Atlantic Canada must make tough energy decisions

Over the course of the past decade, energy issues have become louder and louder in Atlantic Canada; today, energy policy has recently often been the single biggest file for governments in the region. With the Muskrat Falls megaproject, shale gas exploration, and the Energy East pipeline have come a number of decisions Easterners must make—these decisions will play a large part in shaping the region’s economic future.

Let’s first examine the Lower Churchill Project. The project is often simply referred to as “Muskrat Falls,” the waterfall that is being developed for electiricty generation. Muskrat Falls will be owned by Nalcor, which the NL government created in 2007 as a publically-owned electricity-market monopolist. Through its subsidiary NL Hydro, Nalcor has the sole right to supply and sell electricity in the province. And despite the fact that government’s Lower Churchill development plan includes the construction of a Maritime link that connects NL’s electric grid to the mainland’s without passing through Quebec, the NL government has severely restricted interprovincial trade.

By denying Newfoundlanders and Labradorians other electricity options, the province’s government has given Nalcor the power to raise its rates at a whim. This power allows for the construction of the Muskrat Falls project, which will cost $7.7-billion.Without its monopoly, Nalcor would not be able to pay for the project: many economists think the project in uneconomical. In fact, NL’s Public Utilities Board (PUB) could not conclude that the project was the province’s least-cost energy option, stating that there were “gaps in Nalcor’s information and analysis.”

Because of the project’s high costs, the NL government will have to borrow $5-billion—that is, nearly $10,000 for each of its of its residents. With these potential consequences for the both the province’s debt and its electrical rates and output, the NL government’s management of Muskrat Falls will have serious ramifications for the province far into the future.

Muskrat Falls also has ramifications for Nova Scotian energy markets. Emera, Nova Scotia’s publically traded energy corporation will cover 20 per cent of the Maritime link’s cost in exchange for 20 per cent of the electricity produced at Muskrat Falls. Further, Nalcor will be able to use Emera’s transmission rights to sell electricity in the Maritimes and New England.

New Brunswick (NB) faces an equally dramatic energy situation. Two issues dominate energy discussions in the province: hydraulic fracturing (or fracking) and TransCanada’s Energy East pipeline. Tests for shale gas, which NB Premier David Alward hopes will be extracted through fracking, have prompted locals to (often violently) protest. Fiscally, however, potential fracking revenues seem to be the NB government’s only way to pay for its current level of services without raising taxes or adding to the provincial debt, which is approaching $12-billion.

Although New Brunswick’s fracking debate has been Atlantic Canada’s loudest, shale-gas extraction proposals have also provoked argument in NL and Nova Scotia. Recently, the NL government imposed a moratorium on fracking until it has consulted the public and conducted reviews. Nova Scotia has had a fracking moratorium for about two years, though it is set to expire this summer.

New Brunswick can also expect to benefit from the construction of the Energy East pipeline, which will bring Albertan oil to Saint John’s Irving Oil refinery. The most noticeable gains from project will take place during its development and construction: a report by Deloitte found that the pipeline will boost New Brunswick’s GDP by $1.1-billion in this period. And during its 40-year operations phase, the pipeline project will add $1.6-billion to the province’s economy, though it will only directly create 121 permanent jobs.

With Muskrat Falls, NL is taking a significant fiscal risk and trapping consumers with the hope of becoming an energy power. Any jurisdiction that allows fracking must balance the benefits of increased economic activity and royalties with potential environmental harm and local frustrations. And the Energy East pipeline could give NB the sort of economic and fiscal boost it needs. Energy may enrich Atlantic Canada, but squandering it may breed regret.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Dealing with Oil Money: learning from Newfoundland and Labrador

With both a new premier and finance minister, the Government of Newfoundland and Labrador (NL) has begun to prepare its 2014-2015 budget in earnest with consultations that run throughout the month of February. NL’s newly appointed Minister of Finance Charlene Johnson will present the budget to the province’s House of Assembly in the coming months.

Last year, NL’s provincial government projected expenses roughly $500 million greater than revenue, which contrasts starkly to the province’s seven-year period of surpluses between 2005 and 2012. This year, the provincial deficit will likely be smaller due to cost-saving measures taken last year under the Dunderdale administration.

In part, NL’s fiscal troubles are due to declining oil royalties. The provincial budget is largely dependent on offshore royalties, which constitute over $2 billion in revenue of the province’s total of $6.392 billion, as estimated in the 2013-2014 budget. However, annual offshore oil production in NL peaked in 2007 (although new discoveries could boost figures in the future). Due to declining production, in addition to the emergence of new technologies, such as hydraulic fracturing, the province altered its price projections for a barrel of oil from $124 to $105. Royalties from future projects are also unreliable because volatile oil prices determine whether developments are profitable and, ultimately, reign in government revenue. With the upcoming Hebron project, for instance, the expectation is that production will plummet after 2020.

These developments demonstrate that buttressing long-term fiscal arrangements on temporary and volatile resource revenue is imprudent. In many cases, governments benefit politically from spending more or taxing less. However, lapses in revenue can compel them to pursue these benefits even spending increases or tax cuts are unsustainable.

If governments did not spend this revenue on programmes, though, where would it go? A number of alternatives exist.

The first alternative, based on Thomas Paine’s idea of a “citizen’s dividend,” involves equally distributing among a country’s population the rents received from private industry using public resources. Although Paine built the notion of a citizen’s dividend using common ownership as a foundation, the citizen’s divided can be justified on fiscal grounds. Giving royalties to citizens, rather than funnelling it back into government programs, would prevent disproportionate increases in the size of the public sector. Such decreases are problematic, as political incentives preclude the ability to lay-off workers in the future.

The second alternative reflects the Alberta Heritage Savings Trust Fund, which received initially 30 per cent of resource royalties within the province. In NL’s case, and in many other jurisdictions, debt reduction would take the place of a savings fund. Saving allows governments to pay less in interest payments or even earn money from lending. A model similar to Alberta’s, which stipulates mandatory savings, would undermine government attempts to boost spending in order to win short-term political gains.

Choosing either of the two options would conceivably help NL’s provincial government end its fiscal dependence on resource royalties. The current system encourages the government to borrow political capital from future governments by boosting spending when resource money is available. This incentive structure has adverse effects on certain individuals. For instance, laying off public sector employees hired on the assumption that their new position was stable due to budget cuts. Creating rules that govern the use of royalties would mitigate these unfortunate developments.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Sustainable Economy, Sustainable Development

Throughout history Canada has been known for its vast natural resources.  These natural resources have sustained our economy.  Weather it be the beaver pelts used for fashion; lumber used for building, or oil to fuel our cars, Canada’s responsible development of these resources has lead to our success.  Much of the wealth in our great nation, beyond our talented human capital, is found in Canada’s North.  Although I do not encourage a reckless development of our natural resources, it is by far the best way to move many Canadians in northern communities out of poverty.

The bulk of these resources are found in desolate areas, areas with small towns that lack a vibrant economy.  These towns would benefit from the development of these resources- so would native reserves.  This development would provide direct employment to members of the community, and the resulting economic spin off.  Take a diamond mine for example.  This mine would employ many people within its community.  As a result of the additional income in the economy, the community’s need for a barber would rise, as would their need for restaurants and clothing shops.  People would spend more on home repairs, hiring carpenters, plumbers and electricians.  These business opportunities are a result of economic spin off. The result of a diamond mine stretches far beyond the immediate employment.  This economic growth would result in a decreased reliance on government subsidies, as the economy would be finding a way to sustain its self.

Now, I realize that not every small community, nor native reserve sits on a diamond mine, nor has access to the many excellent employment opportunities it presents.   However, I guarantee that each has a resource that if they were willing to develop could help move many members of the community out of poverty.  The operative word of course, is willing. Without a willingness, nor motivation to develop these resources many communities will operate as artificial economies supported through government transfers.  Towns that would have been vacated years ago if it weren’t for government subsidies. Many people will say that’s nothing sustainable about the development of our resources.  I counter that there is nothing sustainable about these communities.  These communities  lack the motivation to seek greater success for their people because the government continues to subsidies their costs at the expense of other taxpayers.  It is not the fault of the individual, but rather of the collective mindset that these subsidies create.

Sustainable development is an industry on to its own.  For those community members who claim development of resources is unsustainable, may I suggest they join this growing industry that seeks to find a solution to make development of certain natural resources a sustainable endeavor?  There are many willing university students who would spend a summer planting trees, and many students who study earth sciences who would be excited to help develop a manner to reclaim land after a mine is finished.  Might we consider enlisting the help of some of sustainable developments greatest proponents in finding a solution that is fitting to all?

The greatest wealth a nation has is found in the creativity of its population.  The human capital’s ability to solve problems can make or break an economy.  With a population of over 30 million people, surely Canada must have the talent needed to develop Canada’s north in a sustainable manner that reflects the values of the community.  Coupled with the incredible natural resources Canada has been blessed with, it is no wonder that our country is a leading player in the global economy.  However, we must find a way to expand this growth to include our northern communities.

If we assume that humans act in their rational best interest, this quote from Adam Smith’s The Wealth of Nations becomes highly relevant:

“Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society… He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention”

Evidently, society is improved by an individual acting in his best interest.  If we empower communities to do so, the results would be astounding.  The first step would be to reduce regulations on development of Canada’s resources, followed by reducing the transfer payments made to such small northern communities (and reserves).  Reducing the transfer payments over a period of time would enable the community to ease into the change, while providing an increasing incentive to find innovative solutions to create a sustainable economy.  This would also break the reliance on the government, while empowering individuals to become accountable for their own success.  Although yes, this means that some people can, and will fail, the community as a whole will be more successful when it can take ownership of its own success, and accountability to its own failures.

-Alanna Newman