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Thursday 17 November 2016


Guest Post written by David Vardy

Many people are in shock as the drama surrounding Muskrat Falls continues to escalate, along with the rising costs and increased exposure to risk. People are greatly alarmed about the impact on our power rates and on the future cost of living in the province, particularly for those on low and fixed incomes. We embarked on this project without knowing what it would cost and without exploring the alternatives. Much of what could go wrong has done so. All of the risks surrounding the project were pointed out by citizens who were ignored by the previous government.

We need to change our course to reflect the escalating risk to our ability to sustain a standard of living comparable with that of other Canadians. To make this change we need to find out where we are now. Stan Marshall said last week that there will be no report on the project cost until next June, indicating that there is great doubt about our current position. Yet we continue blindly to toss more and more money into this money pit.

On November 15, 2016, we learned that the bridging agreement with Astaldi added $150 million to the contract for the power house and other civil works at the generation site. This disclosure was made in Astaldi’s financial statements and did not come from Nalcor or from the new government, which on taking office had promised to “open the books on Muskrat Falls.” The initial contract with Astaldi was for $1.1 billion and the additional $150 million took us only to the end of October.

Nalcor is currently negotiating an agreement for the completion of the work, which again will add to the final cost. We still have no idea what the cost to complete the project will be but the $11.4 billion cost estimate presented by Nalcor, as recently as June 24, 2016, is likely to be far too low!

The Ernst and Young interim report of April 8, 2016 informed us that Nalcor’s cost estimates had been significantly underestimated and that the schedule for completion could not be met. The government could have suspended the project at that time and undertaken a full cost benefit analysis of the options. Instead they voted $1.3 billion in additional funds and carried on without an independent review of the project. Today we are continuing to spend huge amounts of money and the end is not in sight. Nor has the promised expanded Ernst and Young review materialized. Despite information recently released by Nalcor’s CEO the public has not been given the evidence base for continuing to spend without a realistic estimate of final cost. The latest monthly report discloses that $218 million was spent in the month of August 2016, a rate of $7 million each day and $50 million weekly.

How can the public be protected in this situation? Are any safeguards in place to protect us? What institutions are safeguarding us? Are these institutions working properly to ensure transparency and accountability? Or are we navigating without a compass? Why are we relying on Astaldi’s reports to its shareholders for fundamental information on the cost of this project? Why is Nalcor not disclosing the value of contracts awarded? Why is it allowed to operate outside of the Public Tendering Act? Is there any oversight in place?

What is Regulatory Oversight?
Regulatory oversight is the supervision, monitoring and adjustment function that is vital to the success of any major project. Oversight can take many forms, such as an audit to ensure that fundamental principles of prudence, accountability and transparency are maintained. Fundamental to effective oversight is the ability to assess behaviour to ensure it conforms to best practice. Equally important is feedback from the oversight process to the managers of the project so that adjustments can be made in real time. Advice on corrective action is of little value if it is offered only when the project is completed. It may be of value for other projects but it will not improve the performance of the project at hand.

Regulation is about correcting the course of action. Adjusting the air pressure in a tire is a good example because if the pressure is not high enough the tire will wear out quickly. If it is too high the ride will be uncomfortable. Getting the pressure right will ensure better fuel economy, longer life, improved safety and a more comfortable ride. If the Muskrat Falls project is well regulated it will produce more economical and more reliable power, with minimum adverse impact on the environment and the power will be available when needed.

The role of independent oversight is to apply corrections to the project and to the work of the people directly engaged in the construction, as workers and managers. It does not usurp their authority, not does it reduce their accountability. It makes their decisions more transparent and more accountable by applying tests to ensure that proper standards, policies and practices are being used. Independent regulatory oversight provides confidence that performance is being monitored, adjustments are made when necessary and that risks are being monitored, including the risk of unpleasant surprises. Can we have confidence in the regulatory oversight for Muskrat Falls?

The reference point for oversight can be described as the use of “best practices” in engineering and construction. Section 4.13 of the federal provincial loan guarantee agreement refers to “good utility practice” as “a spectrum of acceptable practices, methods or acts generally accepted in” the electric power industry. This was accepted as the guiding principle for the oversight activities of the Independent Engineer.

Similarly, Section 3(b)(iii) of the Electrical Power Control Act provides guidance for regulatory oversight by the Public Utilities Board  in the statement of policy that the industry should be regulated in a way 

that would result in power being delivered to consumers in the province at the lowest possible cost consistent with reliable service.

Government has a major role to play to ensure that the oversight process is efficient and effective, allowing an appropriate balance of powers among the parties, including Nalcor and the various agencies who have a role in protecting the public interest. Government must also ensure that those providing oversight are independent and apply professional expertise, without being compromised by political considerations. The institutions that can provide independent regulatory oversight are the following:

Nalcor Board of Directors
The Board of Directors of Nalcor is arguably the most important form of regulatory oversight available; it exists to hold management to account for their actions and to provide overall direction on the organization’s application of government policy and its use of best practices in engineering, in legal matters, in auditing, in procurement and in all aspects of management. On April 21, 2016 the former Board of Nalcor resigned and a new Board was appointed, a placeholder board which does not encompass the range of skills and experience that are normally needed by such an organization. The passage of six months with an interim board is indicative of a major departure from effective oversight. This should be corrected by the immediate appointment of a strong board with diverse but related skill sets. The successful completion of the Churchill Falls project, within budget and on schedule, testifies to the efficacy of strong management combined with an effective board of directors.

Public Utilities Board
The second institution available to provide oversight and mandated to protect the ratepayers is the Public Utilities Board, whose authority to regulate the Muskrat Falls project was removed by previous governments. The PUB was denied the opportunity to review all options and to recommend the least cost and most reliable power supply option. Nothing has been done by the new government to reverse this erosion of the authority of the PUB. Nalcor operates outside of the regulatory jurisdiction of the PUB through the device of a power purchase agreement (PPA) between Nalcor and its wholly owned subsidiary, Newfoundland and Labrador Hydro. The PUB is not permitted to question the rates set under this PPA.

Prompted by the events of DARKNL the PUB has been holding a hearing into the reliability of power both before and after interconnection with Muskrat Falls but their authority to regulate the construction of Muskrat Falls so as to protect the ratepayer had been removed.

This void in regulatory oversight should be corrected by placing Nalcor under the full regulatory authority of the PUB, emulating the model of Nova Scotia, which has worked well.
An unreported drama is taking place at the PUB as part of its inquiry into the reliability of supply after interconnection. It is a David and Goliath battle, with NL Hydro as Goliath and the Grand Riverkeeper (Labrador) as David. The stakes are enormous and the outcome of vital importance to the province.

The Grand Riverkeeper, as an intervenor before the PUB, has raised issues relating to the reliability of power after interconnection. These issues include the impact of the recent Quebec Superior Court decision on the entitlement of Hydro Quebec to Churchill Falls power under the Renewed Power Contract. The Grand Riverkeeper has provided evidence to the PUB that the loss of this case does indeed undermine our ability to generate full power from Muskrat Falls without negotiating a new water management agreement with Hydro Quebec. (See Muskrat Falls' Contribution to the Reliability of the Island Interconnected System by Philip Raphals.)

Similarly the Grand Riverkeeper is questioning how the reliability of Muskrat Falls power is affected by quick clays underlying the North Spur. They have tabled evidence from Dr. Stig Bernander, a Swedish geotechnical expert. NL Hydro has opposed the introduction of evidence concerning these issues in the current PUB hearing into the reliability of our power supply after interconnection. Goliath has asked that this evidence from David, a registered intervenor, be struck from the record and ignored. There should be no question as to the power of intervenors to raise these and other issues related to reliability. These are legitimate concerns that should be addressed by the PUB, along with the implications for future power rates.

The prospect of having to wait for an update on project cost until next June, as recently announced by Nalcor’s CEO, is daunting and disturbing. Should we continue blindly to spend money without knowing what the final cost will be or should we suspend the project now? If we are going to continue then we need strong oversight to protect the public interest. With our precarious financial position and the escalating costs government has an obligation to ensure that the books are open.

The public should not have to rely on information disclosed by Astaldi for the benefit of its shareholders. The standard of accountability and regulatory oversight should be much higher for this project than the disclosure requirements of Astaldi to its shareholders. Surely the citizens of this province have a right to know what obligations are being imposed on them and on future generations! Right now we remain in darkness, as palpable as DARKNL!

In the second post on this topic I will deal with the role of oversight mechanisms, other than the Board of Directors of Nalcor and the PUB, and with their effectiveness. These include environmental oversight, the Oversight Committee of Deputy Ministers, the Independent Engineer, Ernst and Young and the Auditor General.

David Vardy