Monday, 21 November 2016


Guest Post by David Vardy

In Part I of Muskrat Falls: The Public Right to Decide, I described how Nalcor’s Board of Directors has been an interim board since April 22, 2016, while the PUB continues to be denied authority for regulatory oversight over the Muskrat Falls project. This Part II examines other mechanisms for regulatory oversight.

Can we find mechanisms which will enable greater public participation in decisions, as well as create enhanced transparency and accountability, or is the only rational decision the suspension of work on the generation site, while completing only the transmission line?

Loss of the Quebec court case on Hydro Quebec’s rights to power from Churchill Falls for the period from September 1, 2016 to August 31, 2041 may have large implications on cost. Similarly recent problems with the coffer dam may add to cost escalation and delay the project ever further. These events add weight to the argument for suspension.

David Vardy
Auditor General
The Office of the Auditor General is part of the regulatory oversight to protect ratepayers and taxpayers. The Auditor General has an important role to play even though the Energy Corporation Act establishing Nalcor Energy places limits on how far he can go in investigating “commercially sensitive” issues. The Auditor General should be auditing all contracts to build the project.

Nalcor has been exempted from many normal oversight mechanisms, such as the Public Tendering Act, as well as from provisions of the Corporations Act and the Access to Information and Personal Privacy Act (ATIPPA) and has been afforded greater powers than those exercised by other Crown Corporations. Such exemptions and enhanced powers call for strong checks and balances to ensure probity, transparency and accountability. The recent announcement of the Auditor General’s intention to audit Nalcor is welcome news, and long overdue.

Oversight Committee of Deputy Ministers
The previous government created an Oversight Committee of Deputy Ministers to monitor the project; this committee issued its first report in July 2014 and issued quarterly reports up to the last quarter of 2015. The role of the Committee is to ensure project costs and schedule are well managed and that the project is achieving cost and schedule targets. It is also tasked with examining “whether risks are being sufficiently identified and addressed and whether Nalcor has established adequate contingency to address outstanding Project risks.”

Unfortunately this committee was not independent of government. It now appears to be virtually defunct, having issued no report on project activities in 2016.

Ernst and Young Review
The previous government retained Ernst and Young to assist the Oversight Committee with its oversight role. After the election, the new government expanded the mandate of Ernst and Young and asked them to report in March 2016. This was part of its commitment to open the books on Muskrat Falls. An interim report appeared early in April 2016 but a final report has not appeared. The mandate was to examine the cost and schedule, the key risks, and “identification of opportunities for remediation or corrective action, if necessary.” Despite the failure of EY to deliver the promised review government committed $1.3 billion in “equity” for Muskrat Falls in its 2016-17 budget. Nothing further has been heard from Ernst and Young since their report in April.

The terms of reference did not, unfortunately, call for a full cost benefit analysis of the option of suspending the generation component and continuing only with the transmission line. This option has been seen by many as a way to ameliorate the many risks involved with construction of the generation plant while at the same time providing a way to fulfill our obligations to Nova Scotia. It would also enable us to access Churchill Falls power in 2041 if needed.

Environmental Oversight
The federal provincial joint panel report of August 2011 recommended a number of oversight mechanisms. They included a monitoring and community liaison committee and a complaints resolution process. The province responded to the recommendations on March 12, 2012 but the response was ambivalent. The independent mechanisms recommended by the joint panel have not materialized (see Is It Possible To Make Muskrat Right?). That is why government is now dealing with complaints about methyl mercury on an ad hoc basis, responding to demonstrations, hunger strikes and the shutdown of work on the site through the creation of an Expert Advisory Committee, whose governance structure remains uncertain. Will Nalcor chair the committee? If so it will not be independent.

Why have there been no annual reports on environmental mitigation at Muskrat Falls as recommended by the joint panel? Where is the joint federal provincial regulatory plan?

Independent Engineer
The Independent Engineer, MWH Global, was appointed by the federal government to protect the interests of the federal government as guarantor, along with the interests of the Lenders. With the recent increase in the loan guarantee to $7.9 billion this oversight role of MWH has become more important. The last report of the Independent Engineer relates to the site visit of November 2015. A site visit was conducted in July of 2016 but the related report has not been released. According to NRCan, it is dated September 20, 2016.

Nalcor has refused my request for access to this report under ATIPPA, as has NRCan. Nalcor is refusing on the grounds that the report is incomplete and they are exercising their right under section 29 (1) (b) of  the ATIPPA Act to withhold the report.

Section 29(1)(b) reads as follows:

 29. (1) The head of a public body may refuse to disclose to an applicant information that would reveal …
(b)  the contents of a formal research report or audit report that in the opinion of the head of the public body is incomplete and in respect of which a request or order for completion has been made by the head within 65 business days of delivery of the report;

It is my contention that the report of the July visit to the Muskrat Falls site was neither a “formal research report” nor an “audit report”. It was a report to the federal government as Guarantor and to the Lenders under the federal provincial loan guarantee agreement of November 30, 2012, which established the Independent Engineer.  Why should Nalcor have access to this report before it is made public by the Guarantor?

In my complaint to the Freedom of Information Commissioner I said that the Independent Engineer reports “to the federal government and the Lenders and is not under the control of Nalcor. Clearly Nalcor is attempting to take control over this reporting process, which is highly inappropriate. This is not an audit report under the control of Nalcor and for which Nalcor can dictate what is to be included and what excluded.”

This appears to be an attempt to interfere with the independence of the Independent Engineer and with the integrity of the oversight process. Is there a tug of war going on between the Independent Engineer and Nalcor?

On top of this MWH was recently acquired by Stantec, a major contractor on the Muskrat Falls project which means that they are no longer independent. I have written to both the federal and provincial governments to ask how they intend to deal with this issue. Minister Coady responded to indicate that “Nalcor Energy and the Government of Canada are making arrangements to address the issue to ensure the continued independence of the IE.”
It is hardly comforting to hear that Nalcor is a party in this effort to ensure the independence of the Independent Engineer! Can we expect the fox to guard the hennery?

Despite the commitment of the government to “open the books on Muskrat Falls” this has not happened. The regulatory oversight process is fatally flawed and ineffective, without any semblance of independence, transparency or accountability. The public has a right to know both the cost of completing this project and the cost of stopping it. Furthermore these decisions are of such fundamental importance as to demand greater opportunity for citizen participation. Action should be taken to strengthen regulatory oversight. This action should include the following:

                      1. Appointment of a strong Nalcor board of directors, with the relevant skill set.
                      2. Reinstatement and strengthening of the powers of the PUB.
                      3. A full audit of Muskrat Falls by the Auditor General.
                      4. Expansion of the terms of reference of Ernst and Young, supported by 
                          independent  engineering consultants, to include a cost benefit analysis of                             suspending work at the generation site, while continuing with the               
                          transmission lines.
                      5. Government should revisit the recommendations of the joint environmental  
                          panel. With the three year delay in project completion, to 2020, there     
                          remains an opportunity to get the environmental remediation and adaptation                           right.
                      6. Corrective action to ensure the independence of the Independent Engineer                           bothfrom Nalcor and its contractors.

We as a province have placed an albatross around the necks of our children by sanctioning this project. The evidentiary basis for completing the project, rather than suspending it, has yet to be disclosed. It needs to be assessed independently of Nalcor.

Recent events accentuate the importance of undertaking a full cost benefit analysis of this project. The June 24 report from Nalcor disclosed $7 billion had been spent or committed so by now we may be approaching $8 billion.

The key question will be how much more it will take to complete, bearing in mind the leaking coffer dam, the cost of delays arising from the shutdown, the renegotiation of the Astaldi contract and the cost of reaching a water management agreement with Quebec. All of this could easily call for another $8 billion or more. We should suspend work at the generation site until we have a better estimate of the entire cost. To continue blindly is a tragic mistake.

Negotiations with Quebec should be held in abeyance pending a full cost benefit analysis of the option of suspending this project and continuing with the transmission line alone. Such an analysis may confirm the merit of suspending work at the generation site and preserving the assets, while inviting Hydro Quebec to sell us any power we may need between now and 2041. 

Our best strategy is to match the rates obtained by Hydro Quebec in other markets. Such a purchase of power from Quebec is likely to offer a lower cost option than the completion of the full Muskrat Falls project. It is also likely to be a lower cost option than negotiating a new water management agreement with Quebec.

David Vardy