Monday, 9 April 2018


This is part II of a report chronicling Ottawa’s role in the Muskrat Falls project as both enabler and colluder with the Government of NL and Nalcor.  It discusses numerous areas, albeit briefly, where the Feds ignored blatant holes in Nalcor's business case for the project, each embodying the certainty of project failure. It also describes how they empowered Nova Scotia to control award of the Federal Loan Guarantee (FLG), failed to perform essential due diligence after the project was sanctioned and, inexplicable, failed to intervene as the project's price tag doubled for reasons it had an obligation to all the taxpayers of Canada to understand.   
(Continued from Part I)

Fake Water Management Agreement ignored 
The Canadian public need to learn how the Feds ignored the absence of a (real) Water Management Agreement (WMA) between Nalcor and Hydro Quebec (HQ) — an essential underpinning of feasibility. A WMA is necessary to coordinate the flows on a river on which there are two or more plants. Properly, that is to say legally, established it would Nalcor to maximize power output from the Muskrat facility by “banking” excess power with the Upper Churchill plant and drawing it down at times of high demand. 
The Federal Government was aware that HQ had withheld the signature necessary to confirm its agreement with the WMA. Why did the Feds issue a loan guarantee when the hydro project lacked even the certainty of water?
CFLCo manages the Upper Churchill hydro facility. The Company is owned 34.2% by Hydro Quebec; the other 65.8% by Newfoundland and Labrador. In spite of the Province’s majority ownership, CFLCo still enjoys limited decision-making flexibility.  The Company operates under a shareholders' agreement which requires a special majority decision of the Board of Directors in certain matters, which included the plan of water management. Hydro Quebec directed the CFLCo board not to support it, giving rise to the PUB’s decision to impose the plan subject to the agreements then in place, which included the Upper Churchill contract.
In spite of this conditional feature, Hydro Quebec maintained that the WMA, and other plans by Nalcor to access energy produced by the Upper Churchill, still impinged upon its rights under the Renewal Contract, causing the legal challenge to be brought.  As we all know, the Quebec Superior Court upheld HQ’s position, as a result of which the matter is now headed to the Supreme Court of Canada.

That Nalcor ought to have obtained judicial certainty is a view unequivocally expressed on behalf of the 2041 Group of “naysayers” by lawyer Bern Coffey, who later served as Clerk of the Executive Council. The advantage of delaying the project to obtain such certainty should have been obvious to anyone not conflicted. On this critical issue, the Feds chose to play dumb.  
Allegations of "falsified" estimates and other issues
The project estimates, described by an articulate albeit “anonymous” Nalcor engineer as “falsified”, captured no interest in Ottawa either. Possible malfeasance, when so much money was at stake, ought to have triggered an immediate audit. But, again, Ottawa exhibited not the slightest interest.

To those matters are added others that caused several engineers to contribute to a Blog Post entitled: Engineers Break Silence on Problems at Muskrat Falls. A guest post by renowned Canadian hydro engineer, James L. Gordon, who wrote Engineers’ Competence to Practice Questioned was just one more in a series of such Reports written for this Blog which, taken together, ought to have defeated both Government's penchant for denial. 
Failures of management were magnified by significant issues, like the “dome”, ostensibly erected to advance winter construction of the Powerhouse, but was sent to the scrap yard and never completed. The cost? Reportedly $120 million.

Another monumental failure related to the faulty or “popped cable” which contained an arrant strand. From the factory floor to delivery, storage and erection, Nalcor’s quality control processes failed to give the problem notice requiring its removal, replacement and re-installation. Those failures represent hundreds of millions of dollars in extra cost but even more than that they serve to magnify a group out of their league. 
The Federal Government, ostensibly, was the beneficiary of reports from the Independent Engineer (IE) on the progress of construction. In a 2016 email to David Vardy, NRCan stated: 
In addition to site visit and factory visit reports, the Independent Engineer also provides monthly draw confirmation certificates, as part of the process for releasing of guaranteed debt to the project entities to be used for project costs.
There is no evidence available to confirm whether the IE performed its responsibility according to its Terms of Reference. We do know that the IE found that Nalcor's contingency reserve for the project was too low and reported the issue to the Feds back in November, 2013. But there is no evidence that they thought it was important, placed appropriate demands on Nalcor, or ever asked the IE to do anything other than file the requisite reports. If the they could not see, from the very beginning, that Nalcor did not possess the skill-set needed to manage a megaproject, and great risk to the FLG thereby, we have evidence of either culpability or at best that there was a problem of sleep-walking.

This record of involvement suggests that the Feds’ were prepared only to have the IE confirm that the drawdown of FLG funds did not exceed the percentage completion of the project. The oddity is that when the Province finally ran out of money, the Feds stepped in with another $2.9 billion guarantee, leaving the new CEO Stan Marshall to maintain the status quo as far as project management is concerned, except to remove responsibility for the Labrador Island Link from VP Gilbert Bennett.  By any standard of oversight, funneling more money into a money pit hardly constituted diligent oversight. Equally, Stan Marshall's declaration at the outset, following CEO Ed Martin's dismissal, that the project was a "boondoggle", ought to have caused concern, given NL's fiscal condition, that the FLG already represented sunk cost.

Related to this post:
Federal Complicity: The Untold Story of the Muskrat Falls Project (Part I)

Don’t Mistake the Intent of the FLG
NL is a tiny entity of 520,000 people; the population of a few Toronto city blocks. Only a sponsor having far more sway than the bluster of former Premier Danny Williams could have pushed a highly questionable megaproject along. The truth is that, against such inherent risks in something so large and ill-fitting for the NL economy — and after satisfying legal commitments to Nova Scotia, Muskrat would enlarge NL's power capacity by only 15%.  On this basis, too, only vested interests with real political power and access to control over release of the FLG could have made such a deal happen.   

Prime Minister Harper is said to have had misgivings about the provision of the FLG, though he was certainly well aware of the veto power given Nova Scotia under the Term Sheet. 
Harper responded to Premier Dunderdale’s request for removal of the veto with a take-it-or-leave-it refrain as his plane headed for Goose Bay in 2012 with the announcement of the award.   
If the PM was sceptical, as some suggest, political pressure to accede to the FLG could not have come from this province. Danny Williams had rendered the Tory-dominated Avalon Peninsula a poisoned chalice. The federal election, which preceded the FLG commitment, gave Harper’s party not a single Newfoundland MP.  
Of course, NL didn't need clout. It needed leadership. That would not come from the likes of Danny Williams, Kathy Dunderdale or Nalcor CEO Ed Martin. Combined, they were no match for Federal Justice Minister Peter McKay, the MP representing Nova Scotia. 

Peter McKay
McKay was at the height of his power during those pre-Muskrat years, serving variously as Minister of Justice and Attorney General, Minister of National Defense, Minister of Foreign Affairs, and co-architect of the merger with Harper’s Canadian Alliance when he headed the Progressive Conservative Party. McKay held real political clout. In the long-held tradition of Canadian pork-barrelling, if there were billions of dollars of largesse to be handed out, he would make sure that Nova Scotia got its share. 
In its corner, at the Federal level, NL had the neophyte MP from Labrador, Peter Penashue, who, to be kind, held no capacity to assess Williams' project or the implications of the scheme McKay had divined. This short-lived MP merely watched as NL agreed to terms that were commercially reprehensible.  
How could Peter McKay have resisted? It was the perfect set-up. Canada had made global commitments to reduce its carbon footprint. Muskrat was a source of green energy (by Canadian standards). Nova Scotia would be able to cheaply reduce its carbon footprint by reducing its dependence on dirty coal. NL sought to replace Holyrood thermal generation. Only a few “naysayers” ever took pains to show that Holyrood, because of a brief period of operation even during the winter months, was a polluter in the minor leagues and that other options were available — all far cheaper and carrying far less risk than Muskrat. 
A megaproject that principally benefitted Nova Scotia, for which shared almost no risk, one far too large even considering Nalcor's unrealistically high demand projections (now modified), offered the promise of “clean” energy and “nation-building” too. What could go wrong? 
McKay did not concern himself with that question; nor, it seems, did anyone at the Federal level. McKay simply turned his attention, first, to making sure that Nova Scotia had the right deal. For him, roadblocks within the Federal Government's domain could easily be managed. Besides NL could be counted on to pull out any stops locally. 
Nova Scotia’s UARB took McKay’s cue. At the outset it rejected the deal Nalcor had negotiated with Emera. NL's equivalency of the PUB demanded one far better. Wrote “JM”, one of the most insightful analysts in this Province on the Muskrat Falls project and a frequent contributor to this Blog:
"On the morning of that day, the Utility and Rates Board of Nova Scotia (UARB) rejected Emera’s application for approval of the Maritime Link (ML) stating the deal had to be sweetened by $700 million to $1.4 billion (Net Present Value); otherwise the construction of the Link would fail as the lowest cost option for that Province.  
"Nalcor later surrendered to the entirely predictable demands of the UARB in a revised offer called the “Energy Access Agreement” (EAA) which committed virtually all Newfoundland and Labrador’s surplus power to that Province at a price set by auction in the New England States.  This capitulation by Nalcor secured one of the pre-requisites for the Federal Loan Guarantee.  However, in doing so, Nalcor precluded the future allocation of firm power and energy from Muskrat Falls from use for new industrial requirements in Labrador. It also undermined an early argument used to justify the project."
In a further comment on Nalcor’s willingness to get an agreement at any price and release the FLG, JM added this prophetic declaration:
"It bears stating that Nalcor did not even possess the wherewithal to negotiate a basement selling price, matching the minimum value the UARB sought in its analysis of Nova Scotia’s lowest cost option.  It is a critical error; one that will cost NL taxpayers dearly should New England prices further deflate due to the continued expansion of the US shale gas industry. 
"Is it any wonder that Nova Scotia opposition to the project has been silenced?"
Nalcor, having already spent tens of millions of dollars, was in no position to refuse the UARB’s demand. It didn’t want to, anyway. Seemingly, CEO Ed Martin and his juniors salivated at the thought of counting themselves among the ‘big boys’ of the utility game. Nova Scotia’s demands were facilitated with access to as high as 48% of Muskrat power — more if it prefers. It held no responsibility for cost overruns. The original 20 for 20 deal (20% of the power for 20% equity) grew to a pale imitation of what was originally “sold” to Newfoundlanders. Nova Scotia’s investment now represents only 11% of project costs, other backstopping agreements in Emera’s favour excepted.
Emera CEO Chris Huskilson could not have imagined his good fortune in dealing with a group with access to billions of dollars, who had already spent hundreds of millions in advance of sanction. 
For that reason alone, no one should feel any sympathy for Emera if it loses its $800 million investment in the Labrador Island Link (LIL). Emera’s record of growth and success suggests they had to know the calibre of the folks heading the MF project and gambled that the Feds would not permit NL to default.
Why Nalcor and the NL Government were so desperate to sanction the project, even to enter arrangements that took the pricing mechanism for export power out of NL’s control, is as difficult to understand today as it was in 2012. But that issue is no more opaque than Nalcor’s assumptions regarding oil prices or native demand or, for that matter, the Feds’ willingness to ignore how much power could be virtually given away to Nova Scotia with the balance headed for a declining export market, while they, and NL, kept up the pretense of Muskrat's feasibility. 
Was the Government of Canada Given SNC’s “Buried” Risk Report?
Other questions Canadians can ask might include why the Feds were willing to overlook  well-known issues, including “risks” large enough to be “show-stoppers” - having come to light just four months after sanction.  
All were described in a “Risk Assessment Report” which SNC-Lavalin prepared for Nalcor. That’s the one which CEO Stan Marshall informs us was buried; the one that warned of a “very high risk” of multibillion-dollar-sized overruns; the one that the company states was presented to former CEO Ed Martin, evidently having received it with clenched fist. 
Did SNC also give the Government of Canada a copy? 
Did the Independent Engineer receive a copy as the Federal Government’s agent on the project?
Perhaps Madame Charbonneau, who presided over Quebec’c corruption inquiry is, again, tired of light work and can be employed to ask some tough questions, including some of the ones mentioned. “Under oath” does have a certain ring, doesn’t it?

Not Just Nova Scotia, but Quebec and Ontario Benefitted From Muskrat, too
No one should think that all the benefits of the Muskrat Falls project triggered by the FLG stayed in NL. “Projected Benefits to Canada,” according to the tract which Nalcor gave the Feds in pursuit of the “enhanced loan guarantee,” reminded them that beyond the 4.5 million tonne reduction of CO₂ already cited, the project would deliver $950 million in federal taxes. It would represent $1.2 billion to labour and business in Ontario and $1.2 billion in Quebec. The project represented 18,000 person years of employment in Quebec; over 8 years. That’s 2200 full time jobs. A similar estimate of 17,000 person years of employment went to Ontario.  

In 2012 we might have been too quick to hypothesize why Quebec provided only token resistance to the FLG.  It was not about the mines; likely someone realized that the 2200 jobs created for Quebecers were real and that there might be future consideration, possibly even an Atlantic electricity corridor. 
Little wonder that JM argued in a piece entitled “Robbing Gnarley to pay for Jacques” that, for 50 years, our kids would be sending billions to Upper Canada. JM understood what unions, business and governments were too arrogant - or dumb - to take notice of, that the NL economy was already overheated: short on labour and suffering severe wage inflation.  
Related to this Post
Public needs to go to war first with Ball, then Feds

The culpability of the Government of Canada manifested in many ways: in matters financial, economic and environmental. Strangely, they exhibited no concern that Newfoundland's Crown Corporation, Nalcor, was singularly unsuited to the task of building the project or that the assumptions on which it was predicated were, without exception, faulty. With blinkers on, it watched idly as risks to the Federal Loan Guarantee increasingly became apparent. Some may view such a comment as an invitation to paternalism. But whether offered by a government or a lending institution, when is a lack of adequate oversight on $5 billion or $7.9 billion not cavalier? 

The truth of the matter is that the Feds were willing to place constraints on Muskrat only for as long as the Province of Nova Scotia needed to facilitate its interests; it was a condition precedent of the Term Sheet.

Otherwise, the economic development context given the Loan Guarantee, like the presumption of its economic viability, was an "untruth" to which all, including the Feds and NL, wittingly agreed to be parties, even if irresponsible ones. That is the long and the short of it.
The issue of “write-off” of the Muskrat Falls' debt is on the table, even if most people - and both Governments - are hiding under it.
Denial and delusion might continue to work for awhile, certainly until after the next election. But it won't make the reality of effective bankruptcy go away. It won't make the Feds record of complicity disappear. And it won't slay the cries of paternalism either when the debt wall is reached and a new set of conditions will have to be met by Newfoundland and Labrador.

Essentially, denial is all that left for the parties to this debacle. Eventually a bewildered public will force the Feds to own up, even if the Provincial Government, for the narrowest of partisan reasons, doesn't want to. The real question that remains is this: if the Provincial Government won't, is the public politically mature enough to insist that the conversation is held now, rather than wait for the troubles to pile up?

If the answer is no, the alternative is to await the outrage.