Here's to the crazy ones, the misfits, the rebels, the troublemakers, the
round pegs in the square holes... the ones who see things differently -- they're
not fond of rules... You can quote them, disagree with them, glorify or vilify
them, but the only thing you can't do is ignore them because they change
things... they push the human race forward, and while some may see them as the
crazy ones, we see genius, because the ones who are crazy enough to think that
they can change the world, are the ones who do.

Steve Jobs
US computer engineer & industrialist (1955 - 2011)

Thursday, June 23, 2011

Closing our Sea Rescue Centre

It seems that politics today revolves around resources, and who is going to get them. This is nothing new of course. We had the deficit slashing days when Paul Martin was Finance Minister. He slayed the deficit, but the cuts were deep, and more often than not involved cutting resources to the provinces. They would then do the same to their municipalities. It was a time of restraint for the common good. It could easily be argued that we are in a similar position today.

On the 8th of June, 2011 the federal government announced that Maritime Rescue Sub-Centre St. John's was to be closed, and the responsibilities farmed back to Trenton, Ontario and Halifax, Nova Scotia. The closure, an apparent first step in the trimming of some $57 million dollars and 275 jobs from the Department of Fisheries (DFO), hit the province deeply. The first glancing blow is an emotional one. Newfoundland and Labrador is a maritime province with 500 years of history. It's a proud place, with proud people, and a proud maritime tradition. The very idea of removing the maritime rescue centre breaks with that traditional, emotional tie to the sea.

There is of course the argument that knowledge of both local dialect and of the area is invaluable in the desperate moments of a crisis at sea. This is a fact. In our harbour alone there are at least five distinct dialects. There are local names and references for places on the sea and coast that are not found on maps or on GPSs. It's all part of human intelligence that electronic know-how cannot replace. Isn't that one of the big lessons the Americans learned from the 911 crisis? Human intelligence is invaluable.

Much of this crisis in the making can be layed squarely at the feet of Ms. Dunderdale. The announcement was made on the 8th of June, but the Premiere did not respond for days. In fact she was unavailable for comment a day after the story broke, because she was "out of cellular range". I'm fairly certain Ms. Dunderdale has a Blackberry. You can text with them from anywhere. Is it possible a modern Premiere could be out of phone contact for over 24 hours? In any case, she then refused the call of Liberal Leader Yvonne Jones to reconvene the House of Assembly for an emergency session to pass a unanimous resolution condemning the closure. That would have put the ball back in the PM's court and garnered national headlines. It would have forced the PM to decide whether or not the national political capital lost would be worth the tiny savings of closing the centre.

Despite a VOCM daily poll asking people if they wanted such a vote in the House (which garnered a record 31,000 votes, 83% in favour of such a move), Ms Dunderdale stubbornly refused. She placed all her eggs in a personal phone call with the PM. The logic must have been to show her power, influence, and new relationship with the PM. He shut her down in a phone call that lasted less than 20 minutes, and apparently took seven days to arrange. Not unlike the three weeks it took him to phone her with congratulations on becoming Premier. In any case, the last hope now is the rally in St. John's being held this Saturday. Perhaps Ms. Dunderdale will use the momentum of the rally to call the House into emergency session. Tough call as she won't be there. Personal reasons apparently. I thought when you were Premier you didn't have a life. All part of the sacrifice of the Office. Apparently, that only applies when it suits.

In any case, my family will be making the three hour trip to St. John's for that rally. We need the people of the province to show up in numbers and reflect their deep feelings on this issue. If they don't, the PM will likely conclude there is no real resistance to his cuts. After all, the Premier isn't showing much personal commitment and sacrifice for it - why should he. He has a mandate to reduce the deficit. Just like the 1990's. If you want to keep the centre you'll have to show the PM you mean it. I'll be going to that rally with the thoughts of our local fishermen at heart. I'll also be going with the thoughts of my Great Grandfather, William Maher, close to my heart. A fisherman who died at sea in Bonavista Bay. The ability to save men did not really exist in those days. It does now. Here's my Great Grandfather's tragic story, and please, save our rescue centre:

Tragedy At Burnt Island Tickle
In the Fall of 1907, William Maher, and another man and woman from Burnt Island, left Indian Arm (now Summerville), Bonavista Bay, in a small schooner headed for Burnt Island. A strong breeze of southwest wind was blowing at the time. Everything went well until they arrived at the entrance to Long Tickle. They were about to make tack when the main boom, driven by a gust of wind knocked Skipper William Maher and the other man overboard. The two men were unable to swim and thus were drowned. The woman on the boat grabbed the wheel and ran the schooner ashore in a cove and was rescued. A search failed to recover the bodies of the two men.
This was indeed a great tragedy to hit a small community like Burnt Island and the dark cloud from such an incident lingered for a long time. This tragedy affected the people of St Brendan's since they had many friends and relatives living on the nearby island. Also, St Brendan's and Burnt Island were part of the same parish community.
From Schooners, Skippers & Sharemen of St Brendan's
By Captain Michael Croke
Page 105

Sunday, June 19, 2011

Is Nalcor the new New Brunswick Power?

Is Nalcor the new New Brunswick power? That question has been weighing heavily on my mind lately. Take for instance my recent post Muskrat Math. That math results in a $930 million operating loss a year on the Lower Churchill project. However, that sum is really too generous as it doesn't take into account the cost overruns of the subsea cable, and it doesn't take into account the guaranteed 8.3% return promised to Nalcor, Emera, and Fortis. More importantly, it doesn't take into account the fact that Nalcor can only transmit roughly 30% of the Lower Churchill's production to Nova Scotia for sale to the US or the maritime provinces. Given that stark reality, that $930 million a year loss has to be increased by more than double as it was based on selling all the power. That is a staggering $2 billion loss per year. It defies imagination in one way, but the numbers speak for themselves.

Consider that Ed Martin, CEO of Nalcor apparently told Randy Simms of VOCM radio that the province's energy consumption has been increasing each year. Unfortunately for Mr. Martin, Nalcor's own consumption graphs show a radical decline in consumption since 2003. Power consumption in the province is on the decline. One example of this: In 2000 the Holyrood facility went through roughly 2.5 million barrels of fuel per year; and in 2010 that number decreased to 1.3 million barrels. The point is that what Nalcor and the provincial government are saying on one hand does not match the evidence that in many cases is readily available from their own documents.

Then consider that the government revealed it would allow the Public Utilities Board to investigate the financial worthiness of the Lower Churchill project, but it won't have to report its findings until the 30th of December, 2011. That is two months after the provincial election and one month after the deadline to ink a final agreement with Emera. Draw your own conclusions on that one. Based on the staggering financial lunacy of this agreement there are essentially three realistic reasons why this project has been put forward.

The first could be rooted in some sort of misguided nationalism. A beating of the chest by then Premier Danny Williams at Quebec, and the rest of the country. A "damn the torpedoes we're going in" type of approach. Mr. Williams took down the flag to protest federal actions. His cabinet is almost completely anti-Canadian (according to several members of his government I spoke to -including a Minister). He has a bone to pick with Hydro Quebec over the Upper Churchill, and on that we can both agree. It is also good local politics to throw wood on the fire of anti-Quebec feelings in the province. Yet he is and remains a businessman. He was a businessman before he became a politician, and has returned to business now that he has retired from politics. This deal makes no positive business sense. So this option is out, other than its use as a tool to promote the deal.

The second could be rooted in the idea that the Lower Churchill project, and more specifically the subsea cable to Nova Scotia, would cause Hydro Quebec to panic over potential competition in the US market and come to favourable terms with Nalcor. The problem with that approach is the deal clearly hurts us, and does not effect Hydro Quebec in the least. In fact, Hydro Quebec would be smart to allow, even promote the idea. The resulting economic costs of the deal with leave Nalcor and the province in a situation very similar to that of New Brunswick Power. That is where things get interesting.

Consider that New Brunswick has: an aging population, low birth rate, an evenly split rural and urban population; and energy exports that account for two thirds of its total exports. If that sounds familiar it's because it mirrors the scenario in Newfoundland and Labrador. We all know that Hydro Quebec tried a friendly takeover of New Brunswick Power (NBP) a short time ago. NBP was, and remains, a power company in distress. It has a debt of $4.8 billion dollars. Much of that debt is associated with excess capacity in its electrical generation. NBP generated 4678 mw of electricity in 2010. Nalcor generated 1517 mw in 2010. The addition of Muskrat Falls would add another 865 mw a year for a total generation of 2382 mw, or half the capabilities of NBP. If the Lower Churchill goes ahead Nalcor's debt will be in the $6-7 billion dollar range. NBP has too much capacity to create power and not enough profitable markets to sell it to in order to recoup its debt. The annual cost of operations is therefore driving the company into the ground, and taking down the provincial treasury with it. With our higher debt and 50% less in capacity we have no chance of doing as well as NBP currently is.

The New Brunswick government tried to get out of the never ending cash spiral by selling NBP to Hydro Quebec. The biggest selling feature was that Hydro Quebec would take over the debt, which in turn would free the people of New Brunswick from certain economic collapse. The deal didn't go through. Danny Williams used option one above to appeal to people there. He made Hydro Quebec the bogey man, and maybe they are. The business reality is that it was the New Brunswick government that created their economic nightmare and not Quebec. Quebec tried to capitalize on it - that's business. The important lesson is that the New Brunswick government did it to itself, and its people.

The big question is why are we about to do it to ourselves? New Brunswick has a population 30% larger than Newfoundland and Labrador. They are capable of a larger tax load. They already have more power than they can sell. What they can sell can only be sold at a loss .Why would we do the same to ourselves?

Is the third option a deliberate attempt to place Nalcor in a bankrupt situation like NBP? What would be the point of that? Other than the potential to reduce our "have" status so we pay less or nothing toward equalization to the federal government, a massive NBP-like debt would leave Nalcor open to sale or privatization.

Among Nalcor's assets of course is control over the Upper Churchill - the real jewel in the crown. Is the effect of all these poor business decisions, if not the goal, to render Nalcor a financial death blow that would require outside intervention? Say perhaps even leave the corporation open to a potential take over by the likes of Hydro Quebec? After all, if not for Williams intervention at the time, NBP would be a subsidiary of Hydro Quebec today. NBP will have to be sold down the road in any case as its debt, and capacity issues doom it to that fate. Taxpayers in New Brunswick will only suffer for so long to spite Quebec, and then they will bend under tax burdens. It will be a "we have no choice" kind of scenario.

The kind of scenario Ms Dunderdale and the PC Party of Newfoundland and Labrador are placing us in.

Tuesday, June 14, 2011

Reading Between the Lines

Wade Locke, Professor of Economics at Memorial University, came out to the people of Newfoundland and Labrador last week. The evening meeting dubbed “A Prosperity Plan for Newfoundland and Labrador” was anything but what its name suggests. It was not so much a plan to deal with all of our financial success, but rather a call to arms to avoid financial catastrophe - which was long overdue. In that sense, Dr. Locke showed courage and leadership - to the province, and its politicians.

Dr. Locke projected the costs of declining oil production, heavy taxation, massive debt, and declining population on our future prosperity. He concluded that oil revenues, which currently fund a third of the province's annual operating revenues of roughly $7 billion, are on a steep decline. He concluded that government spending was unsustainable, and irresponsible. He emphasized that if nothing is done to sharply reduce the debt, before oil revenues decrease further, our province will be in a position that is beyond help. The Telegram's story on the evening started with:"Economist Wade Locke tried to scare people a little bit Wednesday night." Nothing could be further from the truth. What Dr. Locke was trying to do was wake people up to the fact that our provincial government's economic policies are unsustainable.

What surprised me was Dr. Locke's refusal to include the costs of the proposed Muskrat Falls hydro project in his debt/economic projections. He told the media that he felt uncomfortable including the project's costs in his forecast as he had done work on the subject for Nalcor. That excuse is not really believable though. Consider that he has worked on behalf of the government on many economic issues throughout his long career. Using his reasoning, would he not therefore feel professionally obliged to refrain from any comment on government economic activities and practises? Perhaps the truth may be that Nalcor required Locke to sign a confidentiality agreement? Mr. Locke also gave Finance Minister Marshall a preview of his talk the morning of his speech. Did he have the Muskrat numbers in that initial brief, but was "requested" to remove them? Unless Dr. Locke comes forward with a logical and professionally consistent reasoning for not including the costs of Muskrat in his dire projections we can only speculate.

However, the one thing we can do is read between the lines. Dr. Locke is projecting annual operating deficits of close to $2 billion within ten years. He's projecting a debt of $30 billion by 2030. The cost of the Muskrat Falls project is estimated to add 50% to the current debt of the province.

The message between the lines: The province of Newfoundland and Labrador is going broke even without Muskrat Falls numbers included, and should we proceed with the project, our financial end will come much sooner.

It is a clear message if you simply, and logically read between the lines.

Wednesday, June 8, 2011

From May3, 2010

In light of Wade Locke's pronouncement tonight on our province's financial situation, and reflecting on the announcement this week of the massive growth in the provincial government since 2006, I thought it would be fun to repost this piece I did 14 months ago.

Monday, May 3, 2010

Newfoundland's Debt Anchor

Who new Newfoundland had a debt of 11 billion dollars? I mean outside of Newfoundland that is. Other than being the best place to live in Canada, I would say discovering this debt was the second biggest secret in the country. Coming from Saskatchewan, where their debt of 6-14 billion(depending on who you speak to and what they include as debt) is a constant source of political bemoaning, it was interesting to note that Newfoundland's debt did not appear to be that big of a talking point. Considering Saskatchewan's population is roughly twice that of Newfoundland, and let's say the their debts are roughly equal, people here ought to be pretty concerned.

The cost of serving that debt was enormous and acted as an anchor on the development of Saskatchewan's economy. It was not until the 100-145 dollar per barrel oil that Saskatchewan's economy started to take off. That, and a large investment of Alberta dollars seeking to buy cheap properties up, and flip them for Alberta sized profits. Of course now that they have doubled the price of housing there, and the oil has dropped, Saskatchewan has leveled off economically. That being said, they did start paying down debt with the goal of eliminating the debt. They know that with the growing elderly population, their tax base to support this debt is declining rapidly, and dumping all that debt on the relatively small working population will only cause another exodus to Alberta or elsewhere.

Is there a lesson for us in all this? I say yes. Some of the biggest economic/demographic traits of Saskatchewan are: rural people leaving for the cities; many people working in Alberta; low prices in the farming sector combined with higher input costs (such as fuel); high taxes; inability to attract new people including such critical sectors as health; an over reliance on the provincial/federal government civil service for well paying jobs; and generally people fighting over what they can get their hands on.

Sound framiliar? As a new comer I can only speak from recent knowledge, but what I have seen so far is a very similar path for these two provinces. In Saskatchewan the labour (read government worker) movement is constantly at war with the "right wing" political parties (read anyone who doesn't support them getting on-going increases in pay and benefits). I like to say that when there are only crumbs left these two fight like dogs for their bit. I hope Newfoundland does not share this futile trait with Saskatchewan. If it does, the ability to reduce the provincial debt will be impaired - to say the least. As we can see with Greece, most recently, and the world in 2008/2009, debt is laying waste to our ability to grow. As they say in business, if you are not growing, you're dying. Newfoundland needs to seriously look at creating a debt payment fund and stick to it. Each year pay down what we can, especially when the Canadian dollar is so high. We likely incurred the debt when the dollar was .65 - .85 US. Now at par we can pay down 20% more debt with the same Canadian dollar.

One thing is certain, at 11 billion dollars, Newfoundland's debt will be an anchor around our neck. If we hope to break the cycle of below average wages, higher than average taxes, and a massive untaxed black market, then the debt has to be the number one priority. Some will say that the economy won't grow without the government (read us) dumping the dollars in. The truth of the matter is a real economy is a private enterprise driven organism. High debt equals high taxes equals less disposable income equals an unhealthy place for business to be.

Thursday, June 2, 2011

Muskrat Math

The proposed Lower Churchill hydro project is all about the math. Part of the problem we have all faced is getting the proper information to do the math and see if this deal is really needed, and if so does it make financial sense. According to Nalcor's Generation Planning Issues 2010 July  the Muskrat Falls project is not necessary.The following graphs are taken from the report:

You will notice firstly that power consumption in the province is on the decline, and is now approximately what it was in 1992. You will also notice that the future forecast for power appears to take off like a rocket with no apparent reasoning. All Nalcor's, and the government's, arguments for increased production appear to be centered around this unexplained rise in consumption.  Nalcor uses this rise to explain that in 2019 we will experience a power deficit, because our demand for power will exceed the amount of power being produced. You can see in the first graph that the HVDC link (Lower Churchill power) causes a massive jump in available power, and that excess drops when Holyrood is scheduled to go offline in 2021.

The second graph shows plan "B" whereby Holyrood would be upgraded with state of the art scrubbers, and expanded onto. There are also a number of smaller on Island projects added to it, and the result is a surplus of power - just much smaller. The real eye opener is the first graph which tells us that essentially all the power produced by the Lower Churchill will be excess power. That is a very worrisome discovery on several fronts.

There is the math which tells the real truth. Its the old saying: "People lie, the evidence does not." The Lower Churchill is scheduled to produce 4.9 terrawatts of power - or 4,900,000,000 kwh (kilowatt hours) per year. It is that number that the government bases its price projection of 14.3 cents per kwh as a breakeven point - the cost of production. From that 4,900,000,000 kwh we have to subtract a few numbers. Firstly, the loss of power by underwater sea transmission needs to be recognized. Experts suggest the average loss of power from either the line itself, or the conversion process to adapt the power to the DC lines is 7%. In our case the power goes through this process twice - once to get to the Island from Labrador, and once to leave the Island for Nova Scotia.  I therefore rounded that loss  up to 10% or 490,000,000 kwh (allowing benefit of the doubt). That comes right off the top, because Emera is entitled to 20% of the power produced not the 20% that arrives.

Then we have to take Emera's 20% of the power from the grand total. So you can subtract a further 888,200,000 kwh that leaves Nalcor with 3,552,800,000 kwh of power to sell. It also means their 14.3 cents to breakeven has changed to 20 cents per kwh due to a lesser amount of power available to recover that money from.

Next we have to add on the cost overruns of the dam, which at this time are unk nown, but which commonly reach between 25-56% according to the World Report on Dams. That would add at least 5 cents per kwh bringing the new total to 25 cents per kwh. Another cost that will be associated with the project is the subsea cable cost overruns. These projects are famous for their overruns - especially in rough waters. Potential issues there include bad weather and rough seas affecting the actual laying of the cable. Problems that can occur include breaking of the cables and even placement. It is interesting to note that even though Emera will pay for the subsea link to Nova Scotia, Nalcor will be responsible for cost overruns on the link. At this time it is impossible to say how much this will add to the cost of business, but it is certain to add to it.

Then there is the guaranteed return to Emera, Nalcor and Fortis of 8.3% on investment. Hard to say where that will end up until we know the final costs of the project - but it will add. Currently Fortis has a 3.5 cent markup on the 9.54 cent per kwh we pay to them for power. What that would look like on a 25 cent per kwh bill is unthinkable.

One last math deduction. As stated earlier, and according to Nalcor's own graphs, all the power from the Lower Churchill will be excess. In other words, we will have to sell it all, and not just a portion. The question is who will we sell it to? It won't be Emera, because they get their free 20% already. They also get a transmission fee on all power we send over the link - likely around 1.5 to 2 cents per kwh. No, it is far more likely that we will have to try and sell that power on the open US market. The problem with that is Hydro Quebec is already there and selling to them at roughly 6 cents per kwh. Take the 25 cents or so it will cost to produce this power, and then sell it for 6 cents. That leave us a loss of 19 cents per kwh. That would be bad if it were only a small excess of power being sold, but as shown earlier it looks to be all the Lower Churchill power. That would leave the Province and Nalcor with a staggering $931 million dollar loss year after year - for 35 years!

The problem with building a project of this size is in the detail. The small details and the large. We aren't the first to build such projects, and there is plenty of evidence in Canada and around the world of how these projects incur these "unforeseen" costs. We need to wake up folks. I don't care if this is Danny's Project, Dunderdale's project or Harper's project. It is a financial disaster for the people of Newfoundland and Labrador. It should be a strong signal to all that our homegrown Fortis group just this week signed a deal to purchase a Vermont company that just signed a 35 year supply deal with Hydro Quebec. They have apparently decided where their best interests lay. We need the press of this province and country to seriously scrutinize the financial details of the project before it's too late. If you think my facts and figures are overinflated then please do your own research - there is plenty out there on this subject. Look at the optimum figures the government gives out for the amount of power possible and the cost to produce it. Then start subtracting all the commitments along the way. You will find out that this project is a disaster for our province - it's only Muskrat Math.