The federal government will restructure the terms of its support for Newfoundland and Labrador’s controversial Muskrat Falls hydroelectric project, as the province scrambles to protect ratepayers from a crippling spike in electricity rates stemming from the project’s cost overruns.
Ottawa and the province announced Monday in St. John’s that they will begin talks on restructuring long-term loan guarantees covering much of the cost of the project, which is not yet in service. Ottawa also allowed the province to defer a debt payment due this year of about $150-million.
First announced in 2010 by Progressive Conservative former premier Danny Williams, the massive project in Labrador was originally estimated to cost $6.2-billion. The price has since more than doubled to $12.7-billion. The project is about three years behind schedule.
Then-prime minister Stephen Harper’s government initially agreed to provide a $5-billion loan guarantee in November, 2012. As the project’s cost overruns mounted, the government of Justin Trudeau extended an additional $2.9-billion guarantee in April, 2017.
Because utility regulations require that the capital cost of the project be incorporated into the prices charged for the power it generates, consumers and businesses faced a near-doubling of their electricity rates, to 23 cents per kilowatt hour from about 13 cents, next year when the project comes fully online. Liberal Premier Dwight Ball assured ratepayers that the proposed restructuring of the debt terms, coupled with other mitigation strategies by the province, would eliminate those price increases.
“Your rates will not go up as a result of Muskrat Falls,” Mr. Ball said Monday at a news conference.
Under the 2017 loan-guarantee agreement, Nalcor Energy, the provincial Crown corporation that operates the project, was scheduled to make its first payment on Dec. 1, 2020, into a “sinking fund” – an account that would be used to repay the federally guaranteed debt when it comes due to bondholders. Now, Ottawa has deferred the sinking-fund payments until the end of 2021. It also agreed to waive the requirement that the province make payments related to further cost overruns into the Cost Overrun Escrow Account – a fund designed to cover project budget shortfalls through annual installments.
The announcement came just three days after the province’s Board of Commissioners of Public Utilities issued its recommendations on options to reduce the impact of the Muskrat Falls costs on electricity rates. The report calculated that the province would have to come up with about $620-million annually in offsets to fully mitigate the rate increases from the cost overruns.
Mr. Ball criticized previous PC provincial governments for the project’s soaring costs, which he said have left the provincial government with less money for other pressing needs.
“How is it that a province that is an energy powerhouse could become a province where people are scared to turn the lights on? This is what we’ve been cleaning up since forming government [in 2015],” said Mr. Ball. “Just imagine what we could have done with the money that’s been already spent on this project, billions of dollars to date."
Monday’s announcement was thin on details regarding the form the restructured loan deal might take. Mr. Ball said part of the proposal involves “monetizing” some of the capital assets, including the Labrador-island link transmission line.
“Now let me be clear, this is not about selling assets. It’s about using those assets to the benefit of ratepayers," he said.
Credit analysts suggested this might involve some way of selling future electricity generation and transmission profits to investors, to essentially move those profits forward so that they could be used in the shorter term to reduce rate costs.
Newfoundland has the country’s highest tax revenue per capita. Its government debt as a percentage of gross domestic product is also among the highest in the country, leaving it little room to absorb the impact of the Muskrat Falls overruns on its budget and on taxpayers. Mr. Ball’s government has promised to erase the annual deficit by 2022-23, but provincial Auditor-General Julia Mullaley warned in December that “there is considerable risk” that the government’s budget targets will not be achieved.
Federal Natural Resources Minister Seamus O’Regan, who is the MP for St. John’s South-Mount Pearl, described the Muskrat Falls situation as a “mess” that Ottawa is prepared to help address. “Today’s measures will help the province bear the weight of Muskrat Falls in the short term and we are committed to be there to help sort this out in the years to come," he said.