation in order to balance the seasonal flow problem of Muskrat Falls, but they don’t have the contractual rights to do this.
The further Newfoundland goes into the project, spending billions after billions on a project they don’t have the contractual rights to operate, the worse off Newfoundland’s going to be. Very urgently, Newfoundland and Labrador need to make an agreement with Hydro-Québec. Since the federal government is so deeply responsible for causing the Muskrat Falls project in the first place, by virtue of its loan guarantees by first the Harper government and now the Trudeau government, the federal government needs to play a brokerage role. They need to bring these parties together, so that they can come to a fair and reasonable storage agreement for the excess production of Muskrat Falls in the springtime.
Post-Script Jan 15, 2018
My friend Brian Crowley, who is also sceptical about Muskrat Falls but knows a vast amount about the constitution, has admonished me to my unconstitutionality claims presented in this testimony.
“My view is that our constitutional scheme is predicated on the notion that provinces are responsible for matters of a purely local or private nature. As soon as they spill over provincial or national boundaries, in my view they become by their nature federal. That is why provinces regulate railways entirely within their boundaries, but Ottawa regulates railways that cross provincial boundaries, for example. Thus as soon as you talk about something crossing provincial boundaries, even if it would be provincial jurisdiction within any individual province, Ottawa acquires competence once the boundaries are crossed…So, Muskrat Falls may be a terrible idea (I certainly think it is!). But I think we have to make the case against it on its merits rather than saying that Ottawa had no power to act in the first place. I don’t think that argument is correct.”
Crowley’s argument looks rock solid.