Thursday, 1 May 2014

POLITICAL 'SPIN' AND COST OVERRUNS: TIME IS OF THE ESSENCE

Though Nalcor CEO Ed Martin has confirmed the Muskrat Falls Project is undergoing "cost pressures" his statement will likely become repetitious.

His early trip to the confessional is more than just an affirmation that ratepayers and taxpayers will be bitten; it is an admission of that Agency’s incompetence for having pursued a foolish project in the first place. 

If Ed Martin’s guarded revelation (he won’t say how much over-budget) was made mid-way or near the end of the Project, just possibly the public might experience some solace that the damage is containable.  But the Project has barely begun.  The project is already a year behind schedule.   

Nalcor is struggling to stave off disaster.
Proof that the Project is off the rails is slowly emerging. Appendix "A" of the Independent Engineer's Report  contains a summary of anticipated award dates for the Major Contract Packages.  The dates were summarized for the original DG3 schedule and the forecast schedule of August, 2013. 

When you compare the Independent Engineer’s August  2013 schedule with the actual status contained in the February 2014 Monthly Report,  it is clear that Nalcor is unable to stay on schedule. 
That ability to meet deadlines is fundamental to the success of the construction business. It is really the ‘canary in the coal mine’ for identifying the costly problem of delay.  The schedule is rarely improved during construction. 


The Independent Engineer (IE) was wise to point out that Nalcor’s schedule was too aggressive given the large project's remote location.  The IE indicated a range of 5 to 7 years.  Nalcor’s schedule was based on 5.25 years. 

The question is this: are the delays identified by Ed Martin the result of proactive planning to reduce costs, or are they the result of Nalcor consistently not meeting its project milestones?  Is the lower cost argument purely ‘spin’ used to mask the evident under-performance by his project team?
Ed Martin advanced the idea that he was prepared to modify the construction schedule to save money.  Even if true, he could not have meant “savings” as you and I define them.  He must have meant ‘savings’ in the context of a worse outcome.
How much more would a one year delay in completion of Muskrat Falls cost?
A Professional Engineer, one familiar with large-scale Projects, offers this computation:
          ~$300 - Interest During Construction (IDC) including interest paid by the Government on its      
                       equity contribution to Nalcor (which shows up as Provincial debt).
             ~$30 million - direct management costs.
             ~$20 million - site costs. 
Total:  ~$350 million additional cost for one construction year. 
Ed Martin is going to spend ~$350 million as a cost savings measure? I don't think so.

Ed Martin seems to be a person more into ‘voodoo’ economics than widely accepted principles like ‘time value of money’. 
Yesterday, Wednesday, April 30th the Telegram reported him saying delays in the Muskrat Falls project won’t add to the interest to be paid on Nalcor's $5 billion construction loan.    

Martin is pretending he is a home owner who simultaneously pays rent and interest while his house is being built except Martin wants you to believe the extra year’s rent don’t add to his project costs. 

We should worry when public servants also engage in ‘spin’.

A delay in Muskrat Falls robs the project of cash flow every day commissioning is delayed, depriving the Company of revenue that can be applied to interest and other costs.  

Nalcor, like any other business, must capitalize ‘interest during construction’ (IDC). It is a cost feature of the Project - no different than labour and materials.  In Nalcor's case, the additional cost is recaptured via your power bills. 

In that connection Martin failed to note he has not disclosed the Power Purchase Agreement (PPA) which will determine the power rate you will be charged to pay off the cost of Muskrat Falls.  That means the PPA can still be changed at any time.

What is more, a 1 year delay seems now to be a best case scenario.   The same Professional Engineer who reviewed these delay costs suggests a more likely completion date is early 2019. 
Ed Martin is not alone in the 'spin' department.  He is joined by Natural Resources Minister Derrick Dalley.
The Minister stated Nalcor has no liability to pay penalties for failing to supply the Maritime Block until Muskrat’s completion. He omits the fact that all such contracts contain a "time is of the essence" clause“.  This is a statement of warning to the contracting parties that performance is expected within the proscribed period of time failing which damages may be claimed by the injured party.
Emera will not be prepared to sit for long on its $1.5 billion investment in the Maritime Link without compensation.  It is possible that Emera is behind schedule, too.  But, don’t expect full disclosure, on these issues, until a general election is out of the way.
Minister Dalley also failed to mention the impact of a delay on the Energy Access Agreement (EAA).  That’s the sweetened deal Nalcor gave Nova Scotia in order to obtain the NS UARB’s support and to trigger the Federal Loan Guarantee.   
The EAA is a 24 year Agreement under which Nalcor has committed a cumulative total of 28.8 TWh of electricity (in addition to the Maritime Block).
The EAA specifically runs until 2041 and legally requires Nalcor to supply virtually all its so-called surplus or ‘market-priced’ power to a maximum of 1.8 terawatt hours (TWh) or an average 1.2 TWh annually over the 24 years. 
In order to achieve the cumulative total of 28.8 TWh during the Term, the minimum offering to Emera of 1.2 TWh will have to increase because the contract period is naturally shorter. 
Unless Nalcor and Emera have entered into a side deal, one not released for public consumption, Emera may invoke a Condition called “Variance” in which Nalcor is legally committed to 75% of its electricity obligation.  ("THE NEW DEAL WITH EMERA: WHAT WILL NALCOR THINK OF NEXT?" offers an explanation of the EAA and the Variance  Clause.) 

Where will all that power come from?
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Related Reading:     MUSKRAT FALLS: THE SKINNY ON COST OVERRUNS
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In a nutshell, any delay in the Muskrat Falls Project is serious. The additional commitments to which Nalcor has obligated us will further challenge our pocketbooks and our patience. 
For now, though, the masters of political 'spin' want those problems to escape public notice. 
It could have something to do with the timing of the next general election.  

Now, that might be a far better reason why time is of the essence!

2 comments:

  1. Every day brings more discouraging, but not unexpected, news on the abysmal failure that is Muskrat Falls and more evidence of the political and business incompetence within both NALCOR and the provincial government.

    The costs will continue to escalate and we are nowhere close to the end of these spiralling costs. That the provincial government can continue on with its unconscionable effort to forge ahead with this project says much about the lack of accountability and integrity within this administration. Any objective assessment of the costs will give any thinking person pause for concern and I have to wonder why all of these backbench MHAs continue to champion a project which is likely to wipe them of the political map. If that were not enough to obliterate them, the recent shenanigans of the PC Party to choose a new leader and Mr. Coleman's "hidden" campaign does not auger well for their fortunes.

    But, as I have repeatedly stated, the damage is still containable if they were to choose to shut the project down…even now. Not a great scenario to contemplate but, faced with an economic catastrophe by completing it, the choice is obvious! The province would be far better off to stop this madness even now. I am not optimistic that this administration will summon up the decency and courage to do so…but one can always hope.

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  2. During the January blackout when it was apparent that our electrical generation was in disrepair I was screaming at politicians that we should never have sunk any money into Muskrat Falls until we had our present electrical grid up to 100% efficiency. There was at least one who listened to me. Now with all the talk lately from the Nova Scotia Energy Minister and CEO of Emera stating that Nova Scotia has nothing to worry about if Muskrat Falls is delayed. They make it plain and simple that Nalcor will pay for any power they have to find from another source. Of course here in NL we don't know what the hell is going on, Ed Martin can't give us a straight answer, nor can any Tories.

    The other day Cabot Martin was on VOCM and he said something interesting; the Maritime Link is not getting it's juice from Muskrat Falls but from Bay d'Espoir. Hmmmm. During the January Blackout Ed Martin said there was no need for a 3rd line from Bay d'Espoir, as some people pointed out would have solved some problems. But now, suddenly they are looking install that 3rd line after all. They are also going to do some work at the Exploits Dam and wanting to put in a new generator at Holyrood.

    Am I being paranoid thinking that they are doing all this, what they called unnecessary work, to add some extra generation and distribution for Nova Scotia? Tell me I'm mental because I don't want someone to tell me my rates went up to ensure Nova Scotia got the contracted juice they are to receive on time and I'm not buying that bullshit about spilling it or selling it.

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