The multi-billion dollar Muskrat Falls Project has proven controversial in Newfoundland and Labrador (NL) and Nova Scotia (NS), where the project’s cost-effectiveness is being debated. One of the potential benefits of the project is the enhancement of the electricity grid, which is especially significant for the Island of Newfoundland. For the first time, it would be connected to the North American grid. NL’s government, however, has enacted legislation that will deny Islanders the gains accrued through trade.

In his commentary, Electricity Market Integration: Newfoundland Chooses Monopoly and Protectionism, James Feehan, Professor of Economics at Memorial University, provides an overview of the Muskrat Falls Project and reviews the economic impact of NL’s protectionist amendments to the Electric Power Control Act.

Feehan argues that NL’s legislation regarding the Muskrat Falls Project, “imposes measures that restrict interprovincial trade and consumer choice.” The provincial government, for instance, has banned retail and industrial development, ownership, and operation of electrical power facilities in Newfoundland and Labrador, affording the NL government (through NL Hydro) the exclusive right of supply, distribution, and sale of electrical power and energy. Furthermore, these provisions are at odds with the United States Federal Energy Regulatory Commission (FERC), which requires open-market reciprocity as a trade provision.

According to Feehan, “… the legislation is completely at odds with allowing electricity buyers and sellers, from within and outside the Island, access to the Island’s transmission system under an open-access transmission tariff agreement (OATT). … The utter rejection of the open-access principle by the NL government will make selling into the United States difficult, if not impossible.”

NL Hydro’s exclusive control over Newfoundland’s electricity supply ensures that the Island will be insulated from competitively-priced electricity. The legislation also removes any limitations on NL Hydro pricing. As a result, Feehan cautions that, “Island ratepayers, with no access to outside markets or alternate on-Island suppliers, will be trapped in a highly monopolized market with little choice but to pay.”

In short, the provincial government and NL Hydro are cushioned from competition, reducing efficiency and innovation and preventing wholesale access to American consumers.

Feehan concludes by arguing that the NL government has introduced legislation that–despite connecting the Island to the North American power grid–replaces physical isolation with economic protectionism geared toward enhancing NL Hydro’s monopoly. By doing so, the potential gains from unimpeded trade and the development of a competitive market will be blocked. Instead, Island ratepayers will be forced to pay for this expensive project, whatever the cost.

Read the commentary here.