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.