The Muskrat Falls project could bring benefit to Newfoundland and Labrador if its risks were reduced. Muskrat Falls is part of a major hydropower resource in northeastern North America, and it can provide reliable power at a predictable price for decades.
This positive conclusion must be tempered by the need for an in-depth review that would protect the province’s electric customers from bearing an overly large burden of risk and also give them the chance to benefit from the project’s success. These are my recommendations in a recently published analysis of the project.
Both proponents and opponents may have misread the meaning of these recommendations. Proponents seem to worry that an in-depth review would be intended to kill the project, while opponents appear to hope that it would do just that. Neither is correct.
A regulatory-type review, either carried out by the province’s Public Utilities Board or a special panel appointed by the government, could provide objective assurance about this large project, whose impact will be felt in Newfoundland and Labrador for decades to come.
It would go beyond the extremely long-range projections of consumer benefit on which the project is now based and set limits on the amount of the customer’s risk of higher rates.
Because all regulation is a delegated legislative function, the ultimate decision on the project will remain with political officials, who would accept or reject conditions set by the panel just as they will accept or reject any conditions put on the federal loan guarantee.
Currently, the focus is on whether Muskrat Falls provides more benefit to the province than the alternative of retaining units now in service and making incremental, local additions to the mix.
Proponents make such a narrow analysis, while opponents want to debate it before a regulatory body. But it misses the potential value of the project to the Atlantic-New England region, which could provide Newfoundland and Labrador with revenue offsets to the costs of the multibillion-dollar project.
One major risk comes from holding 40 per cent of the Muskrat Falls output for short-term sales, which might be more profitable than long-term sales. Nalcor advocates keeping this power available to support future industrial development. These policies may increase potential value, but both also increase risk.
Such policies may make sense for an investor-owned company, where the danger of miscalculation falls on shareholders who chose to buy its stock. Nalcor wants to act in the same fashion, but it’s not in the same position.
Nalcor is part utility, serving as the principal supplier of power in the province. The relationship of any utility to its customers should be regulated. The opinion of one outside expert like Manitoba Hydro International is not a substitute for that oversight and does not offer customers enough protection.
Nalcor has only one shareholder, the provincial government, acting for its taxpayers. While it is true that they have empowered the government to act for them, people in the province could be involuntarily put at risk.
A review can protect ratepayers and reassure taxpayers. It need not mean that the decision on moving forward with the project is given to experts rather than political institutions, though that is frequently the practice elsewhere.
And such a review would not necessarily slow down the project. The Nova Scotia utility regulator will examine ratepayer-related aspects of the project, and its process should take about the same time as one in Newfoundland and Labrador.
To be clear about this approach: by putting a cap on costs that can be imposed on customers and by taking into account sales of Muskrat Falls power outside of the province, a regulatory-type review can improve the chances of the long-run success of the project.
A review could replace projections based on an unrealistic 50-year period with a shorter-term analysis. By using revenues from long-term, off-system sales to replace these projections, Muskrat Falls’ benefits could be both greater and more secure.
The proposals in my paper are mainstream and consistent with the standards and practices applied to utility capital projects across North America. If Newfoundland and Labrador is to be connected to the continental grid by this project, it may want to consider playing by the usual and accepted rules of its new world.
My paper has been criticized on the grounds that its publisher, the Halifax-based Atlantic Institute for Market Studies, is conservative. AIMS has never exercised any control over the substance of my writing, and all my papers are peer-reviewed. I have decades of experience in the electric utility sector in Canada and the United States, and that experience informs my conclusions. Therefore, I believe the paper should be judged only on its merits.
Gordon Weil is an energy market expert and author of the recent paper “The Muskrat Falls Hydro Project: Opportunities and Risks.”