Ego, Arrogance, Incompetence and Crisis

The last week should have been a big eye opener for the people of Newfoundland and Labrador. It began with a stark, and sudden warning that the province would be plunged into rolling power black outs during extremely cold winter weather. People reacted with shock and disbelief when they discovered the outages were caused by "maintenance issues".

At least that was the original story. Planned maintenance on two generators and the breakdown of a third were named as the reason for the rolling black outs. Then it was the extreme weather - which wasn't that extreme. Then a switch yard blew up. Then it was the extreme weather and the maintenance. Then it was planned maintenance that had been delayed due to repairs of another generator. Then it wasn't planned maintenance, but rather maintenance caused by breakdowns. Then it was just plain repairs. As the week progressed so did the story.

The people were enraged. They've been told that the province's energy crown corp, Nalcor, was run by "world class" people, and they didn't need any uppity outsiders telling them what to do. It's a common refrain since Williams became premier here in 2003. They castigated the people who dare spoke in opposition to the obvious flaws in their power concepts and plans as "nay-sayers" and "known critics". Here, castigation is the best form of marginalization. In other words, to dare challenge the plans and actions of the government is somehow being anti-Newfoundland. Williams used to call them "traitors". Dunderdale has stuck with the "nay-sayers". A very small-minded response by very small-minded people.

Then reality hit when the rolling blackouts started happening during normal winter temperatures, and people became infuriated. They wondered out loud why their "world-class" system was not adequate. Nalcor came out with "no worries,its just planned maintenance". The government was absolutely silent. People were not satisfied. The talk talk shows lit up, and began running almost 24 hours a day. The provincial radio station VOCM  began running coverage like a mix of CNN and talk-show. People's outrage escalated as a sense of betrayal, and an absence of leadership combined to fuel the fire.

The explanations kept changing, and it became very clear that, instead of being given a clear picture, spin was the order of the day. A deliberate attempt to manage the truth. Mask it. That all changed when the switch yard exploded and three quarters of the Island's population were plunged into darkness and cold. Luckily for rural Newfoundland wood burning stoves are common, and people were able to keep themselves warm. In the urban centers things were different. They suffered more rolling blackouts and the severity of the mass outage was pronounced with their reliance on electrical heating.

Sadly, at least one person, and perhaps more, died during these events as a result of carbon monoxide poisoning - trying to keep their homes warm, but not ventilating them properly. So many people were admitted to hospital for carbon monoxide poisoning that one Eastern Health doctor called it an "epidemic".

Yet, despite the collapse of the fable that the government and Nalcor was in complete control of the "manifest destiny" of the province, Ms Dunderdale and Nalcor refused to accept responsibility. There was no one to be blamed. There was no flaw in the electrical system. There is no flaw in the government's "energy plan". All was as it should be and the people needed to do their part and not use the power that had been trumpeted as "endless".

Confidence has been shaken. The propaganda-like nationalism surrounding electrical power has been severely shaken. The trust with government and Nalcor has been destroyed. After not making one appearance in the first 48 hours of the crisis, Dunderdale suffered so much criticism she held three press conferences in one day - damage control that failed. Yet the government and Nalcor clung to the myth that they can do no wrong. That the whole fiasco was not a "crisis" - even though 71% of the people believed it was in a province-wide radio poll. Dunderdale called it a "critical time" but not a "crisis".

It's all a symptom of the same thing really. Arrogance and incompetence. Too arrogant to admit incompetence, and too incompetent to admit arrogance. Media and some talk shows continuously call this a "bad PR" plan, or the government "out of control of the message". In reality, it's just the most recent example of a crisis in leadership through out the political and, in some ways, business circles of the province. Egos inflated by nationalism, bolstered by arrogance, and rooted in incompetence.    

Is Newfoundland and Labrador Ready to Lose the Upper Churchill?

Is Newfoundland and Labrador ready to lose the Upper Churchill hydro-electric dam and facilities? Every single Newfoundlander and Labradorian would say a resounding "No". However, we are getting very close to that position, and here's how.

Just say for a moment that Hydro-Quebec or I are successful in the challenges on Muskrat Falls in Court, but Nalcor keeps building the dam and taking power from the Upper Churchill as it apparently is now (according to Hydro-Quebec's Statement of Claim). Where does that leave us? According to the legal opinion given by lawyers at the province's Natural Resources department it leaves us with billions in penalties and costs to Hydro-Quebec  which, according to the opinion, would bankrupt CFLCo unless the provincial government dumped money in to pay the costs off. However, it's not that simple.

When Dean MacDonald and Brian Tobin agreed to sign the Shareholder's Agreement of 1998, they gave Quebec some powers over that scenario. The Agreement gives Hydro-Quebec a veto over the following as it pertains to CFLCo's finances:

3.3.2 Any sale, assignment, transfer, lease or exchange of all or substantially all of the property of CFLCo or any Subsidiary of CFLCo.

3.4.2 The adoption of the annual operating budget and the annual capital expenditure budgets of CFLCo and any variations thereto which would result in the increase or decrease of any such budget by $10 million in the aggregate or $5 million for any particular budget item.

3.4.4 The issue of any Shares or any Rights, except for Rights attaching to subordinated debt obligations, or the issue of any shares or any debt obligations of any Subsidiary of CFLCo.

3.4.5. Any loan or borrowing on the credit of, or any issue, reissue, sale or pledge of debt obligations of, or the grant of any financial assistance, guarantee or security by CFLCo or any Subsidiary of CFLCo in each case having an aggregate principal amount of $25 million or more (whether it be one or more trenches), except for subordinated debt obligations.

8.1 Pre-emptive rights. Subject to Sections 8.3 and 8.4, no shares or rights may be issued by CFLCo to any shareholders or to any other Person (the "New Issue Securities") unless CFLCo shall have first offered it to N&LH and any permitted transferee of N&LH and to HQ and any permitted transferee for the same pro rata to their respective Pro Rata Shares, at the same price and on the same terms and conditions as those offered in respect of the New Issue Securities.

In other words, Hydro-Quebec could veto CFLCo from going into bankruptcy. Or, more dangerously, it could veto the acceptance of any financial assistance by the provincial government to keep CFLCo from going under.

If CFLCo is without funds to pay Hydro-Quebec the court awarded costs it would be unable to operate the dam. It would frankly be unable to meet its payroll. Should that happen, the Power Contract states:

             Should CFLCo, not being prevented by any event of Force Majuere, be unwilling at any time to operate the Plant, and should the plant then be operable, Hydro-Quebec, if not then in default here-under, shall have the right to cause the plant to be operated for the account of CFLCo in accordance with sound utility practises until CFLCo itself resumes such operations.

So, in other words, Hydro-Quebec can force CFLCo not to accept financial assistance from the province, and it can refuse to let CFLCO go bankrupt, and simply take over the operations of the plant while the bill for damages to CFLCo keeps rising to the point of being impossible to pay.

If the provincial government tried to sell some or all of its shares Hydro-Quebec gets first rights to them. If the provincial government tries to issue bonds Hydro-Quebec gets first rights to them as well. And that's only if Hydro-Quebec doesn't use its veto to stop that from happening in the first place.

Consider though that the province wants the Muskrat Falls dam operational by 2016, and consider damages start from that point, Hydro-Quebec can sit on those damages year over year until 2041. By 2041 those damages would be, or could well be, in the vicinity of $25 billion, not including interest. At that point Newfoundland and Labrador would have no choice, but to surrender the dam in its entirety to Quebec.

Is this what we really want? Are we ready to lose the Upper Churchill to Quebec?

Muskrat Falls Deducted

It's important to remember that in the beginning the Muskrat Falls project was billed as Newfoundland and Labrador's green alternative to replacing the Holyrood thermal plant, and bypassing Quebec to be a major exporter of electrical power to the US via Nova Scotia. If there was any surplus power it would: "be recalled as needed for industrial development in Labrador". The word "mines" was not mentioned once in the government's press release  http://tinyurl.com/6vz2unw . Despite the fact that the government was fully aware of the many mining developments that were at various levels of development, and despite the fact that the government was assisting in those developments, and despite the fact that the government knew full well the mining developments would require massive power that was not currently available, it did not use the word "mining" even once in its press release announcing the Muskrat Falls project. So it flew under the radar.

That was 2010. Fast forward to today. Today there is no agreement between Nalcor and Emera to transmit power to Nova Scotia - the original term sheet expiry date is now some 7 months old. There is no federal subsidy, or even a mention of it, for the Maritime Link that would have seen Emera receive over $300 million to assist with the undersea cable. There in fact is no formal agreement signed between Nalcor and Emera to construct the Island Link from Labrador to Newfoundland. There is no written loan guarantee from the federal government. None of these previously crucial aspects of the original Muskrat Falls agreement are in place. That could mean several things. It could mean everything is just moving incredibly slow - slower than it takes for say many international treaties to be formed and signed. It could also mean that they were never intended in the first place.

Take the private conversation between Emera's CEO and the US consulate:

“Given that legacy, Spurr (Emera) remarked that he and his senior colleagues are equally cautious in dealing with the premier (Williams), with knowledge it makes more financial sense for N-L to do a deal with Quebec than with them.
“In fact, Spurr indicated he wouldn't be surprised if Williams ended up doing just that, and leaving Spurr and colleagues to speculate that Williams might be using them to exert more pressure on Quebec to offer a better deal for N-L.”

Of course Mr Spurr may have only been correct in his suspicion, but not in his conclusion. It could also be the case, knowing Williams' penchant for trying to play the federal government for funds, that the real goal was to have the federal government grant the provincial government a loan guarantee based on an "Atlantic Gateway" concept. Once the loan guarantee was granted Newfoundland and Labrador could back out of the Emera deal, and use a portion of that loan guarantee for a dam only project at Muskrat Falls. In other words, it could be that Williams' plan was not to build a link between Newfoundland and Labrador, and the same goes for the Newfoundland and Labrador/Nova Scotia Maritime Link. Knowing how Williams' tends to use the nationalist card in his dealings with the feds, it is entirely likely a threat of nationalist backlash might be used against the federal government if it did not provide a loan guarantee, at least proportionately, for a dam only project -as is happening right now.

We don't know for sure. All we can do is deduce from the evidence. Here's one bit from Williams on April 3, 2012:

" we have a federal loan guarantee worth up to a billion dollars"
Now a loan guarantee of up to a billion dollars would be insignificant on a $6-8 billion dollar project, but a dam only project could cost as little as $3 billion. A billion dollar loan guarantee in that context would make more sense, and at least have an overall impact on the financing costs. That's if you believe a dam only project could work in Labrador.

Here is where more evidence comes. The greatest source of clues lately has actually been in the House of Assembly itself. Minister of Natural Resources Jerome Kennedy has laid it out there in plain language. From Hansard:

Hansard 29 March, 2012

MR. KENNEDY: "Thank you, Mr. Speaker...
We have a very small market here and the oil companies are telling us that we are not going to build an infrastructure to bring a very small amount of natural gas to power Holyrood when, Mr. Speaker, there is no market. I say to the member for - the Opposition House Leader, even if we refurbished Holyrood, what does that do for Labrador mining projects? "


Hansard 30 May, 2012

MR. KENNEDY: "Yes, Mr. Speaker
What we are doing and what we have indicated is that there will be power available with Muskrat Falls, Mr. Speaker, if it is sanctioned and developed. Mr. Speaker, there are no firm contracts signed. I have met with all these companies. There is only one company that said we are willing to buy power. We are in discussions, Mr. Speaker, with these companies and if they want to sign firm contracts, then we will guarantee the power if Muskrat Falls is sanctioned, Mr. Speaker."


MR. KENNEDY: "Thank you, Mr. Speaker.
On March 27, the Member for Cartwright - L'Anse au Clair asked the Minister of Natural Resources to table in the House any correspondence, analysis or reports that government has in relation to the current and projected demand for electricity in Labrador and how such demand can be met.

Newfoundland and Labrador Hydro, Mr. Speaker, is a Crown corporation owned by the people of Newfoundland and Labrador. Its focus is on delivering safe, reliable, least-cost power to residents, businesses, and industrial customers in Newfoundland and Labrador.

Newfoundland and Labrador Hydro, Mr. Speaker, is also mandated to ensure that adequate planning occurs for the future generation, transmission, and distribution of power in the Province. There is currently 525 megawatts of available electricity from the Churchill Falls Generating Station to meet demand in Labrador. This includes the 225 Twin Falls or TwinCo block and the 300 megawatt recall block.

Labrador industrial customers, Mr. Speaker, currently use the full 225 megawatt Twin Falls block and an additional sixty-two megawatts of firm power from the recall block. After Hydro's rural customers and industrial contracts are supplied, there is between eighty and 280 megawatts of recall power available, depending on the time of year. At peak during the winter, Mr. Speaker, in Labrador, 220 megawatts of power is required, thereby leaving eighty megawatts for other use in Labrador or for other export purposes.

Strong commodity prices, Mr. Speaker, have resulted in record levels of mineral exploration in Western Labrador resulting in the announcement of a number of new mining projects. If all projects go ahead, Mr. Speaker, there will be an estimated $10 billion to $15 billion in capital investment for mining developments in Labrador in the next ten years. These new developments will require an adequate supply of electrical power at competitive rates to proceed. So much depends, however, on the need for iron ore in China. The demand for iron ore is affected directly by the Chinese economy.

If Muskrat Falls does not proceed, Mr. Speaker, there will not be sufficient power available for all of the mining projects to proceed. Over the last number of months the minister and departmental officials have held numerous meetings with mining companies, including: the Iron Ore Company of Canada, Cliff's Natural Resources in Wabush, Alderon Iron Ore Corporation, New Millennium Iron Corporation, Tata Steel, Labrador Iron Mines, Vale, and Grand River Ironsands. These meetings have covered numerous topics, Mr. Speaker, and have included discussions regarding power requirements and transmission infrastructure.

As stated earlier, these projects are at various stages, Mr. Speaker, ranging from early stage, pre-feasibility studies, environmental assessment studies, and those that have commenced construction. The normal process, Mr. Speaker, for a new industrial or large commercial customer will be to approach Newfoundland and Labrador Hydro to identify their projects' needs and make a formal request for power.

The following companies, Mr. Speaker, have identified a need for power: IOC, Alderon, Tata/New Millennium, Vale, Labrador Iron Mines, and Grand River Ironsands. Once received, Nalcor then undertakes initial engineering studies that are required to provide the customer with a preliminary estimate of cost and timelines. There is a chart prepared by Nalcor, Mr. Speaker, which summarizes their assessment of potential new demand in Labrador. The chart is based on an aggregate of electricity demand from these projected projects. Some of the companies the department has spoken with have indicated other possible power requirements, such as multiple expansions, but formal requests for service have not yet been made. Projects currently under construction include Tata Steel, Canada's DSO project, and Phase 2 of the Iron Ore Company of Canada's Concentrate Expansion Program. Labrador Iron Mines is already in production and is exploring the potential to transition from electricity supplied by diesel units to hydropower supplied by the isolated Menihek substation.

Projects undergoing feasibility study included Alderon's Kami Project, Grand River Ironsands Churchill River Project, IOC's CEP stage three Project, IOC's Long-term Expansion Program, Tata's LabMag Project, and Vale's underground mine at Voisey's Bay.

Longer term developments included a second phase for the Kami project, the Julienne Lake Project, a second phase for Grand River Ironsands, further expansion associated with IOC, and the Paladin Aurora Michelin Uranium Project near Makkovik."

To satisfy these future mining developments in Labrador, there clearly needs to be a new source of power supplied. While our government would like to develop Gull Island, Mr. Speaker, it is not an option at present. Gull Island can only proceed if our Province can arrive at a favourable arrangement with Quebec on transmission. Gull Island, if developed, can supply an additional 2,250 megawatts of power for Labrador industrial use or export.

Muskrat Falls is an ideal source for new electricity. At 824 megawatts, Mr. Speaker, this project will meet the growing needs of the Island population, and enable us to close the expensive and environmentally unfriendly Holyrood Thermal Generating Station. It will also enable us, Mr. Speaker, to meet the growing needs of the mining industry. Approximately 40 per cent of the output from Muskrat Falls will be available to meet this energy demand. Until such time as the power is required, the excess power will be sold on the spot markets in the Maritimes and Northeastern United States.

The development of Muskrat Falls, Mr. Speaker, will also support significant regional economic development in Labrador. Power will be available for industrial expansion and development in the region at competitive rates, encouraging development, which brings further business opportunities."

The nuts and bolts of Kennedy's comments are utterly at odds. On the one hand he says power to the mines will be provided once Holyrood is replaced. On the the other hand he lists off nine plus mining projects that will require all and more of the 824 MW that Muskrat Falls could produce. Of course, that does not factor in the 20% or 165MW that have been promised to Emera in return for their investment in the Island and Martime Links. There is clearly something not right with the Minister's math. Especially considering his analysis that during the winter months, with full recall of the 300 MW from the Upper Churchill, that there was only 80 MW left for use.

Then, on the evening of May 29, 2012 Premier Dunderdale stands in the House of Assembly and does an hour or so rant of which the following is a partial transcript http://tinyurl.com/7k7z82g

"Mr Speaker we have to pay for generation of power. So if we, unless there is a huge population explosion in Labrador, Mr Speaker, something absolutely unbelievable happens in Labrador, along with the great mining developments that are going on up there now Mr Speaker, Muskrat Falls would never be developed because people would never be able to afford the electricity and the mining companies would never be able to afford the electricity. And we had a mining, the Minister of Natural Resources and I met with a mining company in my boardroom on Friday, Mr Speaker, and they are very interested in whats happening in Labrador, because they are ready to move on their project...
They need Muskrat Falls to be developed Mr Speaker...Mr Speaker, they understand that if Muskrat Falls does not go ahead what happens in Labrador from that point on lies squarely in the hands of Hydro Quebec and the province of Quebec Mr Speaker...We enable development in Labrador Mr Speaker, because we absorb so much of the costs. We are able to sell electricity power to atleast six mining developments we hope in Labrador Mr Speaker...Mr Speaker, does anyone have confidence that when mines go to Hydro Quebec looking for energy for developments in Labrador that they are going to get the best industrial rates in Atlantic Canada? Not likely Mr Speaker...All those benefits are on the horizon Mr Speaker, but they need power."

So again we can see the pattern. There are numerous mines in Labrador putting pressure on the provincial government to move forward with Muskrat Falls quickly as their developments are ready to go - or close to it. The twist in Dunderdale's comments:
 "...are going to get the best industrial rates in Atlantic Canada?"
Kennedy's comments to the Telegram were close as well:
“I have met with IOC, Tata Steel, Alderon Resources, Labrador Iron Sands, Labrador Iron Mines, and Vale Inco; they all need power. They are saying to us: where can we get the power? They want the power at industrial rates because industrial rates in Quebec and in Manitoba, you have to be competitive. So, we are still in the process of determining what those rates will be.”

To listen to, and believe the government, you would think there were mines begging for power, at competetive rates, and that at this time no decisions had been made. That any number of senior mining executives would be chewing their nails in nervous fashion over the apparent state of flux the project is in. Certainly, there is a hint of that in Alderon's annual return filed with the US Securities Commission:

"Alderon needs to enter into contract with external service and utility providers

Mining, processing, development and exploration activities depend, to one degree or another, on adequate

infrastructure. In order to develop a mine at the Kami Property, Alderon will need to negotiate and
conclude various agreements with external service and utility providers for rail transportation, power and
port access and these are important determinants which affect capital and operating costs.
The Company’s future operations will require rail transportation from the Kami Property to a sea port
(expected to be the Port of Sept-Îles) and ship berthing, storage and loading facilities at such port. The
Company has not yet concluded agreements with the relevant rail companies or port operators
necessary for the transportation and handling of the Company’s planned production of iron ore and
there can be no assurance that agreements on acceptable terms will be concluded. The inability to
conclude any such agreements could have a material adverse effect on the Company’s results of
operations and financial condition and render the development of a mine on the Kami Property unviable...

Although low cost power from a major hydroelectric development at Churchill Falls to the east is
currently transmitted into the Wabush region for the existing mine operations, the current availability of
additional electric power on the existing infrastructure in the region is limited. The solution to the current
power capacity situation is the construction of a third 230 kV line from Churchill Falls; however, no
agreements have been reached for such construction and there is no certainty it will occur. If the current
power capacity issues in the Wabush region are not resolved in time for the Kami Property’s
development, Alderon will have to investigate other sources of power. There is no certainty that the
Company will be able to access sources of power on economically feasible terms and this could have a
material adverse effect on the Company’s results of operations and financial condition and render the
development of a mine on the Kami Property unviable."

However, and in a seeming direct contradiction to that statement, Alderon's Chief Executive Officer Tayfun Eldem, states in a corporate promotional video on the Kami project http://tinyurl.com/83sghms :
"We have very cheap power available to us at competitive rates that we believe will be a great advantage to Alderon."
That comment does not seem to square up with the comments made by the government. That comment does seem to square up with the comments of  Alderon's Executive Chairman Mark Morabito when, in the same promotional video, he states:
"There is no other iron ore project in North America, and very few in the world, get to production faster than we can and particularity at our low cost. In order to create an iron ore mine what you need is access to infrastructure, because you are required to move tons and tons of material. And so you need rail, you need power, you need ports. There are alot of iron ore deposits in the world that have been identified that have none of these things and if you want to put those things in it requires billions of dollars in capital and years of time to build that infrastructure. Here we are, we've found a deposit inside an existing iron ore mining camp with rail, with power, and with port."

So, to summarize by way of deduction, we have a government desperately trying to push a hydro electric development through to supply mines with power in Labrador. That government is being dishonest with its citizens as to the intent of the development, and its reasoning does not hold up to the least amount of scrutiny. For example, somebody should ask the Premier how much power (how many MW) would Alderon's Kami project require? Or any number of the rest of them that they've admitted to being in talks with. A simple question. Then the Muskrat Math will become quite evident. Cap Ex, by way of consumption example , apparently needs around 250 MW for it's mining project in Quebec. With only about 659 MW available after Emera gets their supposed share, does it defy common sense to believe that mining operations in Labrador could be satisfied? Not even close. Does it mean that that Maritime and Island Links are likely not on the table and never were? Yes. Does it mean the vast majority of KWHs being produced by a Muskrat Falls project will be sold at 3-4 cents per KWH to mining operations? Yes.

Does that mean the taxpayers/ratepayers of Newfoundland and Labrador will be massively subsidizing mining operations in Labrador for generations? Yes it absolutely does. 

It's just a matter of simple deduction.

Newfoundland and Labrador - To be or Not to be?

The capacity to borrow, or pay debt, is the number one issue driving the world financial markets. It has been for some time. What plays into that? The first is demographics. In a world economy based on consumption of goods the larger your base of consumers the better. However, the age groupings of those consumers, their family sizes, etc also come into play. Secondly, the ability of those consumers to consume is crucial. Large, older populations that have reached their ability to pay for goods they have consumed, or are consuming, renders them somewhat irrelevant to the financial markets of the world that need to expand to remain relevant.

These are the primary reasons why the previously very third world countries of Brazil, India, China, etc are now the new engines of world consumption. They have large, young populations that have relatively low debt levels and similar expectations. International corporations, financial and otherwise, understand that the future is there. The Western World, the "old frontier", has essentially reached its limit of borrowing capacity compared to that which it produces - so its on the decline. You can see it everywhere in Europe, and we saw it dramatically in the US in 2008 til present. We even see it in Canada as a kind of microcosms of the world. Alberta and Saskatchewan, fired by resources consumed in the developing world, have experienced wage inflation which has in turn created housing inflation. That inflation has led to property equity increases, on paper, that have not been earned or paid for. Meanwhile, Ontario, Quebec, and for the most part Atlantic Canada decline.

Thomas Mulcair, federal NDP leader, recently referenced the situation as the "Dutch Disease". Essentially, the rationalization of the national economy toward resource based inflation that in turn causes a massive loss in traditional industries. The "petro dollar", created by high fuel prices, leaves most of your other industries unable to export internationally. It's very political in Canada's case as it pits region against region. So while Mr. Mulcair was 100% right in his analysis, the Premiers of British Columbia and Saskatchewan attacked him for saying it.

Newfoundland and Labrador reflects both of these realities. While on the one hand it has realized offshore oil wealth that has fueled one third of all government spending in the last five years, on the other hand it has all the negatives that are affecting the rest of the western world. It has the worst demographic/age outlook of any political jurisdiction in the western world - and that's saying something. It has fifty percent of its population dispersed over its rural area. Despite its new found oil wealth the majority of its population works for between $10 to $15 dollars per hour in non-unionized sectors. Its government and resource based, unionized labour sectors, inflate the average wage levels - deceptively so. Its property values have increased in the Avalon area, and Labrador, allowing homeowners to leverage new debt on "sudden equity", while its rural areas suffer stagnation or decline in real estate values - thereby restricting the amount those people can borrow.

Then there is the case of the Newfoundland and Labrador government. It has seen its general revenues, driven by oil/mining and high taxes, swell. In 2001-2002 the government held, at the end of the fiscal year, $ 510.2 million in cash and temporary investments. These funds were invested at between 1.00% and 4.85%. Its gross debt was $10.65 billion, minus $1.73 billion in assets, for a net debt of $8.92 billion. Its unfunded pension liabilities, for public service pensions, was $3.391.6 million. Its revenues for the year were $3.9 billion and its expenses were $4.5 billion. The population for 2001 was 512,930 with an average age of 38 years of age.

Fast forward to 2011-2012, and the oil boom province. At the end of the fiscal year the government held $2.21billion in cash and temporary investments. Theses funds were invested at between .20% and 7%. Its gross debt was $13.1 billion, minus $5 billion in assets, for a net debt of $8.1 billion. Its unfunded pension liabilities, for public service pensions, was $2.67 billion. Its revenues for the year were $8.13 billion  and its expenses were $7.53 billion. The population for 2011 was 511,036.

It's easy to see that in the last decade government revenues and expenditure have risen substantially. This despite the decline in population, and the fast aging population in the western world. It is also noticeable that the cash on hand at the end of the fiscal years has dramatically increased. Its also interesting to note that despite the one time $2 billion payment given to former Premier Williams on account of the Offshore Accord, which had to be directed to debt (unfunded pension plans) by agreement of the parties, that the unfunded public pension liability has actually substantially increased since 2005 - when the payment was received. It's also shocking to note that, despite all the oil revenues, the province's gross debt has actually grown by almost 30%.

The bottom line is that the government of Newfoundland and Labrador has just been undisciplined - period. It has ignored the very real international, and even national, financial lessons provided in the last many years. It follows the financial thinking of making the books look good to the banker, while hiding the many inherent weaknesses its lack of financial discipline has had on the province's true financial picture. The Conference Board of Canada recently stated that Newfoundland and Labrador's offshore oil revenues would decline rapidly after 2020 - eight years from now. Despite this, offshore oil revenues are not being used to retire debt. In fact that debt has grown - and will continue to do so. It has taken the rather childish position of "having money in the bank" as opposed to funding its unfunded pension plans. It has tried to leverage its money to super inflate certain sectors of the economy like hydor, mining and oil, while watching the majority of the economy suffer "all of the costs of inflation but none of the benefits."

A final, but telling example. The province had, at the end of 2011, an equity investment of $1.28 billion in Nalcor - its energy crown corporation. It claimed assets worth $2.6 billion. It made, on operations, a total of $77.5 million net. Contrast that with the Newfoundland and Labrador Liquor Corporation.  The province had a total equity position of  $62.3 million. It claimed total assets of $91.6 million. It made, on operations, $132.013 million - of which it turned over $132 million to the province's general revenue fund. Nalcor did not return one cent to the fund. Given that the province intends to proceed with the Muskrat Falls Hydro development, and the estimated price tag for that is between $5 billion - $8 billion (financing costs not included), and given the rate of return on investment to the people of the province of Nalcor's operations, and given the overall financial and demographic picture of the province as laid out above, one is left questioning the credibility of the government's position. Sinking clear profit (oil) into a business that can not produce a substantial return (Nalcor) is the worst thing that could happen to the people of Newfoundland and Labrador.

After all, would it not make more sense to arrange a power purchase agreement with Hydro Quebec to supply power to mining developments in Labrador? The infrastructure would then be in place for the 2041 hand over of the Upper Churchill to the province at a much reduced cost. The mines would get their power and the province would get their royalties. Let's not forget the average life span of an iron ore mine is 25 years. In the mean time, precious oil revenues could be used to pay off the provinces debt, which includes a number of large borrowings at 10% interest carrying forward for the next thirty years. Eliminating debt would also allow the province to reduce or even eliminate provincial sales taxes and gasoline taxes. That would encourage both public and corporate participation in the economy for the long term, and not just on a mega project by mega project basis. It would also place Newfoundland and Labrador in an enviable position nationally and internationally of being one of the few places left in the western world that has the capacity to consume debt - should it choose to.

Sadly, this is a tipping point in our history. A once in a historic lifetime opportunity to fundamentally alter the province's future, and most importantly the lives of the people that live here. A moment in time when real discipline could transform the province from a state of survival to the place to be. As I see it, we are half way through that moment in time and the important (beyond window dressing) fundamentals of Newfoundland and Labrador's economic future have been badly misplayed. The incessant, childish one-up-man ship approach of the province's political characters is only upstaged by the delusional dreams of those that are duty bound not to lead their people into this kind of future. Accountability is screaming its absence - at all levels.

Nalcor's Chief Lies on Air - another Muskrat moment

This week the public was given a rare opportunity to ask questions of Ed Martin, CEO of Nalcor, regarding the Muskrat Falls project on province-wide radio - VOCM Openline with host Randy Simms. Having asked questions to both Nalcor, and Jerome Kennedy in the past on the Altius Royalty Trust proposal to fund Muskrat Falls, and having those questions ignored, I took the opportunity to phone in and engage Mr. Martin on the subject.

I had submitted a Twitter question that same morning covering the Altius proposal, but anticipated it may not get covered - so I phoned in as well. Just before I came on the air, host Randy Simms put my question to Mr Martin :

  " @VOCMOpenLine Can Ed Martin comment on the Royalty Trust financing option with Altius?"

Mr Martin answered as follows:

" It was news to me...uh...in terms of where that came up, and, uh. So I tried to do some research into what's happening there...Let me say first off there is no Royalty Trust agreement with Altius. There is no offer of financing involved. There is nothing to that. We are doing traditional financing to this point."

Mr. Simms asks him:

"So Where does this story come from?"

Martin answers:

"I think where this comes from, only speculating, but I look back to 2003 or so, I wasn't there (Nalcor) at the time...uh...But there had been a request for proposals that had been asked for to help develop the Lower Churchill. A couple had come in for the actual development and a couple came in for the financing arrangement. One, Altius, was involved in one of those with a royalty trust arrangement, they had suggested and there's another group, I forget who they were, uh, but both of those finance proposals were put aside, uh...and really it hasn't been looked at ever since...its not anywhere near what we are trying to achieve."

Later in my telephone conversation Martin adds:

"From the Altius perspective, um, Brad, I just have to say to you I had you know that came up, somebody mentioned it to me, there has been some, uh, what do you call, uh, blog, twitters stuff going on about that and I had to ask my people is there any, you know, what, what's been talked about here? As I mentioned earlier that was something I think happened previous. We haven't looked at it for five years, six years, its been put on the back shelf and I really wasn't aware of it, so to my knowledge, and, never will...This Altius thing, uh, I can tell you it's just not on my radar screen at all, coming out of nowhere."

Mr.Simms sums up with:

"I've never, I've never heard of it or seen it but that doesn't mean it doesn't exist. But you (Mr Martin) are saying you've never heard about it, you're saying?"

Mr Martin answers:

"That's correct."

There you have it. Ed Martin at one point of the interview says he was unaware of the proposal to the point he had to ask staff about it. Then he states it was an old proposal from 2003 when he wasn't CEO of Nalcor. Then in his final answer to Randy he states he's never heard about it. Forget for a moment all the obvious contradictions in these statements. Take a look at the truth instead.

From the Government of Newfoundland and Labrador press release August 8, 2005: http://www.releases.gov.nl.ca/releases/2005/exec/0808n03.htm

"As we proceed with these proposals, we are also keeping our options open regarding the ownership structure for the development ranging from a 100 per cent NLH owned and led development, to a lease/franchise option, and a variety of equity partnership options,” added Mr. Dean MacDonald.

Ed Martin stated that he is excited to lead Newfoundland and Labrador Hydro at such a critical time in the province. “I am very pleased to have the opportunity to contribute to an organization that will work with the province in developing this tremendous hydro resource,” said Mr. Martin. “Today, we are narrowing down the field of proponents coming out of phase one of the EOI who we will be engaging as we consider our market and development arrangement options. In addition to the full development concept and financing submissions, the proposals involving services and products will remain on file for future consideration.” 

"Finally, an innovative financing option in the form of a royalty trust has been proposed by Altius. This concept will be explored later in the process."

A few things are evident from the press release. Firstly, Ed Martin was head of Nalcor when the decision was made to push Altius's proposal through to the next level. Secondly, he was obviously familiar with it, and referenced the financing options in his quote. Third, the royalty trust proposal was given a distinct nod from the other submissions, and specifically referenced: "...This concept will be explored later in the process." Finally, it is all but obvious that Mr. Martin did not hear about the Altius proposal from "bloggers and twitterers."

In fact, Mr Martin's comments regarding the Altius proposal were false - a lie. Not only were they a lie, he framed the entire idea as something coming from bloggers and twitters. In essence, he mislead the listening public and tried to turn the entire Altius proposal into some sort of flight of fancy, misguided attempt of bloggers to muddy the waters. The problem with Mr. Martin lying about his knowledge of the proposal is it casts even more doubt on the credibility of his word in regard to the rest of the mostly behind closed doors planning on Muskrat Falls. If he is going to lie about one issue in public, without hesitation, what else could he be misrepresenting? As a public servant, is he not duty bound to answer questions truthfully? The public are shareholders after all in Nalcor, and they will be the ones who have to pay the enormous cost of this potential project.

Mr. Martin goes on to say that the financing portion of the project will be put out to tender. He doesn't say what the specifications of the tender will be. Will there be a Newfoundland requirement in the financing? We just don't know. What I do know, as of my two short questions to Mr. Martin, that Nalcor is prepared to deceive. It is prepared to put out half truths, slanted/stacked requirements, anything to push Muskrat Falls to fruition. Apparently that now includes the very head of Nalcor misleading the public on the airwaves of this province. 

Here's the entire Ed Martin show on VOCM - my conversation with Mr Martin starts around the 1:20 mark  http://youtu.be/-hIG7ACho-Q

The Tri-colour Dam

Muskrat Falls is about one thing only - money. That's not unusual in business. What makes Muskrat Falls so different from most modern business proposals is the sell. The sell, of course, is aimed at the audience - in this case the people of Newfoundland and Labrador that will be expected to pay for this "business development". The medium for the sell is Newfoundland nationalism.

My great - great -  grandfather arrived in Newfoundland from Ireland in the 1830's - along with many escaping the miseries of Irish life. His name was Micheal O'Meagre. He was from the same family as the man who created the Newfoundland tri-colour (old pinky) - Thomas O'Meagre. Thomas also created the Irish republican tri-colour. At that time it was a romantic notion that these nations would become republics in their own right. In Ireland's case that did become a reality. In Newfoundland's case it did not. Newfoundland went from being a British colony, to representative government, to financial default, to a province of Canada in 1949. Newfoundland was never a republic.

Yet, the tricolour can be found in many places in Newfoundland. Societies such as the "Smiling Land" foundation based in Toronto have it on their logo. When I asked Tim Powers, Newfoundland ex-patriot and VP of Summa, why his Smiling Land group had a republican flag on its logo he said:

"Smiling Land takes its name from the Ode to Newfoundland. That predates the current provincial flag. A connect with our history. "

Which would be fine except the question was:

"@powerstim Wondering why your Smiling Land group uses a republican flag on its emblem rather than the provincial flag? "

To the casual observer it would be an odd response to a specific question to Mr. Powers. However, the truth of the matter is Newfoundland nationalists wrap themselves in a faux history that eerily resembles the Irish blarney of their forefathers. Mr. Powers answer eludes to this: "..predates the current provincial flag."The tri-colour was never an official flag of Newfoundland at any time in it's 500 year history - never. Just like the rest of the rhetoric, the Newfoundland tri-colour never flew over Newfoundland. Never. It is the invention of a man that wished to see Newfoundland as an independent republic. Yet it is perpetuated as having some sort of historical, cultural relevance - which it does not.

Of course we've seen this in Canada before - Quebec. The "quiet revolution", and Quebec nationalization of industries. It really is no different. Quebec was never an independent country - let alone a republic. Yet, Quebec nationalists have perpetuated the myth of nationhood. They fought the federal government on every level, and an appeasing federal mentality allowed a narrow-minded nationalist movement to grow.

Adding to the Newfoundland nationalist mentality was the "humiliation" of having to become a province of Canada. You see Newfoundland only joined Canada after the "confederates" won a second referendum by about 7000 votes - the narrowest of margins. Even more telling was the fact that a massive majority in St.John's voted against joining Canada, while a massive majority in rural Newfoundland and Labrador voted to join Canada. Many historians attribute this vote result to the "Baymen" wanting to rid themselves of the "tyranny of the Townies". Over the years resentment about joining Canada by those opposed has taken on many different angles. Whether it be the devastation of fish stocks, or the lack of federal jobs. The sense that somehow Newfoundland has been wronged has become endemic in these circles.

Successive Newfoundland Premiers have perpetuated this myth through the years in an attempt, ironically so, to imitate the success Quebec nationalists have had winning concessions from Ottawa. This time around the spin is being used to sell Muskrat Falls. Whether it be Danny Williams:

 “This is a day of great historic significance to Newfoundland and Labrador as we move forward with development of the Lower Churchill project, on our own terms and free of the geographic stranglehold of Quebec which has for too long determined the fate of the most attractive clean energy project in North America,”

Or the current Premier, in her attempt to marginalize former Premier Peckford's public criticism of Muskrat Falls:

 "missive from afar...A debate that you have not been engaged in or public information sessions that you haven't participated in, it's difficult for me to deal with."

The message remains the same in Newfoundland nationalist circles: If you don't agree with where we are taking the province you are, to quote former Premier Williams, "traitors". The message is repeated over and over again to the public. Just as the Quebec government has perpetuated the myth amongst Quebecers over the last 40 years that Quebec can separate at any time, the Newfoundland nationalists perpetuate the myth that dissention equals disloyalty. Both are fallacies designed to achieve given ends. Both are a despicable abuse of public influence. In the old days we just called it as it was: propaganda. The latest battlefield of Newfoundland nationalism centres around Nalcor and Muskrat Falls. It won't be the last, and it isn't the first. The government's stated reasoning for the construction of Muskrat Falls is as phony as the tri-colour that they wrap it in.

Muskrat Falls Green Little Secret

You've heard it before: "the greenest project in North America." You've heard this too: " replacing the dirty power from Holyrood." Yet, you haven't heard this: "Our strategy is to get the US federal government to subsidize Muskrat Falls."

Muskrat Falls has our former Premier Danny Williams written all over it. A project that on its face makes no economic sense. Yet dig a little deeper, and you will see a man playing the angles. A man attempting to build a purse from a sows ear. Mr. Creativity - that is Danny William's strong suit. A great imagination combined with an ability to play the angles. Add in a strong sprinkling of Newfoundland nationalism, and you have the complete picture. We saw it with the offshore royalty war with Ottawa. We saw it with the nationalization of Abitibi assets. We even saw it with the Ice Caps. An ability to take a so so or worse situation, dust it off, repackage it, and most importantly have others pay for it. Don't get me wrong - Danny is a genius at what he does. I didn't call him the "Father of Modern Newfoundland and Labrador" without reason.

Unfortunately, all the wheeling and dealing sometimes leaves big, bad holes. In the case of Abitibi he was able to pass off the initial cost of expropriation to Ottawa ($150 million), because he understood that Abitibi's only legal recourse was through the NAFTA trade agreement and that was a federal responsibility. So Harper grumbled, but paid the bill. Not exactly a patriotic strategy, but Danny's PCs were always about Newfoundland first and "to hell with the rest of the country". Fair enough in the war of fiscal federalism that seems to be our lot. Unfortunately, the environmental clean up bill to clean the Abitibi site up is estimated at $250 million. It is currently in court with the government of Newfoundland and Labrador trying to argue they aren't responsible for the environmental mess. Indeed they argue the company they took the property from is. Long story short - Newfoundland is going to lose this one and hold the tab. A creative , but somewhat reactive strategy maturing to bare its not so nice fruit.

That brings us to the much discussed Muskrat Falls deal. Many analysts have questioned its economic viability. The biggest question of all - how can you make enough money on the 40% of the power generated for export to the maritimes and US to pay for this deal? There would seem to be a common sense cap to the amount you could charge for the first 40% generated that is to be consumed in Newfoundland and Labrador. That certainly can not come anywhere near to paying for the fixed costs of the project. The next 20% is being given to Emera to subsidize its investment in the Maritime Link portion of the project. That leaves only 40% left. Here is the answer: have the US government subsidize the 40% sold in the US.

This is where you say "okay we have a conspiracy theorist on our hands here." In fact, I would not  have discovered this myself if I hadn't been given it a year ago by  - lets just say a highly placed unnamed source. Nalcor's big plan for the 40% going to the US is to sell it on the energy exchanges into the US. That isn't a secret. They've openly admitted that many times. That in itself would not come close to paying for it as US market rates for power are 60% or more below the cost of producing and transmitting the power.

No, the secret to making it all work is something borrowed from Nalcor's arch rival Hydro Quebec. The secret is RECs. Never heard of them? Stands for Renewable Energy Credits. Here's a good link to understand what they are all about  http://tinyurl.com/7qtvj35 . In the nutshell: they provide credits to the seller of energy, not the buyer , which can be sold on exchanges to organizations looking to meet government or self - imposed green targets. The only kicker is this - it has to be from an eligible renewable energy. That is where Hydro Quebec and the ever sharp mind of Danny Williams comes in.

Hydro Quebec has been aggressively pursuing "green renewable" status for its power in the US. It also wants those credits to subsidize its operations and offset its massive debt. It has used the state of Vermont as its proverbial beach head. Having just signed a massive supply agreement to the two largest power suppliers in Vermont (one which the Quebec government owned through the Caisse - Green Mountain Power, and the other which the Caisse just outbid Fortis Group for - Central Vermont Public Service) Quebec effectively controls the power business in that state. It was even instrumental in having the Yankee Nuclear Plant in Vermont closed which just happened to open up a massive new supply contract for them on top of the one just signed. In any case, Hydro Quebec succeeded in being given the coveted "Renewable Energy" label by the state of Vermont.  http://tinyurl.com/6u9u472

The problem being that is just a first step. To succeed they must convince the United States government that they should receive that status. Then it will be up to the US if they want to subsidize a foreign national to monopolize their electrical system. This is the piggy back strategy that Nalcor is trying to execute and that has the imagination of Danny Williams written all over it. The question is will it work? The other question is why has it been kept so secret?

Some possible answers are political in nature. It may not be good for the image of a former Premier, who built a career on battling Hydro Quebec publicly, to admit his primary strategy is to follow Quebec. It may not be good for Newfoundland nationalism to admit the same. So there are those angles. Another, and likely more to the point reason is the chance of major hydro dams receiving the "Renewable Energy" label to qualify for the Renewable Energy Credits is almost non-existent.

Listening to Danny Williams on the CBC show On Point this week I heard him use an old familiar phrase: "roll the dice." Nalcor is rolling the dice by banking on Hydro Quebec to succeed in getting renewable status for large hydro. If the gamble fails the people of Newfoundland and Labrador will be losing $900 million a year on the operations of Muskrat Falls. This roll of the dice is the little secret of Muskrat Falls that the PC government don't want you to know, and don't want to talk about. Take heed.

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.

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.

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. 

Harper's broken promises to Newfoundland and Labrador (in writing)

In 2006, then Premier Williams wrote a letter with a series of questions, to all federal Party leaders. It's a great historical document to look at now, some five years later, and see what was fulfilled. Of course we are all well aware of the broken promise to exclude non - renewable resources from the equalization formula. It resulted in the famous ABC (Anyone But Conservative) campaign which saw the provincial government campaign against the federal Conservatives in the next election - and be 100% successful in their campaign. That broken promise cost this province billions. However, there are some promises made in that document that might surprise people here. Read for yourself:  http://www.releases.gov.nl.ca/releases/2006/exec/01harper.pdf

The one promise that really jumps off the page to me is:

"Energy:

Does your party support efforts to develop the hydro-power of the Lower Churchill River System for the primary benefit of Newfoundland and Labrador, including the provision of a Federal Government loan guarantee to proceed with the project?

We support this in principle and believe that it is important for Newfoundland and Labrador to have greater control of it's energy mix. A Conservative government would welcome discussions on this initiative and would hope the potential exists for it to proceed in the spirit of past successes such as the Hibernia project."

Support in principle. Interesting wording. That was 2006. Here we are in 2011, and fighting another federal election campaign. Mr. Harper comes to St. John's recently and states: "With these criteria in mind...a re-elected Conservative government would provide a loan guarantee or financial equivalent to the Lower Churchill...there is still a lot to be decided and worked out. I would rather get to a stage where we are ready to be very specific with how we are going to proceed." Sounds to me like support in principle if the three conditions he stipulated are met - economically viable, environmentally friendly, and regionally beneficial. So what has changed? He made the commitment five years ago, and never lived up to it. Then he comes to Newfoundland and Labrador one week into an election and makes the same promise he didn't live up to five years earlier - trying to take advantage of this for votes.

This time however he also extended that "support in principle" to extending federal loan guarantees, or financial equivalent, to all such projects across the country. A mind boggling "support in principle" considering the Conference Board of Canada report of two days ago. The report states that over $273 billion will need to be spent across the country over the next twenty years to build hydro projects. That's $15 billion per year in new projects every year for the next twenty years. Forget the impact of such a commitment on our federal finances. Try not to think of what this says about fiscal responsibility, or deficit reduction. The bigger question here is can Mr. Harper get away with playing the country today the way he has played Newfoundland and Labrador since 2006?

Note to Ms. Dunderdale: Support in principle doesn't mean much to those who don't have any - other than say what you must to get seats. Of course, you know that already.

The Price of Ambition - The Lower Churchill Falls

Whenever some tin pot dictator in the world erects this tower, or that palace, we wonder how on earth will that be paid for. It's usually in some country that has a bank account supervised directly by the International Monetary Fund, and half the people are starving. We usually come to the quick assumption that the poor people in that country will be further enslaved to their debt, and have no chance to escape their debacle - or their dictator. Then there's us.

Newfoundland and Labrador's version of the dictator's palace is the proposed Lower Churchill development. A  massive dam to be built on the Churchill River to produce hydro electric power. On it's face a laudable endeavour. However, the financials just do not measure up. To begin with, this province already has the highest per capita debt in the country. Higher than Quebec's, and that is saying something. Just to put things in perspective, Newfoundland and Labrador's key economic numbers are: Total gross debt of over $11 billion dollars; and annual interest payments on debt approximately $1 billion dollars. That is as of today - without the Lower Churchill price tag.

Our population, the folks who pay the bills and debt, is changing for the worse. People living in the Province has declined since 1971 by 21,000 souls. However, that isn't the worst part. The bad part is that we have a severe upside-down population triangle. Normally, a healthy population has a great mass of young people as it's base, and a tiny amount of elderly as it's tip - the other ages fit in between. In our case, we have a large and growing mass of elderly as our tip, and a rapidly declining young population. By way of example, in 1971 people aged 0 - 4  numbered 62,136. Today they number 23,413. That is a 62% decline. For the age range of 0 - 20 the decline over the last 40 years is a staggering 47%.  In other words, our population is composed of older people. Shockingly, in 20 years from now, 50% of our current population will be either retired or deceased. Either way they will not be capable of paying much into the tax system to offset debt.

Then consider our "have" status. Oil resources accounted for approximately 40% of this province's general revenues for 2010.  The Atlantic Accord guaranteed that those revenues would not be clawed back until at least 2013. That is the year the federal government can start taking significant revenues from this province's offshore oil revenues. Prior to the most recent Accord, the federal government was clawing back close to 90% of the offshore revenues as equalization. It was our turn to pay in as opposed to taking out. Danny Williams stalled that process with his hard bargaining, but a stall is just that - a stall. It is important to remember that offshore oil legally belongs to the federal government, and those resources can be infringed upon almost at will - should they choose to do so. The bottom line is come 2013 that 40% of our revenue that funded this province for the last several years will be significantly reduced. The question then becomes: "How will we fund our current government let alone borrow for anything?"

As if to add insult to injury, the Upper Churchill Contract with Hydro Quebec automatically renews in 2016. That renewal gives Hydro Quebec almost full benefit of the power produced there, but at a 20% cut in the already insultingly low rate to Newfoundland and Labrador. Our provincial government appears resigned to allowing this contract to run it's course until 2041.

The problem with the Lower Churchill/Emera deal is that it can not make money. The hydro market is already flooded and, ironically, a massive amount of natural gas to power electricity generating stations will only add to that. Quebec is currently in the process of building four more dams on the Romaine River, which will ensure it stays that way.

The other problem with the deal is that it will, at the least, double or triple the provincial debt. Our portion of the project is officially pegged at $4.5 - 5 billion. The more likely number is $8 - 10 billion. When is the last time you heard of a large government funded project coming in on budget. The safer bet is to double the original figure. Then there is the cost of financing the debt. Just like your home mortgage, long term debts take on massive borrowing costs. You may have paid $100,000.00 for that house, but in twenty-five years you will have paid $300,000.00 with interest factored in. Apply those principles to the debt required to build the Lower Churchill and the overall cost would range from $24 - 30 billion dollars. Add that to our current gross debt, and assume no other deficits were incurred during that 30 year period, the total provincial debt would resemble $35 - 41 billion - not including interest on our current debt.

Unfortunately, we can not even hope to subsidize that cost with the Lower Churchill dam. Quebec is selling power into the US market at 6-8 cents per kwh in 35 year supply contracts. According to our provincial government, based on their $4.5 billion estimate to build the Lower Churchill, we can produce power for 14.3 cents per kwh. That is almost 50% higher than what Quebec is selling it for. If we try to sell that power to the US market we will take a 50% loss on the cost to produce it.

In reality, this provincial government does not have a hope in hell of funding this project without the federal government. Their claim that they will go forward with it whether the feds guarantee the loans or not is sheer bluff. The numbers do not lie. As we speak the federal government is going over the province's business plan. According to the Prime Minister, they want many financial and environmental questions answered - no doubt. I would be alarmed if they didn't. The Upper Churchill Contract was a hydro deal that sentenced this province to economic destitution by starving it of the potential revenues of it's own resources. The Lower Churchill would sentence the people to a type of economic insanity that is normally reserved for the guys in the Middle East, and their Palaces.  

Mega Bust

It was with great fanfare, and a lot of provincial pride, that most people in this Province welcomed the Lower Churchill Development Agreement with Emera, and Nova Scotia. The largest "green" mega project in North America. A "nation building" exercise akin to the great national railway. An end run around the monopolistic clutches of Hydro Quebec. A rousing appeal on many levels. I was initially agreeable on all fronts.

However, the details started to come out. The first detail to really get my attention was the capacity of the sub-sea lines and stations. The Labrador-Island Transmission Link will cross the Strait of Belle Isle and have a capacity of 900 megawatts. The Maritime Link will run from Bottom Brook, near Stephenville and connect at Lingan, Nova Scotia. The sub-sea link will be approximately 180 kilometres long and will have a capacity of 500 megawatts. 900 MW to Newfoundland and 500 MW to Nova Scotia? Excuse me.

The sub-sea links from Labrador to Nova Scotia are completely inadequate to ever transmit the power from the Upper Churchill project to the Maritimes. The excavation and installation of such a massive sub sea link, and of course the cost, would logically require a much higher capacity line to qualify as an end run around Hydro Quebec. What would be the point of having your primary asset isolated by functionality from your main market if you intended to be a major player in the hydro electric business south of the border? Makes absolutely no sense from a corporate point of view. In a private corporation such vision would likely result in termination and laughter - not sure which would come first. There would certainly be a share holder revolt.

The "green" aspect is also questionable. There is a big debate going on in the US right now as to whether or not large hydro electric power projects qualify as new green power. Of course Hydro Quebec is fully invested in the propagation of this idea in Vermont and other key US states. The key reasoning is a large, matching US federal government grant to promote new green energy initiatives. In other words, the Mother of all Double-Dipping. Get paid for the power and get a nice bonus on top of that. Big money and big business. The real environmental impacts, especially in Labrador, are highly questionable. Including, but not limited to 41.5 km2 of flooded land. Some would say this is a much smaller flood impact than the Upper Churchill. However, I like the argument: We used to live in caves, but we don't do that either anymore.

The big clincher for me was the economic impact. I am not speaking of the positive benefits, because any expenditure of billions is going to create spin offs - long term and short term. No, I am speaking of debt. The killer of dreams and aspirations, the chains that bind us to futility, and the proven fatal curse of all civilizations. Newfoundland and Labrador's current debt hovers in the $11 billion mark - a massive amount for 500,000 souls. The interest payments on that debt alone take a sizable bite from the Province's annual budget as it is. Now imagine adding another 6 to 10 billion on top of that. Even with federal loan guarantees the interest paid on that debt over it's lifetime will double the cost to at least $20 billion. That would be almost suicidal enough if it were making money, but with massive surpluses already existing in the hydro market it becomes genocidal.

The bottom line is every dollar we ever hoped to get from oil would be paid in interest to foreign bond holders for a massive concrete block on the lower Churchill River. In 2016 we are going to lose another 20% of our revenue from the Upper Churchill in accordance with the automatic renewal clause of the 1969 Power Contract. Factor in an aging population. The end result is a financial quagmire of biblical proportions. The only way any financial group would even glance at this project is if the federal government would guarantee the loans, but should they?

The federal government needs to take a step back, shake it's collective head, and wake up. It should not even consider supporting this "project". If the provincial government is in collective lemming mode someone has to show reason. Corporately it makes no sense. Financially it makes no sense. Environmentally it makes limited sense. Perhaps we need to call a spade a spade. This whole project is simply a negotiating ace - and not a good one. The Provincial government holds out the Lower Churchill as a stick against Hydro Quebec. That may be warranted, but the stick has to be taken seriously. As the saying goes: "This dog don't hunt."
The federal government needs to come clean with the people of Newfoundland and Labrador and explain to them the ramifications of this project.

Personally, I was at first a big fan of the idea. If you love the Province, you have to pull for it on something this big. However, when the real details started coming out, if you love the Province you have to say no to this project. To do otherwise is to sentence the Province, and her people, to a destitution not yet seen in these lands.