Guest Post
written by David Vardy
Introduction
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.
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.
Conclusion
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
