Monday, 2 February 2015

WHAT WOULD YOU LOSE, LOSING NALCOR? (PART II)

This piece was supposed to deal with some specifics about how we might begin to dismantle Nalcor. But, on reflection, it is insufficient to condemn Nalcor having been unwise enough to be born a state owned enterprise (SOE).  The question deserves a wider evaluation than the condemnation, offered in Part I, for its high spending ways; though I cannot assure a different conclusion. 

Still, it might be a good idea to discuss and determine whether that SOE has made decisions so wise that their public policy impact exceeds even its ability to destroy public money. The originally intended part II will now become part III.

Typically, governments establish SOES to fill a spot in a program it deems essential to economic growth and development; one that the private sector is unwilling or unable to undertake. In addition, governments expect SOES to use the clout of the state to lever those goals.

When SOES act in conflict with economic policies or when they behave recklessly, management must be cleared out. This outcome equally applies if the SOE’s original purpose is no longer relevant, having been submitted to the clarity of changing circumstance, or clearer minds (for Nalcor it is both). 

Nalcor CEO Ed Martin
It should be acknowledged, too, that while Nalcor’s mandate is sanctioned by the government, the company has enjoyed tremendous operating flexibility. The SOE has the capacity to legally bind the province. In addition, it is difficult to imagine that senior officers do not influence, or believe they are not at the forefront, of provincial economic policy.

Little more than a year ago, we could still hear Muskrat embraced in the nationalist flag of uninspired demagoguery. Premier Dunderdale frequently regaled the folks at Nalcor as “international experts”. Nalcor officials did not disagree. 

The public might ask: if it is dismantled, will the province survive the loss of Nalcor’s expertise?

The cost escalation of Muskrat Falls has already gone from a total of $7.4 billion to $8.3 billion, announced June 26, 2014.  The equity requirement from the province has increased from $1.9 billion to $2.8 billion; that’s 47%. Therefore, a better question might be: can the Province survive Nalcor?

The question gives rise to several others that might be used in this assessment. I expect, in this missive, I have covered only the bare bones of a public policy question Opposition Leader Dwight Ball, Premier Paul Davis, and others, ought to be giving attention.

Let’s begin here.

Even if the project had economic merit, why would Nalcor not have waited to start Muskrat until after 2017, pending completion of the Hebron and the Husky platforms (the latter on hold), rushing into an overheated market, driving up the cost of the project?

If Muskrat was able to withstand a “robust” financial test, and with only a small Husky GBS in sight, post 2017, why would Nalcor not have wanted the Bull Arm (Hebron), Argentia (Husky) and Muskrat projects staged, keeping something in reserve, other than unemployment?

Given the historic volatility of oil prices, why would they not have advised Government, in the meantime, to conserve cash, thereby facilitating a ‘real’ equity infusion, in place of more borrowed money, adding to the public debt?  

Real experts would not know when; but they would be aware, inevitably, a cyclical decline will occur.

The addition of a turbine at Holyrood represents a cost far less than a delay; had the whole project been stalled.

Nalcor and its regulated subsidiary, NL Hydro, were aware many years ago, new homes heated by baseboard radiation, are the main driver of peak electricity demand. An intelligent SOE, mandated to provide 'lowest cost' electricity would have actively discouraged options that encouraged high capital expenditures. It might have improved deficient forecasting techniques (noted by Manitoba Hydro International); just as easily it could have curtailed demand by installing smart metering, requiring new home construction to be furnished with heat pumps (now an old technology), encouraged "net zero" homes and similar architecture. In addition, it ought to have embraced new internet based technologies. 

Energy conservation options are often referred to as the "fifth fuel"; one that is also the cheapest. In the U.S., according to the Economist newspaper, the cost of saving a KWh is 2.5 cents vs. a typical retail cost of 1o cents per KWh. Even if the cost to saving a KWh in NL is double or triple, when compared to Muskrat power, likely in excess of 30 cents per KWh, on a fully allocated or a "cost of service" basis, it would have made far more sense. 

Millions of public and private dollars have been spent bringing fibre-op to every nook and cranny in this province. Long before Muskrat was sanctioned, a global effort was under way to make electricity grids "smart" adding to them "all kinds of information technology, such as sensors, digital meters and a utilities network akin to the internet..." The modernizations "help avoid outages and save energy", the Economist reported back in 2009. For all that investment, Nalcor can only report a faster download of Facebook.

In addition to measures reducing demand, allowing for conservation and creating a smarter grid, Nalcor could have incrementally developed the components of the so-called "isolated island" option, if short term demand still threatened to outstrip supply. 

Unlike some jurisdictions, Nalcor had a bevy of options; bite-sized pieces it could have employed had it chosen not to elevate Muskrat madness to the status of virtue.

Even more to the point, it could have waited a few essential years, as our couple of mega projects wound down, taking the time to assess whether the stratospheric heights of the price of oil had any staying power. 

Instead, Nalcor chose to lever that short-term spike, using it to goose Muskrat's advantage by $2.2 billion over the isolated option; impossibly attempting to forecast a high number for oil, decades out.  How does 'want' get disconnected from 'need', except if the outcome is pre-determined?

That is not all.

Why would experts proceed with a multi-billion dollar project, knowingly risking legal challenge by Hydro Quebec that now threatens much of its generating capacity?

Why would Nalcor have commenced construction on Muskrat knowing Nova Scotia had the upper hand, an effective right of veto over the Federal Loan Guarantee? A decision increasing the commitment of power to that Province, from 20% to almost 60% of Muskrat equivalent, at a price far less than the cost of production was only one result. NL was already on the hook for 80% of cost overruns on the Maritime Link. 

It had to have occurred to Ed Martin that Nova Scotia was no less a greedy or avaricious neighbour than that of La Belle Province; that it was acting out of self-interest because it could. But, remember, Nalcor's cheque book was willingly busy at Muskrat; pushing NL into a corner; diminishing leverage for negotiation each passing day.

Why would they have advised project sanction in December, 2013 with essential geotechnical work on the North Spur incomplete until the summer of 2014; the analysis questioned, then and now, by “real” experts?

Why would Nalcor experts have told the public in NL, that Upper Churchill power would not be available in 2041, a key plank in its argument for Muskrat (though NL is the majority shareholder in CFLco), as it was telling the UARB of Nova Scotia the opposite?

Then there is, ostensibly, the more macro public policy role of a state owned enterprise.
Having employed mostly oil industry related expertise to build a hydro facility, essentially a large scale construction project, why did Nalcor not recognize the potential for more work on the Hebron project?

Nalcor V-P Gilbert Bennett
It provides no comfort that the V-P, responsible for Muskrat, a former cable television manager, may be more suited to a takeover of the “Oprah” Network than to keeping a construction project on schedule; but did Nalcor ignore the creation of hundreds of high paying construction jobs, essentially because additional offshore related work competed with Nalcor’s aspirations at Muskrat? Did larger employment prospects at Hebron have no ranking? Was Nalcor unable to lever the clout of the state or did it simply fail to recognize the importance of the work? 

Experts would not have been satisfied with NLers limited, once again, to placing rebar and concrete for the Gravity Base Structure, and to building a hotel, the accommodations module.  These are exactly the same semi-skilled activities performed on Hibernia more than twenty years ago. Have our training facilities, management capabilities, and engineering expertise not grown since that time?   

The employment of a broader range of technical skills would have ensured the yards at Bull Arm, Argentia, Burin and Bay Bulls are kept busy, when no offshore oil production facility is in the queue.

Nalcor would have been mindful that the 1985 Atlantic Accord secured the right to extend local benefits; a critical economic policy objective achieved in the pursuit of offshore jurisdiction and rights. That Nalcor felt unconnected with such an important policy tool is evidenced by Muskrat having a threshold, for local benefits, lower even than Hebron!

One example. Along the 1100 km. of transmission line to Muskrat Falls, 1264 steel towers are being erected on the A/C line; more will be go up for the D/C line.  They constitute a Meccano set of cut plate steel, enough to build 10 Eiffel Towers; Nalcor's estimate, not mine. The material could have been fabricated in NL as easily as the towers are assembled; good work for a local fabricator, in the absence of jobs sent to South Korea.  If not here, Ontario is not busy these days. 

How does a country, like Turkey, find itself Nalcor’s fabricator of choice amidst much Canadian unemployment and a $5 billion federal loan guarantee? Why did Nalcor not plan it, as NL or at least Canadian work? 

Then, too, real experts are proud of their expertise; confidence is worn alongside a badge of accountability.  Experts are not emboldened by secrecy; they will respect privacy but will not hide under the cloak of commercial sensitivity. 

Then there is the Liberty Report into DARKNL; a litany of management failures and incompetence, deserving of a public shaming.

What would we be missing, if we chose to dismantle Nalcor? What vision, wisdom, and expertise would be lost?

Nalcor might say most of those are issues of general economic import, policies for which the government is responsible, that Nalcor is a group of investment managers, untroubled by fussy problems such as jobs or the size of the public debt.  Indeed, CEO Ed Martin was heard to inform a business group, back when he was pitching the project: ‘Muskrat poses no risk for Nalcor’, implying any risk rests with ratepayers.

But, even here, any claim to expertise founders.  Nalcor’s management has been given the test demanded of every company by its shareholders: results.  Our portfolio of high risk ‘investments’, levered solely by public debt, look pretty shaky.

The amount of public money destroyed onshore and offshore, and in consequence of the mounting overruns at Muskrat Falls, now runs into the billions of dollars. The inevitable demands for more money will put Nalcor at odds with those who rightfully claim priority in the social policy field: hospitals, schools, and social services.

In summary, Nalcor took advantage of a very brief period of high oil prices to pursue a policy objective  inspired by a transient Premier. We cannot blame Nalcor for Williams' policy choice. But professionals, those believing they are experts, have a duty not just to their political masters, but to the truth.

Another of Nalcor's great failures is that it became political; not necessarily in a partisan way, but in how it dealt with change as it occurred under it feet. It could not bear to acknowledge the model it had chosen to resolve the Island's modest energy issues, was not just overly expensive; it was incorrect and outdated. There was no business case; the one proposed was a construct.

It made no sense, either, even for a province far more wealthy and populous than ours, or even one unthreatened by demography, as NL surely is. 

But Nalcor could not turn back.  It could not resist the keyhole of political opportunism provided by Williams and Dunderdale who would have agreed to most anything, as long as it contained the seduction of legacy.  

Nalcor's experts succumbed to defending the indefensible. They yielded to obfuscation; surrendered to secrecy.  Many, but not Ed Martin or Gilbert Bennett, could see they wore no clothes.

Now, with billions of dollars on the line in oil projects and at Muskrat, and as politicians play tricks to camouflage their inability to make tough choices; amidst overspending and little money, Nalcor threatens our pocket books and the confidence of a society mislead.
  
For Newfoundland and Labrador, dismantling Nalcor may be the easiest decision on offer.


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