TIME TO TAKE CONTROL OF NALCOR

Written by David Vardy

The new government of Premier Ball ran on a reform platform of “openness, transparency and accountability”. It is time for them to show strong and decisive leadership and assert immediate control over all aspects of energy policy, including Nalcor and Muskrat Falls. By failing to do so, they have fallen into a quicksand which is not of their making. The sordid severance mess was also the creation of previous governments. 

At the center of the mire is Nalcor Energy, a crown corporation which has become a law onto itself and which is building the Muskrat Falls project, behind schedule and over budget. The new government should be questioning the very existence of Nalcor rather than being held in thrall by it.

Termination of the CEO

Instead of responding to Ed Martin’s request for a meeting in mid-April the government should instead, and much earlier, have called him in and dismissed him “with cause”, not “without cause” as the Board of Nalcor is reported to have done.

Such early action is unlikely to have triggered severance payments under the employment contract with the former CEO. Surely the Muskrat Falls fiasco, combined with “Dark NL” and the damning indictment of NL Hydro by the PUB over “imprudent” spending of millions of dollars offer more than adequate “just cause”. 

Such assertive action by the new government would have avoided the current controversy over Ed Martin’s severance package. While it might have provoked legal action it would have been acclaimed by the people of the province as both necessary and appropriate.

David Vardy

Having appointed Ernst and Young (EY) to undertake a review of Muskrat Falls shortly after its election, the government should have withheld the injection of $1.3 B in equity for Nalcor, pending completion of the final EY report. This more assertive action would have sent a stronger signal than the muted misgivings expressed in the budget speech about Nalcor and its failure to return dividends to the province. The interim report of EY, publicly released on April 12, 2016, two days ahead of the April 14 budget, gives no support to continue a massive injection of provincial funds. Indeed, the report sent a warning of escalating costs and project delays.

In the budget speech the Minister of Finance also said that

   The previous administration allowed Nalcor’s organizational structure,     

   compensation and benefits packages to grow beyond what taxpayers would consider    reasonable, particularly given our current fiscal and economic circumstances.

These statements in the budget prompted the Nalcor CEO to seek a meeting with the Premier, one which led to announcements by the Premier and the CEO respectively that Mr. Martin would be stepping down on his own volition. The Nalcor Board has now announced that its CEO was terminated without cause, triggering a payout of $6.1 million.

If the Auditor General determines that the severance component of $1.4 million was not appropriate will government then call upon the Board to recover it? In the meantime, Nalcor’s performance bonus plan should be placed under immediate review, along with all of the supplementary executive retirement plans (SERPs) and compensation practices at Nalcor.

The Powers of Nalcor

The powers of Nalcor far exceed those accorded to other crown corporations. The compensation and benefits (including severance and supplemental executive retirement plan, SERP) of its CEO and other senior executives are, similarly, in a league to themselves. Government is required by law to ratify the contract of employment with the CEO but, for those reporting to the CEO, Nalcor has absolute discretion. The compensation package of the CEO comports with the grand imperial vision of Nalcor. It is time for this to end. It is also time to question the need for Nalcor.

The new government has been taken prisoner by the flawed policies of the previous government, including a legacy of overspending and imprudent decisions. The most imprudent decision of all was the decision to sanction Muskrat Falls, in defiance of the advice from two panels, namely the PUB and the Joint Federal-Provincial environmental panel. 

On top of this, Muskrat Falls was removed from the jurisdiction of the PUB, which would normally review the project and protect the ratepayer by conducting oversight over the project, as has happened in Nova Scotia. Instead Nalcor was allowed absolute and complete control of the agenda. The new government has allowed this to continue for too long.

Reform of Nalcor means an end to the special powers and exemptions conveyed by legislation.

Reform should begin with changes to, or revocation of, the Energy Corporation Act (ECA). This was the legislation which created Nalcor. It also amended or removed normal oversight provisions and placed Nalcor in a position of enhanced authority and reduced accountability. The ECA includes exemptions from the Corporations Act which remove the personal liability of members of the Board of Directors. By the same token, amendments to the Electrical Power Control Act remove Nalcor from oversight by the PUB and affirm its monopoly position. This legislation forces electricity consumers to buy power only from Nalcor.

Nalcor has been setting its own public tendering and disclosure rules for Muskrat Falls. Nalcor has not disclosed the value of contracts awarded or reported publicly on change orders, which can vastly increase the final project cost. The public has been left in the dark on the final cost and completion schedule for Muskrat Falls. These practices cry out for reform.

While many, including the undersigned, welcomed the appointment of Stan Marshall as the new CEO this is only one of many steps required to bring this corporation under control so that it serves the public interest and is not a law unto itself. We look forward to the early appointment of a strong and independent Board of Directors.  

For too long Nalcor has operated with a small board without the breath and expertise of corporations such as Fortis. For too long this weak board has been dominated by its CEO and other executive officers. 

Nalcor was to be the “energy warehouse” for the province. In creating Nalcor the previous government created an entity which has usurped the policy role of government and used extraordinary powers to advance its imperial agenda, which may no longer be the agenda of the new government.

If government is to reform Nalcor it must roll back the special legislation which has weakened and eliminated normal oversight. All Muskrat Falls contracts and change orders should be reviewed by the Auditor General. Government should remove the monopoly-conferring amendments to the Electrical Power Control Act. In addition government should act to compel compliance with public tendering policies.

Government should also take decisive action to protect the environment. The previous government allowed Nalcor too much influence in the environmental review process, resulting in significant risks with methyl mercury and with the underlying quick clay at the North Spur.  While government has been pre-occupied with the financial debacle arising from Muskrat Falls the issues relating to health, safety, conservation and environmental damage deserve urgent attention.

The Way Ahead

Is it not time to question the wisdom of the Muskrat Falls project through an open, transparent and accountable reform process? Government must act upon its commitment to “open the books” on Muskrat Falls. The new Nalcor CEO does indeed have a mandate to examine options and report back to government. But it is government which must ensure that the public are engaged in a search for the right solutions. Government should conduct a full cost benefit analysis of the option of shutting the project down, in whole or in part, compared with the option of completing it.

In light of the escalating costs, Muskrat Falls should not be completed unless there is evidence to support the decision. It is not sufficient simply to tell us that the commitments are too binding to be renegotiated and that the contracts with construction companies and with Emera tie us in a Gordian Knot. The new government should be seeking to distance itself from the flawed policies of their predecessors rather than allowing these flawed policies to deflect them from the course of “openness, transparency and accountability”.

The Liberal platform called for a Cabinet Committee to plan for the end of the Churchill Falls contract in 2041. Action on this important initiative should be expedited and linked with the decision to continue or suspend the Muskrat Falls project. In 2041, the full 5428 MW of low cost Churchill Falls will be available! In the intervening 25 years and beyond, Muskrat Falls is likely to be a financial albatross.

Government should restore democratic oversight and affirm the role of the PUB. They should review the need for the continuation of Nalcor but in the meantime they should change the rules of the game, to place Nalcor in the same position as its wholly owned subsidiary NL Hydro, which is a fully regulated public utility.

Most importantly, government should bring energy policy back into government and remove it from an unaccountable crown corporation with illusions of imperial grandeur.

David Vardy