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Monday 16 May 2016


Guest Post by David Vardy and Ron Penney

Commentary on Briefing Note to the Minister of Natural Resources from Nalcor Energy on suspending or significantly delaying the Muskrat Falls Project

We were appalled with the briefing note released May 12, 2016 by the CBC on the option to suspend or delay the Muskrat Falls project, based on an ATIPPA request. While the note was highly redacted we have to say it was most unbalanced, inaccurate and unprofessional.

Here are our responses to the specious arguments made by Nalcor:

      1.        The province needs the power.
Nalcor's media briefings have referred to the island's 40-year load growth rate as averaging 2.3% annually, and therefore has referred to its forecast 0.8% average growth rate as “conservative”. However, over the 20-year period leading up to the decision to sanction Muskrat Falls, the island's average annual load growth rate was near zero. Island peak demand has grown only slightly over the past ten years. Energy use on the Island in 2015 was below the all- time high of 2004.

Holyrood must be maintained in future and cannot be phased out. It will continue to be needed to provide reliability of supply. We and others, including Newfoundland Power, have expressed concerns about the reliability of Muskrat Falls transmission.

Other options are available to supply power in addition to Holyrood. These options include demand side management, which should focus on reducing the use of electricity for space heating and thereby will moderate costly peak demand on the power system. Hydroelectric options remain on the Island, some of which are expansions of existing power systems, such as Cat Arm.

       2.        A lot of money has been spent
The letter reports that 50% of the work has been done. The latest oversight report claims that 40.5% has been completed. The letter is silent on the cost to complete, which is surely a bigger issue than the cost incurred. Decisions should be made on the basis of future costs, not past costs. Bygones are bygones.

       3.        Ottawa could take over the project
This is hardly the spectre that it is presented to be. The province would continue to have jurisdiction over regulation of the water rights and over the sale of power in the province. The letter neglects to mention that Ottawa might be amenable to change the loan guarantee agreement, given the changed circumstances of runaway costs and uncertain completion timelines.

       4.        We’d still owe power to Nova Scotia
No reference is made to the fact that the province could find replacement power and that there are ways to discharge any commitment which should be assessed. It is not sufficient to simply throw up our hands without seeking alternative options.

       5.        It would put people out of work
It is disgraceful to find this project being defended as a make work project. The cost per job is $500,000. This defense is based on the fallacy that we can spend ourselves into prosperity.

It defies credulity that Nalcor continues to boast about $60 billion in benefits and cost savings.

These numbers rely upon outdated oil price projections and upon “profits” from ratepayers in the form of a risk premium on equity capital. These “profits” are being extracted from the pockets of ratepayers through electric power rates that are much higher than current rates and higher than rates paid in other provinces. The numbers also rely upon spurious multiplier effects, along with induced and indirect incomes. There is no reason to believe that such expenditures will create higher incomes than those which would have occurred if the project had not been undertaken. Reliance on such fallacious reasoning is indicative of the lack of a real business case for this flawed project.

       6.        NL would not be weaned off fossil fuels
This project hardly passes muster as a green project when you consider the methyl mercury problems and the potential for liquefaction of the quick clays at the North Spur. There are on Island hydro sites available which could be developed with lower costs and considerably lower risks.

       7.        Advantages
The Briefing Note claims there are no advantages from closing down the project. No reference is made to the attractive option of suspending work at the site and instead completing the transmission line to wheel remaining Recall power, along with a block of power purchased from Hydro Quebec and sourced from Churchill Falls, as an interim supply until 2041.

       8.        Project management
Surprisingly, the briefing note makes no reference to the enormous project management problems at the site. The result is that the Astaldi contract for the power house has stalled, placing the overall project cost and schedule into grave uncertainty and prompting the new CEO to comment that he is “deeply troubled” by the project.

       9.        Lack of balance and independence
As former Deputy Ministers we know that Ministerial briefing notes must provide a fair and balanced assessment of the options. This briefing note is anything but balanced and it neglects to deal with the cost to complete the project or to offer alternative options. It reflects the mentality of those who limited the options for consideration by our PUB. And it also reflects badly on the public service, which has failed to properly and independently advise the Minister and the government on this project.
We have serious concerns that the oversight mechanisms that have been put in place are too heavily reliant upon Nalcor as the source of information. This includes the oversight committee, the so-called “independent engineer” and Ernst and Young, who have stated inter alia that:

The Review has been based on data and information provided by Nalcor. EY has not sought to independently verify this data. EY has had access to the Nalcor team: we have not had direct access to contractors. EY has not conducted any engineering review, physical inspection or validation of construction process.

       10.      Conclusion
This briefing note reveals a huge deficit in the quality of the advice which the new government is receiving from its senior advisors. It is time to seek alternative sources of advice from people who are not committed to justifying the mistakes of the past.
Future planning must rest on future costs and not on sunk costs. The decision to proceed or to suspend the project should be based upon a cost benefit analysis of the project, which compares the cost of suspending the project, in whole or in part, with the cost of finishing it.

Already the cost has escalated from $6.2 billion in 2010 to $9.05 billion in 2015. The totality of this $2.85 billion increase is being financed by provincial equity, raising the total equity from $700 million to $3.55 billion, a five-fold increase. If total cost escalates to $12.5 billion then $7.0 billion in equity will be required, a tenfold increase, adding to the borrowing requirements of the province.

The undersigned have written to the Premier to advocate appointment of a Blue Ribbon Panel to undertake exactly this kind of analysis. We have specifically asked that consideration be given to continuation of the transmission line combined with suspension of the work at the generation site so that remaining unused Recall power can be wheeled to the Island, along with a block of Churchill Falls power purchased from Hydro Quebec.  Such a transmission line would allow access by interconnected residents to all Churchill Falls power after 2041.  Our letter to the Premier, dated March 1, 2016, and copied to the Minister of Natural Resources, is attached.

Our letter to the Premier deals as well with the need for an expanded oversight process covering the risks associated with quick clays underlying the North Spur. It is our view that the environmental and health impacts associated with Muskrat Falls have not received adequate attention and this is confirmed by recent evidence relating to the adverse health impact of methyl mercury. This can be traced in part to the decision by governments to reject the advice of the joint federal provincial environmental panel to undertake clear cutting of the full reservoir area. We hope that the new government will ensure that oversight mechanisms are expanded to address environmental and health risks.

We are heartened by the appointment of Stan Marshall as the new CEO of Nalcor and we understand this briefing note was prepared in March, before his appointment. We expect that Mr. Marshall would have been equally appalled and would not sign such a briefing note if it were prepared for his signature. We hope that CEO Marshall will support the position we have recommended to the government in our letter to Premier Dwight Ball, including the need for a group of advisors to fulfill the role we have identified for a Blue Ribbon Panel.

A strong new Board of Directors will strengthen the oversight process. We recommend that such a new board be put in place as soon as possible, replacing the interim board members who are serving as placeholders. However the proposed Blue Ribbon Panel will still be needed to seek public input, with independence from Nalcor and without the day to day responsibility for corporate governance of a Board of Directors.

We understand from the new CEO that a revised schedule and new cost estimates for Muskrat Falls will not be available until the end of June. The choices now facing the province are extremely difficult. They will impact not only on the present generation but on many generations to come, because of the escalating costs and rising risks of the Muskrat Falls project. The new CEO of Nalcor has a mandate to report to government on the options available as well as to evaluate their cost and their ability to meet the energy needs of the province.

The new government is committed to “opening the books” on Muskrat Falls. We hope this greater transparency will put a stop to the release of highly redacted information, which has been paid for by the taxpayer, who deserves unfettered access. We hope it will also lead to improved disclosure of contract values which have hitherto been concealed. We also believe it is high time for the Auditor General to be mandated to undertake a full and unrestricted audit of all Nalcor activities, beginning with Muskrat Falls.

However, much more is required than “opening the books”. The public must play an expanded role in decisions around this project, which has the potential to double the public debt. The final decision should be taken only after Nalcor and government have informed the public and engaged them in identifying and assessing the options. The government should not follow the practice of the previous government by taking this decision on its own. It does not have such a wide-ranging mandate, nor did the previous government!  The Blue Ribbon Panel we have proposed could engage in such a public process and should be mandated to seek public input before presenting its final report to government.


David Vardy and Ron Penney