Provincial and Federal Governments Collaborate to Protect Residents from Negative Impacts of Muskrat Falls

  • Executive Council
  • Natural Resources
  • Finance

10 February 2020

The Honourable Dwight Ball, Premier of Newfoundland and Labrador, and the Honourable Seamus O’Regan, Minister of Natural Resources, Government of Canada, have announced a sustainable, long-term solution to protect ratepayers from the negative impacts of the Muskrat Falls Project today and into the future.

The Muskrat Falls Project, sanctioned in 2012 by the previous administration, has created an urgent issue facing the province today. If left unaddressed, this would have a devastating impact on Newfoundlanders and Labradorians, who would face unprecedented electricity rate increases and economic hardship.

Both governments have agreed to undertake a financial restructuring of the projects to ensure that they are financially stable over the long-term and ratepayers are protected.

The solution involves transitioning the Muskrat Falls/Labrador Transmission Assets revenue model to a traditional cost of service model which will ensure that equity returns from Nalcor are redirected to benefit ratepayers. The change to a cost of service model reflects the approach used for regulated utilities throughout North America. A more detailed explanation of the revenue model is included in the backgrounder below.

With the Government of Canada’s involvement, monetizing suitable assets, such as our dividends from the Labrador Island Link, is also required to ensure a sustainable long-term solution. Related discussions are ongoing.

To reduce cash requirements related to servicing the project’s debt, the Government of Canada is allowing a deferral of Sinking Fund and Cost Overrun Escrow Account payments if required.

The formal agreement with both levels of government will be implemented by project commissioning. Residents will be further updated once the specifics have been finalized.

Additionally, Canada is also prepared to work with provincial governments to consider opportunities for further electrification and decarbonization.

In addition to discussions with the Federal Government, work is continuing on the Provincial Government’s rate management plan.

The confirmation letters between the Government of Newfoundland and Labrador and the Government of Canada are online here.

Quotes
“We committed to protecting ratepayers from the negative impacts of the Muskrat Falls Project. We are delivering on that commitment. Working with the Government of Canada, we have extensively analyzed the true financial structure of the Muskrat Falls Project which was sanctioned by the previous government in 2012. We have identified a long-term solution on behalf of the people of the province.”
Honourable Dwight Ball
Premier of Newfoundland and Labrador

“We are focused on protecting residents and businesses from increases in electricity rates due to the previous government’s legacy Muskrat Falls Project. In addition to discussions with the Federal Government, work is continuing on the approach to rate management, including electrification, export sales and cost control.”
Honourable Siobhan Coady
Minister of Natural Resources

“For several years, the Muskrat Falls Project has had a negative effect on consumer confidence in this province, and the financial realities of the project have been the single largest downward pressure for our bond rating agencies, which has impacted every decision we’ve made as a government. With this agreement, we are putting this project on more sustainable footing and providing more certainty to ratepayers in the short and long term.”
Honourable Tom Osborne
Minister of Finance

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Learn More

Presentation: Muskrat Falls Financial Restructuring Update

News Release: Provincial Government Secures Enhanced Federal Loan Guarantee

News Release: Minister Coady Releases Interim Report on Muskrat Falls from Board of Commissioners of Public Utilities

News Release: Landmark Atlantic Accord Agreement Achieved

News Release: Premier Ball Releases Plan to Protect Residents from the Cost Impacts of Muskrat Falls

Follow us on Twitter: @GovNL, @NR_GovNL and @FIN_GovNL

Media contacts
Jeremy Reynolds
Office of the Premier
709-729-3558
JeremyReynolds@gov.nl.ca

Lisa Lawlor
Natural Resources
709-729-5777, 631-8155
lisalawlor@gov.nl.ca

Marc Budgell
Finance
709-729-2477, 689-0430
marcbudgell@gov.nl.ca

BACKGROUNDER

Last April, the Government of Newfoundland and Labrador and the Government of Canada agreed to enter into a formal process to examine the financial structure of the Muskrat Falls Project.

An expert team comprised of legal, financial, and electricity professionals has been analyzing the underlying reasons for projected rate increases, considering all available options to resolve cost drivers, and providing independent advice to advance further rate mitigation measures.

As a result of work undertaken, both governments have agreed to a financial restructuring so the projects are financially stable over the long-term and ratepayers are protected. This involves changing the revenue model for the Muskrat Falls/Labrador Transmission Assets to a traditional cost of service model and redirecting equity returns from Nalcor to benefit ratepayers. The cost of service model reflects the approach used for regulated utilities throughout North America.

The Muskrat Falls/Labrador Transmission Assets currently uses an internal rate of return financing structure – not normally used for such projects. Under this model, revenue requirements start low but escalate every year until 2070. Consequently, electricity rates would continually increase over time. Ratepayers could not bear such costs.

By contrast, the cost of service model is traditionally used to compensate regulated utilities for the costs of providing electrical service, which includes a prescribed return on equity. The model has evolved over more than 100 years of utility regulation across Canada and the United States. Newfoundland Power and Newfoundland and Labrador Hydro use this approach, along with other regulated utilities providing electricity service across Canada and the US. This model is also used for the Labrador Island Link component of the Lower Churchill Project. The cost of service model has a revenue requirement starting slightly higher than the internal rate of return but then decreases over time as the project assets are depreciated, similar to a mortgage. Moving to a cost of service financing structure will allow costs related to the Muskrat Falls/Labrador Transmission Assets to gradually decline over time, therefore avoiding significant increases to electricity rates long-term.

As stated in the rate management plan announced last year, the Provincial Government expects consumers will be paying approximately 13.5 cents per kilowatt hour in 2021 if costs increased due to normal Newfoundland and Labrador Hydro operations, and without any impact from Muskrat Falls.

The Lower Churchill Project assets are:

  • The 824 megawatt Muskrat Falls hydroelectric generating station located in Labrador;
  • The Labrador Transmission Assets, two transmission lines connecting 250 kilometres between Muskrat Falls and Churchill Falls; and
  • The Labrador Island Link, a transmission line connecting 1,100 kilometres between Muskrat Falls and Soldiers Pond
2020 02 10 2:15 pm