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Monday 4 September 2017


Guest Post by David Vardy
Summary of Submission to BCUC
This is a summary of my detailed submission entitled "Site C and Muskrat Falls Compared" made to the British Columbia Utilities Commission relating to their inquiry into Site C. This inquiry was initiated by the new NDP government of BC and is directed towards the determination of the costs of continuing, suspending or terminating the project.  
In both provinces there were joint federal provincial environmental reports. In each case the joint panel recommended further detailed financial and economic analysis to confirm the wisdom of proceeding, recognizing that no strong business case had been presented for either Site C or Muskrat Falls.  Both provincial governments proceeded with little deference to the advice from the joint environmental panels.

In a Telegram article dated May 25, 2013 the Honourable John Crosbie said that “Muskrat Falls is worth the risk”, quoting T. S. Eliot on the subject of risk: Only those who would risk going too far can possibly find out how far you can go. Since then we have sailed on a sea of risk and reaped the whirlwind. In Newfoundland and Labrador (NL) the challenge now is to prevent the risks from destabilizing the provincial economy. The risks of operating the project may prove to be just as daunting as those of building it, due to the impact of high power rates. The incidence of these power bills is likely to be placed on those with the least ability to avoid the burden, namely residential customers.

Also included in the risk of Muskrat Falls is the risk of landslides and earth movements in a one kilometre long hill known as the North Spur which is a natural dam which encloses the new run-of-the-river reservoir. This summer a graduate student released a thesis which concludes that that the rise in the water level from 17 m to 39 m may trigger a landslide and that the “North Spur does not form a safe and reliable part of the impoundment wall.” Both projects have an impact on the population living close to the generation sites and impose environmental risks that need to be mitigated. The risk of dam breach is common to both projects, along with methylmercury contamination. These risks to human safety must be given absolute priority in reviewing the implications of the options at issue in the BCUC inquiry. 
People living close to the Muskrat Falls site have insisted on the need for an expert geo-technical panel to confirm the safety of the natural dam, which is underlain by sensitive clays which threaten to liquefy, placing residents and workers at risk, along with the capital investment. The government of NL has accepted Nalcor’s assurance that the dam is safe. The NL experience suggests that stronger environmental oversight is needed, along with mechanisms for monitoring and community liaison and for complaint resolution, independent of the project proponent.

Both projects were exempted from the jurisdiction of their respective public utility board, preventing the utility boards from fulfilling their mandates to protect ratepayers by making decisions based on detailed assessments of alternatives. 

Both projects are being financed in unorthodox ways. Both impose costs on future generations, drawing upon 50-70 year time horizons for repayment. Not only is the financial structure for Muskrat Falls complex but it violates fundamental principles relating to the need for arm’s length relationships between a regulated utility and related companies (including the parent company). The take-or-pay power purchase agreement (PPA) between NL Hydro and its parent company, Nalcor Energy, is the pivot around which the deal is contrived.

The contract is a Power Purchase Agreement which commits NL Hydro, a regulated utility, to buy Muskrat Falls power from Nalcor Energy, its parent company, and prevents NL Hydro from purchasing lower cost energy in the market. NL Hydro is compelled by extraordinary provincial legislation enacted in 2012, pursuant to the federal loan guarantee agreement, to purchase power only from Nalcor.

In both cases the proponents are crown corporations which were mandated to build megaprojects embraced as legacy projects by their political masters. Both provincial governments have given their energy corporations a broad mandate but fettered their public utility boards by limiting their powers.

Artist's Rendition Site C Dam, B.C.
While the projects are similar in terms of energy, capacity and cost they are different in terms of the scale of the burden they will impose on each province.  The population of British Columbia is nine times that of Newfoundland and Labrador and is projected to increase by one million over the next 20 years, while NL will experience a decline in population. The cost of Site C represents just 3.7% of the Gross Domestic Product of BC compared with 42% for Muskrat Falls and NL. The scale of Muskrat Falls, relative to the size of the province’s fiscal capacity and population base, is a major concern. The per capita net debt in NL is $26,883, compared with $8,429 in BC. (RBC) 

The Liberal government of NL inherited the Muskrat Falls project from their Progressive Conservative predecessors. The project was announced by Premier Danny Williams in 2010 and sanctioned by Premier Kathy Dunderdale in 2012. The Liberal government of Premier Dwight Ball, which took office in December 2015, has resisted calls for an investigation into the merits of stopping or suspending the project.  Prior to sanctioning the Muskrat Falls project the Dunderdale government presented a reference question to the NL PUB, a more limited question than has now been given to the BCUC, one which strictly limits the alternatives under consideration. The PUB concluded in its report to the government of Premier Dunderdale that the cost estimates and other supporting projections were too imprecise for them to offer an informed opinion, having asked for additional time to review revised and updated cost estimates, based on more detailed design work. This request was refused.

In NL there has been a call for a public inquiry into the escalating costs of Muskrat Falls and for a forensic audit to review allegations that cost estimates were falsified deliberately in order to secure project sanction. Government’s response has been that any public inquiry should wait until the project is completed, a position rejected by most critics.

There has been a public debate about Muskrat Falls but many knowledgeable people have refused to engage openly in the dialogue. In a province where government plays a large role there has been a “fear factor” as people have been reticent to speak out for fear of retribution by government and by Nalcor, which can take many forms. Some people are concerned that the careers of their children may be jeopardized. In a community where Nalcor employs many engineers and engineering companies there is a concern about being blacklisted. I suspect this is not as big an issue in BC.

My submission provides a comparison of the two projects, along with a more comprehensive overview and analysis of the Muskrat Falls project. In my executive summary I offer the BCUC a list of 14 recommendations, of which the top six are as follows, beginning with human safety as an overriding priority.

1.                The BCUC must be guided by the policy objective of ensuring a reliable supply of power at the lowest cost possible. Yet they must also keep in mind an even higher social goal, which is to ensure the safety of those affected by the project, both those working at the site and those living in its vicinity. People living close to Muskrat Falls have become convinced that the project poses a danger to themselves and to their way of life. They are concerned that the North Spur may collapse and cause a dam breach that may threaten their lives and they are concerned that their country food will be poisoned by methylmercury.

They have learnt a great deal more about these dangers and they have received no reassurance from government or Nalcor to allay their fears. They are not satisfied that the environmental oversight mechanisms are sufficiently independent of the proponent and they are disappointed that the independent oversight mechanisms recommended by the joint panel have been compromised. They have learnt that the only way to make their voices heard is to protest and occupy the site and they have been arrested and incarcerated because of such protest. 

On May 9th, 2017 a petition to government signed by over 1,000 people was presented asking that a panel of geotechnical experts be appointed to review the North Spur remediation work to ensure that the dam will be safe but no response has been received.
My first recommendation is that the BCUC recognize that where human safety is at issue the precautionary principle must be followed, giving deference to those who are at risk. This means that people must have an independent authority to whom they can go to seek solutions, whether the problems be risk of dam failure or poison in their food. 

2.                    Beware the lure of jobs and the lobbying efforts of contractors and consultants to keep the project going! The terms of reference for the Site C inquiry include the words “advise on the implications” of continuing, suspending or terminating the project. The BCUC should focus on supplying reliable energy safely, at least cost, and not on the economic development or employment “implications” of the project.  Project proponents emphasize the number of jobs created without disclosing the fact that the cost per job is very high, the leakages from the local economy enormous and the jobs are short term. 

3.                    In order to avoid nasty surprises it is best to avoid committing to a project unless a high level of engineering design has been done to anticipate problems and to build a high level of confidence in cost estimates. In the building of Muskrat Falls a lot of engineering work was left to be done after the project was sanctioned. The level of engineering design completed was not sufficient to provide reliable estimates prior to consideration by the NL PUB and in advance of sanction. 

4.                    Do not overbuild the system. Build accordingly to your need and ensure that the system is as adaptable as possible. This is particularly important in an era of rapid technological change. For NL, Muskrat Falls was far too large for our needs and far too expensive.  

5.                    Financing mechanisms should be as transparent as possible. In NL the financial arrangements surrounding Muskrat Falls are so byzantine that they are difficult to comprehend. 

6.                    Seek input from all parties and prompt reticent stakeholders to participate, even if they fail to register or file evidence. In the case of the 2011-12 PUB hearing in NL one of the major players remained silent, namely Newfoundland Power (NP), a Fortis subsidiary, which is a regulated, investor owned utility with a mandate for the distribution of power to most of the Island’s population. Their failure to participate denied the investigation access to a vast reservoir of expertise. NP manages the interface with the customers who consume power from Nalcor’s subsidiary, NL Hydro, a regulated company which generates most of the power and operates the high voltage transmission system. This interface places them in a good position to advise on growth in consumer demand for electricity.
Artist's Rendition Muskrat Falls, NL
The government of NL has just released a report by EY, which was commissioned to review cost estimates and scheduling of project completion. The mandate of EY did not embrace a review of the cost of continuing, terminating or suspending the project yet it took almost two years to complete at a cost of $2.2 million. EY, or preferably the PUB of NL, should have been tasked to ask the fundamental question whether we should be continuing the Muskrat Falls project. This was the kind of fundamental review which was expected of the new government after it assumed power in December of 2015. Yet we are presented with a report on August 31, 20117 which fails to address the key question, which is: why are we continuing with this project as presented by Premier Williams in 2010 when the underlying assumptions have been demonstrated to be flawed?

While there are many lessons BC can learn from our mistakes it is vital, even at this late date, that we emulate the BC model by examining the wisdom of continuing with the project in its present form, given the fundamental change in energy markets and the massive cost escalation experienced in building Muskrat Falls. Perhaps we will discover that the value of the generation component, as measured by the sales revenue it will produce, will be far below the remaining cost to complete it. If so, the analysis may reveal that the generation component should be suspended or terminated.  

David Vardy