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Thursday 21 March 2019

FIFTEEN TAKEAWAYS PHASE I MUSKRAT FALLS INQUIRY

Guest Post by Muskrat Falls Concerned Citizens Coalition Members David Vardy, Ron Penney and Des Sullivan

Now that the second phase of the Inquiry has begun it may be helpful to take stock of where we are and what we have learned to date. 
Here are fifteen key issues on which the Inquiry Commissioner, Richard LeBlanc, must opine and about which the public should be informed. We have not attempted to assign priorities to them but we can say they that, while they are important, there are others issues that have been identified. We will post them another time.  

1.         When the Muskrat Falls project was sanctioned there was only a three per cent probability that the project would be completed on time, based on evidence provided by Nalcor’s risk consultant Richard Westney.


2.         The joint environmental panel recommended that the availability of Churchill Falls power in 2041 should be central in the province’s energy planning. The evidence is that Nalcor did not include the 2041 option in its planning, nor did they include the prospect of buying power from Quebec on an interim basis to bridge from the present to 2041.

3.         Muskrat Falls was sanctioned without the federal loan guarantee, whose completion took place at “financial close”, November 29, 2013, almost a year after project sanction by the province on December 17, 2013. In addition, it occurred only after Nalcor offered to supply Nova Scotia with additional power as demanded by the Utilities and Review Board of Nova Scotia. The federal loan guarantee depended upon sanctioning by Nova Scotia which in turn was contingent upon UARB approval, given on November 29, 2013. It is worthy of note that the “Limited Notice to Proceed” (LNP) issued to Astaldi took place on the date of Financial Close, namely November 29, 2013 – which illuminates Nalcor’s lack of concern for the risks the project held for the province (see #4 below).


4.         Before financial close Grant Thornton reported that bids for Muskrat Falls construction work were coming in 25% higher than DG3 estimates. Yet there was no indication that this information prompted reconsideration of the sanction decision before financial close took place and before committing the province to an irrevocable commitment to finish the project regardless of cost. In addition Nalcor did not communicate this information on major cost overruns which could have led to reconsideration of the sanction decision. The Minister of Natural Resources at the time, Derrick Dalley, said he was not informed of the overruns.

5.         No oversight was put in place to trigger a reconsideration of the sanction decision on the basis of early cost overruns nor was there consideration of entering conditional contracts for all major components before sanction or financial close in order to increase the level of certainty of costs and reduce risk. There is evidence that Nalcor had been advised to adopt the practice of finalizing bids and securing firm cost information from contracts before committing the province to providing a guarantee that the province would supply sufficient equity to complete the project whatever the cost may be, known as a “completion guarantee”. This matter was raised by MFCCC counsel when questioning Nalcor witness Pat Hussey.

6.         Grant Thornton concluded that their “findings and observations indicate a potential understatement of costs at the time of sanctioning of the Interconnected Island Option (Muskrat Falls Project) which in turn would understate the CPW of this option.” (The CPW or Cumulative Present Worth is a metric used to compare the two options on a present value basis.) 

7.         Nalcor spent over $140 million on the proposed Gull Island Hydro project prior to Muskrat Falls Sanction. This is a huge investment on a project which had not been sanctioned by government and is indicative of the determination of the government of the day to build a project on the Lower Churchill, with or without a viable business case.

8.         The testimony from the Inquiry indicates that government was determined to build a Lower Churchill project. The shift from Gull Island to Muskrat Falls took place just before the Term Sheet announced on November 18, 2010 when Nalcor and government concluded that the Gull Island project was not ready for sanction. At that time the focus shifted from the export of Gull power to the use of Muskrat Falls power for use on the Island and to replace the thermal plant at Holyrood. In short, the evidence suggests that the option having the lower financial risk to the province (the Isolated Island option comprised of small hydro, wind and thermal) was never seriously considered.

9.         Despite Nalcor’s prediction that rates would rise even if costs remained at the DG3 level of $7.4 billion (including financing cost) and despite declining population Nalcor predicted that demand would rise by 60% over 50 years. Nalcor has now dramatically reduced its forecast of load growth. Without load growth it will be impossible for Nalcor to recover the capital cost of Muskrat Falls. Grant Thornton reported that the load forecast used in the sanctioning decision may have been overstated. They went on to say “In addition, an overstatement in load forecast may impact the decision of the need and/or timing of adding generation sources.”

10.       The revenue requirements for Muskrat Falls will greatly exceed estimated revenues, which may actually decline rather than increase. Nalcor had wrongfully assumed that demand was highly inelastic to rate changes.

11.        When Muskrat Falls comes on stream the cost of our electrical system will rival the cost of education, including primary, secondary and post-secondary education. The annual cost of our power system will rise from $800 to $1.6 billion.

12.       Nalcor is using a system of accounting which shifts the return on equity into the distant future and thereby understates revenue requirements in early years. In the early years, even without “rate mitigation”, the province will be heavily subsidizing the cost of electric power. The prospect of future recovery of these subsidies is remote without significant load growth. The unorthodox methodology adopted by Nalcor was intended to reduce “rate shock” but it has the effect of shifting both cost and risk to the province and understating the cost of the project.

13.       The joint environmental panel called for an independent financial review of the project. This review never happened. The federal government was warned by concerned citizens that they should not give a guarantee without an independent financial review. The 2012 review by the PUB was based on inadequate engineering design because they had access only to the DG2 cost estimates, which were based on less than 10% of the engineering design being completed. The PUB was denied access to the DG3 cost estimates which it needed to provide the advice requested by government. MHI was retained by government to review the DG3 estimates but they were denied access to the risk report prepared by Westney and did not review the business case of the project or its financial viability.

14.       Manitoba Hydro International (MHI) admitted they had no mandate to review the business case for Muskrat Falls. Evidence given at the Inquiry confirmed that a senior bureaucrat in the Department of Natural Resources revised the drafts MHI Report leading Commission Counsel, Barry Learmonth, to suggest that the language was "watered down". The "tone is much milder" he said. The existence of a $500 million strategic reserve was also not disclosed to MHI either.  The MHI Report played a key role in the Government's public justification for Sanction of the project.

15.       Neither the province nor the federal government had an independent review available to them either before provincial sanction or financial close, which took place a year later.

David Vardy
Ron Penney
Des Sullivan