Letter fo the Editor 18 July 2014
Tax Grab Response
I write in response to Gerry Goodman’s
letters to the editor in the July 9 and 18, editions of The Telegram. In
late June, Nalcor Energy provided a capital cost update for the Muskrat Falls
project which is $6.99 billion.
This is
based on 98 per cent of engineering now completed and contracts awarded or
through advanced evaluation for more than 90 per cent of project costs.
Similar to
other construction projects in the province and around the world, we are
experiencing changing market conditions in an extremely active construction
industry.
As a
result of these factors, combined with planned design enhancements for the
project, capital costs for the Muskrat Falls project have increased by around
$800 million since sanction in December 2012, or around 13 per cent, not an
increase of one third as Goodman stated.
These cost
changes are being offset by other savings of approximately $300 million net
present value which was negotiated through our financing arrangements.
While
nobody wants to see an increased cost estimate, the level of variability
between estimates at sanction, where we had approximately 40 per cent
engineering complete, and our current budget, with engineering and procurement
practically complete, is within the range expected for a large-scale project.
Some of
the information Goodman references in his letter is taken from early analysis
of the Muskrat Falls project and before sanction in December 2012.
In
particular, ratepayers will not be paying the 20 per cent rate of return nor
will equity financing be 100 per cent as Goodman stated.
The cost of equity is estimated between
8.4 per cent for generation (which is a fixed internal rate of return typical
for a regulated electrical utility) and 8.8 per cent for transmission (the
current regulated return on equity approved by the Public Utilities Board).
For both project components, the cost is
based on the percentage of equity and debt and, along with facilities capital
costs, is passed to Hydro and on to ratepayers with no additional return being
earned by Hydro.
The
Muskrat Falls project remains the least-cost way to meet our province’s
electricity needs. While the capital cost of the project is substantial,
financing terms are extremely attractive, and the annual cost of financing and
operations is very attractive compared to remaining an isolated island system
as we are today.
Even
though we are developing this resource first and foremost for our province, we
also recognize that there will be sufficient excess power to provide for power
exports.
The value
of these export sales is currently estimated at close to $3 billion in nominal
value over the life of the project, which will all be returned to Newfoundland
and Labrador.
No longer will we be paying to purchase
fuel to burn at the Holyrood plant.
We will have a 100-year or longer asset
that will generate significant value and cash flows for our province for many
generations of Newfoundlanders and Labradorians, and be able to reliably meet
our own electricity needs.
While Goodman calls this a “tax grab,”
the government of Newfoundland and Labrador is investing equity in this project
and will receive a reasonable return on its investment, all of which is
included in the electricity costs to ratepayers.
This money will used by the government
to invest in our province from improving the province’s infrastructure, funding
health care and schools, to reducing our debt.
Gilbert Bennett
Vice-president, Lower Churchill Project
St. John’s
