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Monday 17 February 2014


During my two years of review of Muskrat Falls, I have often asked myself what future generations will think of the project.  What will be public perception of the engineering, the economics and most importantly the political debate which surrounded it? 

In an era when blogs, newspaper articles, and VOCM call-in programs are all recorded for posterity, how will future generations of Newfoundlanders and Labradorians view the leaders of today?  In particular, what will they say about the execution of their responsibility to safeguard the interests of the tax payers? 
Will the critics including Vardy, Penney, Martin, Sullivan, and Hollett be viewed as fear mongers, visionaries or simply as democrats?  On what side of history will they lie? 
Despite all assurances from the experts, time will produce a final arbiter of the economic merit of the project.  The final construction costs, combined with the future world price of energy, and the power demands of the Province will constitute the most quantitative parts of that evaluation. 

Even though future success will silence the legacy of the present day critics, I am certain that future political scientists will study how our democratic institutions were tempered, in order for the project to proceed. 

In the 21st century, when other Western democracies strived to increase transparency, public engagement and political accountability, Newfoundland and Labrador went against the grain.  Under any unbiased examination, the democratic legacy of Muskrat Falls will certainly fall upon the wrong side of history.

It would not be fair to place the blame solely on the current Progressive Conservative government.  When the previous Liberal administration excluded the Lower Churchill Project from the purview of the Public Utilities Board, in 2000,  a slippery slope began to take shape.  It was the beginning of a process of excluding the project from normal democratic controls.  That process was key to ensuring transparency and accountability in the expenditure of public funds. 
Although the Liberal’s conceived the project under a shroud of secrecy, it was a different project than the current version.  The Liberals had a deal which would see the larger Gull Island constructed first, with no immediate link to the Island.  Instead of being financed by Newfoundland tax payers, it was financed through a power purchase agreement with Hydro Quebec.  The price was adjusted for inflation and the deal included a basement price for Gull Island of 35$/MWhr.  There was a distribution of risk between the partners Hydro Quebec and Newfoundland and Labrador Hydro.    

By the time the Liberals were turfed from power, in 2003, some $57 million of taxpayer’s money was already spent on the project.   The newly elected Progressive Conservative Government noted a lack of normal oversight on the procurement of certain services with direct intervention from the Premier’s Office: A Government Press Release stated:

However, Minister Byrne indicated that such a process [Request for Proposals] was not followed for the selection and awarding of contracts to several different law firms and to communications consultants. The bulk of the legal services was contracted to Patterson Palmer Hunt and Murphy at a cost of approximately $2.7 million, with a further $915,843 spent at Chalker Green and Rowe/McInnis Cooper. The communications costs included $461,000 to SNC-Lavelin and approximately $400,000 to Bristol Communications.

"The direction came directly from the premier’s office as to which law firms and communications companies were to be hired to carry out the required work," said Minister Byrne

From very early on, the Lower Churchill project lacked the proper governance expected of a Crown Corporation. 

In 2007, the William’s Government launched the Energy Plan.  The initial legislative vehicle was the 2007 Energy Corporation Act which “established an energy corporation for the province”.  The Corporation was later re-branded “Nalcor”.  

The legislation removed the obligation of the Crown Corporation to adhere to the Public Tendering Act, protected vast amounts of sensitive information from the Access to Information Laws, and limited the powers of the Auditor General to review the activities of Nalcor.  The Act was revised in 2008 to even further protect Nalcor from being forced to engage the normal processes of public oversight.  

Nalcor has benefited immensely from the largesse of the taxpayers of Newfoundland and Labrador.   

Between 2006 and 2013, $1.4 Billion was directly invested in Nalcor in the form of deferred dividends and direct equity contributions.  Those investments allowed Nalcor to grow into a diversified energy company under the shield of secrecy afforded by the Energy Corporation Act. 

The evolution of Nalcor bucked the trend for crown corporations in strong western democracies.  The Organization of Economic Co-operation and Development (OECD) is an international organization founded in 1961 to promote trade, and economic progress.  It is committed to democracy, a market economy, and set best practices for economic policies.  Canada is a founding Member.  To understand how out of step Nalcor and the Province are with modern democracies one would do well to read the OECD's recommended practice for Crown Corporations. Nalcor is far from the “model” the OECD promotes.

As the world moves to higher transparency, independence, and market competition, in Newfoundland and Labrador our insular government has moved in a completely opposite direction.  It has used strong arm tactics to ensure that both Government and Nalcor (both unwittingly joined at the hip) were positioned to proceed with the Lower Churchill Project. 

Armed with the original exemption, the Provincial Government intended that the Public Utilities Board was involved only in setting the power rates for the project. But, contrary to the terms of the Electrical Power Control Act, the public would not be permitted transparency on the question of whether Muskrat Falls is the lowest cost alternative. 

Public opposition and a damning report from the Canadian Environmental Agency forced the Government to refer the project to the Public Utilities Board.  Still, the Government still did not permit a full review.  The Maritime Link was removed from the terms of reference and the reference question was limited to two options only.  They included the Interconnected Case (with Muskrat Falls) and the Isolated Island. 

By omitting the Maritime Link component of the project, the terms of reference severely impacted the effectiveness of the review.  Simply put, the PUB was not permitted the opportunity to review the deal as it was negotiated.  Using narrow terms-of -reference and a ring-fenced reference question, the Government attempted to railroad the PUB’s approval of the project.   

Instead of Government keeping Nalcor accountable and protecting tax payers, it became the primary accomplice for limiting public review of the project.     

As limited as it was, the PUB review was very beneficial.  It identified several major shortcomings in the project.  Most startling, to the Author, was the manner in which Nalcor abandoned its own Gated Management Process. 

Without proper public review, or political challenge, due diligence is entirely reliant upon internal controls within Nalcor. 

As with any company, there should be a solid business case presented; one which identifies all the risks and benefits of the project.  

Nalcor employs a Gated Management Process, which is a recognized method of planning large projects.  The project is divided into a number of Phases divided by gates, or decision points.  At each gate the status of the project is reviewed and the criteria for proceeding are re-affirmed.  The Process is usually facilitated by a steering committee of senior management. The following Exhibit, from Nalcor’s July 2011 Presentation to the PUB, is instructive:

The Gated Management Process initiated by Nalcor in 2006 was used for the development of the Lower Churchill.  Decision Gate 1, completed in February 2007, was not used for the purpose of providing the lowest cost power to the Province.  Rather, its purpose was to develop the Lower Churchill primarily for export.  The Decision Gate 2 report, presented to the PUB (Exhibit 22), offered limited discussion of alternatives to the project.  It engaged in even less discussion about project economics.  It was purely a readiness review.

When the decision was made, in July 2010, to abandon Gull Island (for export) and to proceed with Muskrat Falls, ostensibly to meet the Island’s growing electrical requirement, the DG2 mandate should have changed to examine all potential alternatives for meeting our electrical needs.  The principal outcome ought to have identified the lowest cost alternative to NL ratepayers.   Nalcor’s DG2 reports, submitted to the PUB, showed little evidence of such analysis. 

In the opinion of the Author, this deficiency constituted not just a failure in Nalcor’s management processes; it contravened its legislated responsibility under the Electrical Power Control Act.  Nalcor failed to provide the least cost option for NL ratepayers.  

If Muskrat Falls is not a success, historians will view the DG2 endorsement as the critical failure point in Nalcor’s governance.

As the project proceeds, Nalcor continues to withhold critical information.   No update has been forthcoming on the total cost estimate of the project in over 15 months.  The Crown Corporation has not yet responded to many critical questions such as those posed by Uncle Gnarley Blog.

This Blog questioned (i) the amount of Capacity and Energy which will be available to the Island once Muskrat Falls comes on-line in 2017, and (ii) details of Nalcor’s commitment to Emera.

The Maritime Link was excluded from PUB review of the project.  It is still not clear if the engineering calculations, submitted by Nalcor, properly reflected the delivery of 167 MWs to Emera during peak winter months.  Was the lowest cost conclusion based on getting access to the entire output of Muskrat Falls during the winter?  Is there sufficient Capacity remaining for our own requirements once the 167 MW peak-period delivery is made? 

If the Strategist (a forecasting tool) runs, submitted to the PUB, did not include the 167 MWs, how will the Island’s peak requirements be met in winter?  What is the potential impact on the rates? 

These are critical questions which must be answered by Nalcor.  If the 167 MWs was excluded from the lowest cost analysis submitted to the PUB and endorsed by Manitoba Hydro, it would undermine the entire process. 

These questions can be easily answered by Nalcor. They can be validated by the public release of the Power Purchase Agreement signed between Nalcor and Newfoundland Hydro to fulfil the requirements of the Federal Loan Guarantee.   The fact that such an important agreement has not been released is unacceptable. 

Many of the public comments submitted as part of the ongoing PUB review reflect these same questions.  Other are outstanding regarding the reliability of the island system once Muskrat Falls comes on-line and Holyrood is decommissioned. 

Nalcor has done itself no favor by, yet again, limiting the release of this information. 

The following is a direct quote from the PUB’s Pre-hearing Conference: 

With respect to the fifth item proposed by Newfoundland Power regarding the potential review of measures to ensure reliability after commissioning of Muskrat Falls and the Labrador Island Link, we believe that that matter is beyond the appropriate scope for this review” 
              Mr. MacDougal – Legal Counsel for Newfoundland Hydro

Is it in the best interests of tax payers that Newfoundland and Labrador Hydro petition the PUB to exclude Muskrat Falls from ongoing review by that Agency?  Hardly.  NLH is essentially prolonging both the Government’s and Nalcor attempt’s to limit public scrutiny of critical decisions they have taken.  These questions are inextricably linked to huge financial obligations to which the public is now committed. 

Newfoundland Power demands a more detailed assessment.  The Company evidently recognizes that its corporate image is at risk five years from now when domestic rates must bear the Muskrat Falls project, the third line to the Avalon, and the third line to Labrador West.   Rates will increase considerably.  If Holyrood must stay open beyond 2021, and undergo further upgrades, our power rates will be even higher. 

As we await the decision of the PUB we must wonder what Chairman Andy Wells is thinking?  Will he limit the scope of the review as requested by Newfoundland and Labrador Hydro?  Will the PUB make the right decision and review the reliability of the system post-Muskrat Falls?  Will the PUB permit the public their first opportunity to truly understand the impacts of the Maritime Link? 

The Provincial Government, Nalcor and the critics, including this Author, will eventually be judged by history.  

Now, as it conducts an investigation into matters relating to the security of the Island’s power supply, including the events that caused the ‘black-outs’ of early January, the PUB is challenged to be on the right side of history once again. 

No one has ever questioned that Agency’s independence.  The issue outstanding is whether we will be left to question its courage. 
The judgement of history awaits us all. 
Editor's Note: This Post was written by "JM", the anonymous researcher, writer and 
presenter, to the PUB and in local Blogs, on the Muskrat Falls Project. JM has written a 
number of Uncle Gnarley pieces, including, most recently, Gnarley's Theory of Political Devolution, Parts I and II and The Great Revolutionaru From the Shore
.  One of his latest Papers is entitled: Muskrat Falls Revenue Stream: Fact or Fiction.  JM has also submitted most recently to the PUB a Paper entitled:  Underestimating Peak Load and the Potential Impact on the Muskrat Falls Solution.  To recent readers to Uncle Gnarley Blog, who may be unfamiliar with "JM", I would say that, while circumstances require his anonymity, you will be impressed with the depth of his analysis on many aspects of the Muskrat Falls Project.  Also, look for his Presentation to the PUB which formed part of that Agency's analysis of the Muskrat Falls Project - Des Sullivan