Another megaproject pushing public utilities to the brink

Nalcor’s Muskrat Falls hydro project will cost more than double original estimates, is years behind schedule and will impose triple-digit rate increases on electricity customers when it starts producing power.

This article first appeared in The Telegram.

Muskrat Falls will cost more than double original estimates, is years behind schedule and will impose triple-digit rate increases on electricity customers when it starts producing power.

But behind the headlines of a project gone off the rails lies a much deeper malaise plaguing public utilities across Canada: megaprojects.

Like nearly all megaprojects, the original cost estimates of Muskrat Falls have proven to be wildly optimistic. In 2010, the “total cost” of the project was said to be $6.2 billion. It took Nalcor years to publicly admit that figure didn’t include interest and other financing costs, which, if included, pushed the price tag up to nearly $7 billion.

But it wasn’t until 2016 — with the appointment of new CEO Stan Marshall — that Nalcor came anywhere close to admitting the true cost of Muskrat Falls. One of Marshall’s first major announcements was that the price of the megaproject had increased to $11.4 billion and was two years behind schedule — and he couldn’t rule out more cost increases. Marshall has since issued two new estimates of the megaproject, admitting that Muskrat Falls will cost $12.7 billion and that it’s a “hell of a lot worse” for Newfoundland and Labrador’s ratepayers than the notorious Churchill Falls contract.

The rate increases that households and businesses across the province will be forced to pay because of Muskrat Falls, like most megaprojects, have followed the time-tested method of being overly optimistic and repeatedly revised higher. Early estimates put the all-in cost of power from Muskrat Falls at around 15 cents per kilowatt hour. But the most recent estimate from Nalcor has upped that figured to more than 23 cents and it would be even more if that figure didn’t include the “savings” stemming from a $7.9-billion federal guarantee to bail out Nalcor if it can’t pay off its ballooning debt.

Most megaprojects typically go ahead only after regulators are blocked from examining the economics of the project. Muskrat Falls is no different. First, the province ignored the warnings of a 2011 joint federal-provincial review panel calling Nalcor’s evidence that Muskrat Falls was the most cost-effective way to meet future demand “inadequate.” Then the province used the legislature to block its own regulator, the Public Utilities Board, from reviewing Muskrat Falls. Only after public outcry did the province allow for a very limited review, with the PUB publicly calling the process “torturous” and Nalcor’s refusal to co-operate “inexplicable.”

Unfortunately, the problems facing Muskrat Falls are part of a well-documented trend with megaprojects, plaguing numerous other projects being built by public utilities across the country.

Manitoba Hydro’s Keeyask dam is expected to cost $8.7 billion — more than triple initial estimates. Contrary to claims from the utility’s executives that the dam’s output would be sold to power-hungry customers in the United States and help lower bills for Manitoba ratepayers, the utility now expects to sell that power at a loss, meaning Manitobans will be subsidizing power for American consumers and businesses for decades. The utility is also asking for much higher rate increases than it initially forecast, amounting to more than four times the rate of inflation.

In B.C., the legislature was used to block its regulator from reviewing the $8.8-billion Site C dam. The province also passed laws setting rates at an arbitrarily low level and forced the utility — and the regulator tasked with setting “just and reasonable” rates — to defer the costs of Site C and other capital projects to future customers.

In Ontario, the province steadily dismantled the regulatory system that was explicitly put in place to protect customers from projects like the $12.8-billion refurbishment of the Darlington nuclear station. The legislature was used to establish the “need” for the project, blocked it from a public review and then forced the regulator to artificially lower rates in the near-term, kicking the cost to future ratepayers.

Like nearly all megaprojects, Muskrat Falls is the result of a public utility relying on the power of its shareholder — the province — to run roughshod over the checks and balances put in place to protect ratepayers and taxpayers alike from this type of reckless spending. Sadly, Nalcor’s folly with Muskrat Falls is just the latest cautionary tale.

Brady Yauch is an economist and Executive Director of the Consumer Policy Institute. bradyyauch@consumerpolicyinstitute.org.

Read Consumer Policy Institute’s recent report “How Megaprojects Bankrupt Power Utilities and Leave Regulators in the Dark.” 

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