Guest Post by David Vardy
Framing the Mandate for a Commission of Inquiry
Premier Ball has announced that an Inquiry into the Muskrat
Falls project will begin soon, perhaps before Christmas. Before celebrating
this announcement we need to know that the Inquiry will have a broad scope, as
well as the necessary resources to do the job.
The Commissioners must have a wide range of expertise,
including experience in managing major projects, as well as expertise in energy
policy, project engineering and public utility regulation. The panel should
include people who operate at an international level as well as Commissioners
who understand the environment in which we operate. This mission calls for a
broad set of skills and requires more than one single Commissioner.
The terms of reference for the Inquiry should be framed with public input through a consultation process. I agree with Uncle Gnarley that Nalcor should have no role in writing the mandate of the Commission. The mandate should be as broad as possible and it should allow the Commission to report and recommend on all matters relating to the project. If there are any restrictions they should be subject to public debate. Government should release a draft of the terms of reference and invite public input, perhaps through the good offices of an independent third party.
The purpose of the inquiry should be to improve public policy and the management of public projects, with particular reference to the completion of Muskrat Falls and the task of placing its future operation on a viable footing. All major public inquiries in the past have had two major components: the first to find out what went wrong and the second to find out how to prevent the problems from recurring.
The Ocean Ranger inquiry was conducted in phases. The first
was to find out why the Ocean Ranger went down in February of 1982 with 84
people on board. The second was to improve safety standards to reduce the risk
of future disasters. The mandate for these inquiries included both a
retrospective as well as a prospective, or forward-looking, focus. The
same can be said of the Harris Panel on the State of the Northern Cod Stock,
the Dunphy Inquiry and the Wells Inquiry into Offshore Helicopter Safety.
The Inquiry should be given all the powers conferred under the
Public Inquiries Act, the power to subpoena evidence and cross-examine
witnesses, similar to other public inquiries such as the Ocean Ranger Royal
Commission and the Cameron Inquiry into Breast Cancer Testing. Government
should challenge the Commission of Inquiry to find solutions and to set a new
course for the operational phase of Muskrat Falls.
What we demand from the Commission of Inquiry is the
unvarnished truth, a rare commodity in the Muskrat Falls world. The Commission
must assess the many tainted assumptions and the flawed business model and tell
us if the project can be salvaged, despite its sullied provenance. The conduct
of a forensic audit will be essential to the process of tracking how decisions
were made and determining if professional or legal codes were breached.
In its Report and Recommendations, the Commission must reveal
what was wrong and why it was wrong but they must go beyond pointing out the
errors and search for solutions, solutions that will replace the flawed
components or pillars on which the project was sanctioned. The work of the Commission
must balance its work between investigating what errors were made, whether
through deliberate deceit or ignorance, and finding remedial solutions.
The balance between the Commission’s investigation of past
mistakes in policy and management, versus finding future solutions, should be
50/50, with equal weight between investigating past mistakes and proposing
future solutions. If no solutions can be found, the Commission should report
truthfully that the project is not viable and advise that further financial
commitments should be avoided.
Examination of consumer behaviour tells us that, if rates
double, demand will shrink by 40%, eliminating all potential demand for Muskrat
Falls and devaluing the assets. Export revenues are unlikely to cover operating
costs. The project may have to be mothballed, even if it is perfectly capable
of generating power, albeit at a loss.
The joint environmental panel report was ignored and overruled
and the PUB was denied the opportunity to conduct a full review or to exercise
regulatory oversight over the project and its construction. The project is
being carried out without the environmental oversight needed to ensure that the
recommendations of the joint panel are implemented. From both an environmental
and financial standpoint this project is a disaster of epic proportions.
The Inquiry should be charged with finding out how the
fundamental flaws can be corrected. If they cannot be corrected then the
project will go into bankruptcy because it will not be able to cover the
operating costs, let alone the capital costs.
The Muskrat Falls project was sanctioned without a sound
business case. Without fundamental changes the project will founder into
bankruptcy. The Inquiry should be mandated to report and recommend on all
matters which threaten the viability of the project. The “pillars” upon which
the project is founded are built upon sand and not on solid rock. Unless these
pillars are reconstructed on a solid rock foundation the failure of the project
is assured. If action to correct the fundamental flaws is excluded from the
remit of the Commission the project is doomed. I will cite only four examples
of such pillars.
1.
The first pillar is the 50-year take-or-pay power
purchase agreement (PPA) which requires that NL Hydro purchase power from its
parent company Nalcor Energy, regardless of price. This unregulated monopoly
situation is intolerable in 2017 and belongs back in the 19th century, when
unregulated monopolies ruled the day.
Consumers
will find ways to avoid contributing toward the cost of Muskrat Falls when
rates double, leading to a reduction in demand from 7,000 GWh to 5,000 GWh or
less. Revenues from rate increases may increase slightly or possibly decline,
depending on whether the elasticity of demand (in absolute value) is less than
one or greater. If the latter (greater than one or >|-1|) then
revenues will actually fall when rates rise, leaving no contribution toward the
estimated $800 million in incremental cost arising from Muskrat Falls, other
than meagre export revenues.
2. The second pillar is the water management
agreement to which Quebec has
refused
to become a signatory, leaving the project without the ability to optimize
production and to achieve its capacity (824MW) and energy (4,900 GWH) production
targets. When the Quebec Superior Court ruled in 2016 that the rights given to
Hydro Quebec under the first 40 years of the 65 year power contract continue
intact into the final 25 years (the Renewal Contract) it struck a blow at a
fundamental pillar of the Muskrat Falls project.
3. The third is the agreement with Nova Scotia to
provide power at rates below
the
rates offered to consumers in this province. This is an unsustainable pillar of
the Muskrat Falls project.
4.
The fourth pillar is the back end loading of the
costs, which imposes an
intolerable
burden on future generations. This is illustrated by Nalcor’s estimates of
capital cost recovery for generation assets, rising from $170 million in the
first full year of operation to $1067 million in year 50.
In addition to these four pillars there are many assumptions
that must be challenged by the Commission, including the following:
i.
The contrived cost estimates, which have risen
from $6.2 billion to $12.7 billion and are likely to rise further;
ii.
The assumption that oil prices would continue to
increase beyond the level prevailing at the time the project was announced;
iii.
Load growth projections, rising from 7,000 GWh to
10,000 GWh by 2030, along with the assumption that rate revenues will always
increase in lock step when rates increase;
iv.
The assumption that Nalcor should be given
extraordinary powers, including exemption from compliance with the Public
Tendering Act and removed from oversight by the PUB;
v.
The assumption that Nalcor was capable of managing
a project of this magnitude; and
vi.
The assumption that the North Spur has been fully
remediated and is now safe. This poses intolerable risks upon people close to
the generation site. There must be a technical review of the science and
remedial action to avoid a disaster of epic proportions. While the Commission
may not have the expertise to conduct the necessary technical review they can
assess the need for such a review and recommend it be undertaken before the
project is completed.
We know we cannot make a silk purse out of a sow’s ear but we have to strive at least for a “polyester purse”, for a project which covers most of its costs, without plunging the province into bankruptcy, or else making it a dependency of the federal government.
The Commission must be able to make recommendations which will
strengthen the project’s viability. These may include legislative changes to
place Nalcor under full regulation by the PUB or the merger of all of Nalcor’s
electric power assets into a fully regulated NL Hydro. They may include
abandonment of the take-or-pay contract as well as the unconscionable energy
sales agreements with Nova Scotia. They may include recommendations concerning
the flawed business practices and lack of transparency of Nalcor.
The Commission should be asked to provide interim reports,
reports which will enable government to introduce changes in project management
and in the business model under which Muskrat Falls will be operated. With at
least three years remaining before full power there is ample opportunity to
make improvements in the project, particularly in the way it will operate after
construction. If the Commission discovers that the business model is beyond
remediation they will have no choice but to recommend termination, in order to
avoid digging us deeper and deeper into a hole from which there is no escape
other than declaring provincial insolvency.
David Vardy