Former PUB chair lays out warnings on Muskrat Falls

Economist David Vardy says province must assess the cost of stopping, as well as the cost of continuing with hydro project

Published on March 18, 2016

By Kevin Curley and Barbara Dean-Simmons
If the Muskrat Falls hydroelectric project continues to completion, the debt for the province will equate to about $20,000 for every man, woman and child in Newfoundland and Labrador.

That’s the reality laid out by David Vardy, economist and former chairman and chief executive officer of the Newfoundland Public Utilities Board, in a speech to the Clarenville Rotary Club earlier this week.

A day after his address to Rotary, Vardy sat down with The Packet to provide more detail of his concerns about Muskrat Falls.

He said the massive project, first announced by the Danny Williams government in 2010, was promised to be a huge pay off for the province, bringing in revenues from the sale of energy to Eastern U.S. markets.

Those were the days of high oil prices, when the provincial coffers were awash with oil royalties to help fund other megaprojects.

That scenario is now on shaky ground.

Oil prices have plummeted and the province’s fiscal position is drastically weaker, so much so, said Vardy, that the province is at the point where it cannot borrow under long-term loan agreements.

Instead, said Vardy, the province is only able to borrow short-term from lending agencies, because its financial rating has taken a hit.

He said that means the province may not even be able to borrow the money to cover the costs of completing the Muskrat Falls project.

Vardy, and others, have been concerned about the feasibility of Muskrat Falls from the start and over time his worry has grown.

When the project was unveiled to great fanfare, in a news conference at the Sheraton Hotel in 2010, the original estimated cost was $7.75 billion, including the $1.55 billion cost of the Maritime Link, he noted.

At that time, the province said it would put up $0.7 billion, the Nova Scotia government had committee to $0.5 billion and Ottawa was providing a loan guarantee to help finance the project.

Since then, the costs on the project have risen, the Nova Scotia part of the deal has changed and the province, through Nalcor, has already borrowed the full $5 billion using long-term bonds.

Originally, for agreeing to be partners in the project — essentially financing the cost of the Maritime Link — the Nova Scotia government would get 20 per cent of Muskrat’s power, Newfoundland and Labrador would use 40 per cent, leaving 40 per cent for surplus sales.

However, Vardy said, when Nova Scotia’s Utilities and Review Board assessed the project, it rejected the original deal and renegotiated it.

The revised deal will see Nova Scotia getting from 44-56 per cent of the power generated by Muskrat Falls, for 21 years.

That leaves less than 10 per cent of the power from Muskrat for this province to sell to other markets.

 “The current government has inherited a big mess and they need to deal with it,” Vardy said.

He said it’s not too late to pull back, to stop the project, if necessary.

So far, construction has cost about $4 billion, he said, and will probably reach $6 billion before the year is over.

However, based on how costs have risen since the first estimates, and other factors that came into play, Vardy said the final costs could be $12-15 billion if it continues.

Ernst and Young, a financial services and accounting firm, is reviewing project costs, scheduling and risks involved to complete the project.

However, Vardy said the other thing the province must assess is how much it would cost to stop the project.

While he won’t go as far as to say the project should definitely be abandoned, Vardy said he’d like to have more facts, including the report from Ernst and Young. He does think the government should weigh the cost and benefits of continuing, against the cost and benefits of stopping.

If stopping isn’t an option, he said, the province would need to attempt to renegotiate the deal with Nova Scotia and look to the federal government for some more cash.

Meanwhile, Vardy said, when it comes to the demand for energy from consumers in this province, the answer may lie in the Upper Churchill — the project of the government of former premier Joe Smallwood that went down in infamy as being one of the worst deals in Canadian history.

Despite that bad deal, said Vardy, this province still gets 300 megawatts of power from the Upper Churchill. Half of that is committed for use in Labrador. The other half could come to the island, he said.

Ironically, thanks to the Muskrat Falls project, a transmission link across the Labrador Straits makes it possible to feed Upper Churchill power to the island.

“We could be using it on the island, so that could be a huge help,” he said,

To those who say Muskrat Falls can’t be stopped because it’s an important job creator, Vardy has a quick answer.

“When I look at the monthly reports from NALCOR and I look at how much money they spent in the month of November. They spent $205 million. Then I looked at how much they were spending per person. It worked out to $480,000 per person, per year,” Vardy said.

 “To say we are going to keep this project going — as a make work project — when it is costing us half a million dollars per person — you have to be kidding.”

Vardy said the next pivotal point will be the Ernst Young report.

 “It may well be that when they do the analysis, maybe they’re right. I don’t know. It might come to the conclusion that we can’t stop it, but at least we’ve looked at it,” Vardy said.

However, if the province chooses to continue the project, Vardy said it must determine how to pay the bill.

“It will have to come from the province, unless we can go to the federal government and ask them to put in more money,” he said.

Vardy said he was suspicious of the Muskrat Falls project since the beginning, and is anxiously awaiting the Ernst and Young report in the next few weeks.

With that report, he said, the Liberal government of Dwight Ball has to be ready to make some key decisions.