The Uncle Gnarley Blog has a new website. Click here to visit to view the latest posts!

Thursday 5 April 2018


This two part report chronicles Ottawa’s role in the Muskrat Falls project as both enabler and colluder with the Government of NL and Nalcor.  How the Feds empowered Nova Scotia to control award of the Federal Loan Guarantee (FLG) is discussed along with Ottawa’s failure to perform basic due diligence to protect Canadian taxpayers and reduce or eliminate the risk of default by the Government of NL. The articles describe the manner in which the Feds were complicit in an unviable project advanced under unwarranted assumptions. It also details how they refused to intervene as the MF project sank under gross management incompetence.  

When the Government causes a catastrophe in our name, we are all collectively responsible. Such is the case with the Muskrat Falls project. 
In one way or another NL will pay for the debacle; just not the whole cost, because the accumulated provincial debt compounded by excessive borrowing for Muskrat has made our total debt unmanageable. We are effectively broke. 
But even if NL’s coffers were full, taking into account the role played by the Government of Canada as “enabler”  without whose guarantee Muskrat would have died in design, the Feds’ complicity in the sanction and its aftermath makes it a responsible party. The Federal Government’s actions, and often inaction, ought to be exposed.

Muskrat Falls Spillway
Due Diligence Processes Missing
It is not just that the Government of Canada precipitated and facilitated the ultimate decision to sanction. Canadians ought to have expected it to impose high standards of proof of project feasibility and management competence. It ought to have exercised diligence during the construction phase, typically the period of greatest risk.   
The promise of a completion guarantee and a power purchase agreement do not justify carelessly watching as a small economy falls into abyss. 
There are other considerations, too. As in anything government-sponsored, political self-interest is never very distant.
The Federal Tories, under PM Stephen Harper, allowed tribal self-interest (Nova Scotia’s) and raw political power (Peter McKay’s) to enable a protracted process of deception falsely glorifying the project’s virtues for the local economy. Megalomania gave it birth; corruption has yet to be proven. 
On account of the sheer folly of the proposal and the size of the loan guarantee (enlarged under the current PM), the highly flawed process of project review ought to have rung alarm bells in the Nation’s Capital. But, not unlike NL, Ottawa showed that it possessed no immunity to either improvidence or recklessness, especially when politics is given free rein over common sense.
To be sure, the origins of the Muskrat Falls project illuminate NL’s weak political leadership and an acceleration in the decline of our key governance institutions. But in this case, the Federal Government exhibited little more sophistication than did NL, notwithstanding its history of institutional maturity and experience dealing with large projects.  
Governments make mistakes all the time. But how often is a single decision so wrong in its proportion that the fallout brings an entire society to its financial knees?   
It is fanciful to think that NL politicians were so wise or such good connivers, and Nalcor’s expertise so impressive or its reputation so renowned, that stringent review processes were not necessary, or that the Feds were somehow compelled to bend to NL’s demand for the FLG. 
What was so compelling? 
A cadre of bureaucrats, neophytes in the world of megaproject construction — having never built anything — were enabled when they should have been dismissed. The CEO of Nalcor was a middle level bureaucrat at Petro Canada, his V-P was manager of a local cable network. The remainder of the management team largely came with expertise in offshore oil projects. Where was the experience in heavy civil engineering, construction and development?
Feds ignore own Joint Review Panel
The Federal Government was well aware of the Joint Environmental Panel’s refusal to endorse the scheme, the word “joint” denoting federal participation and responsibility. 
In August 2011 the Panel produced a four-volume Report. Its key conclusion echoed none of the sense of destiny that accompanied former Premier Williams’ high-sounding rhetoric which presaged his Muskrat Falls announcement. Instead more sober panel members had assessed Nalcor's claims and, among other misgivings, took aim at their electrical demand forecast - long ago debunked by Nalcor, too. (Demand at time of Sanction has declined and will not reach that level again until 2036. Source: Nalcor). 
The three-member inquiry was categorical in its conclusion:
… the Panel did not accept that developing the hydroelectric potential of the lower Churchill River was a “need”, and that therefore the Project should be compared to reasonable alternatives…
Feds ignored NL PUB, too

Following the difficult process locally of pressing the Tories to submit Muskrat to the PUB, the Feds were uninterested in the review, even when a clearly dubious and a ring-fenced reference question giving the Board just two options from which to choose lowest cost (Muskrat was given a $2.2 billion advantage) resulted in a position described as agnostic. 
The PUB wrote a 100 page Report in which it reviewed the analysis of Manitoba Hydro International, its Consultant on the Reference, and incorporated the evidence of critics and others who had intervened in the Public Hearing process. Succinctly, it advised Nalcor and the Government:  
The Board concludes that the information provided by Nalcor in the review is not detailed, complete or current enough to determine whether the Interconnected Option represents the least-cost option for the supply of power to Island Interconnected customers over the period of 2011–2067, as compared to the Isolated Island Option.
The conclusion was not the one that either the Province or the Feds wanted.  Oblivious to the risks for both, they watched as Nalcor went on the hunt for “consultants” and others, including the Consumer Advocate to the PUB, until a poor business case elicited the necessary justification to proceed. The Consumer Advocate was appointed on the basis of political favoritism and not on the basis of a call for proposals with strict selection criteria. The selection should have been turned over to the Board, particularly when the proponent was a Crown Corporation.
Forensic Audit should have preceded second guarantee
Even as the project went off the rails, one might expect that a forensic audit would have precluded the decision to extend the guarantee by an additional $2.9 billion — if only to identify underlying problems and to determine if what was broken could be fixed. The second commitment brought the total sum of the Federal Loan Guarantee to $7.9 billion. Yet, there is no evidence that the Feds ever entertained any obligation to  examine project risks or management, despite the multitude of problems that had come to light, or report to Canadian taxpayers — including those living in NL.
In this province there is little doubt that a far-too-trusting public clung to partisanship for the certainty they sought over Muskrat — as if political parties were anchors of prudence, objectivity, insight, analysis and honesty. 
Even if offsetting such naïveté was attempted, on what basis would anyone think the national government callous and irresponsible, willing even to conspire with Nalcor to make sure that any objections to the project became submerged to the glowing chatter of Nalcor’s PR machine?
With so much talk of GHG emissions, savings measured not in dollars but in tonnes of carbon saved, how could the NL public not think that the Feds were simply doing their duty, or that the award of the FLG was just an act of nation-building?
Other issues need a hearing
What else should the Canadian public hear?
They should learn, for example, how even in the early days of the Hearings by the Federal/Provincial Joint Panel, NRCan (Consultant to the Panel) conspired with Nalcor to dismiss the testimony of the Geological Survey of Canada on the problem of “sensitive soils” (known as “Quick Clay”) in relation to the North Spur. The Spur constitutes two-thirds of the Muskrat Falls dam. Even a 2018 analysis (there were earlier ones) by Swedish experts condemns Nalcor’s “fix” as horribly inadequate.
NRCan acknowledged in writing that Nalcor's claims about the stability of the Lower Churchill Valley weren’t supported by the evidence contained in the Feds’ own Environmental Impact Statement. Early on, it was an issue that gravely concerned NRCan, though the apprehension was allowed to die without resolution. The Joint Panel can confirm that NRCan’s questions to Nalcor were never answered.
NRCan Report flimsy at best
The Canadian public will also want to know why their government accepted a poorly reasoned and incomplete 2014 report prepared by NRCan bureaucrats entitled Economic Analysis Lower Churchill Hydroelectric Generation Project — ostensibly the basis of its formal approval of the FLG. (When this question was put to a senior federal bureaucrat by this correspondent, the reply was that NRCan staffing had been seriously gutted under the Tories and that they simply did not have the expertise to do better.) 
David Vardy, in a 2012 email, characterized NRCan's Report succinctly:
The analysis is out of date and appears to have been done before the PUB hearing. There is no reference to the evidence placed before the Board. There is heavy reliance on the Navigant study of last summer and much of the information is inaccurate or out of date.
Vardy’s assessment was correct. In the first place, it employed project cost numbers that assumed both Muskrat Falls and the Gull Island project would proceed. Page 4 of the Report confirms Vardy assertions of the Feds’ stale offering (read them carefully and compare them with the forecast cost at sanction and the cost now:

According to Nalcor, the Project is expected to cost $6.4 billion in 2010 dollars: $2.9 billion for Muskrat Falls (compared with $7.4 billion at the time of sanction) and $3.5 billion for Gull Island.

How is it possible that even as project costs headed higher, finally in pursuit of $12 billion figure,  Ottawa remained silent?  
The NRCan Review recognized a multitude of risks to the project’s feasibility but the authors were careful not to weigh them. For example, it noted on page 11 that:

On the downside, much of the wealth generation in the last twenty years in Newfoundland and Labrador has come from the offshore oil industry. This industry is in decline and while the Hebron project is expected to provide a boost, its impact is expected to slow the decline — not reverse it. Population is not expected to grow over the forecast and the mining and processing discussion suggests that after the Vale smelter, there is no expectation for further growth on the Island. If crude oil prices do not grow as expected then penetration rates for electricity in the residential sector may not continue.
There is nothing like time to confirm any forecast.
Ignoring the well-researched analysis of the Joint Review Panel, the Review performed no independent research to assess Nalor’s claims or to refute those of the Joint Panel. Evidently, NRCan decided that simply acknowledging the risks was sufficient. Accepting the Nalcor line throughout the document, it accepted this assertion:

Nalcor does not expect that the construction boom would be followed by a significant down-turn in activity. It expects that the additional source of power plus the employment and business experience gained from the project would result in other industrial opportunities in both Labrador and on the Island.
Other than the claim to have performed a “rough verification of the CPW” (Cumulative Present Worth) comparing the net difference in value of the two options under consideration — the Interconnected and the Isolated options — the Review relied exclusively upon Nalcor’s Consultant, Navigant Consulting, which, almost without exception, found Nalcor’s forecasts and projections to be “reasonable”. The objections of the Joint Review Panel were noted by the Federal Review but they were neither reviewed nor given weight against Navigant’s uniformly positive view of Nalcor’s forecasts and assumptions.
Feds ignored even the uncertainty of water 
Like NL, the Canadian Government also 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 of water on a river on which there are two or more plants. In this case, it was necessary that Nalcor 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. 
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 know, the Quebec Superior Court upheld HQ’s position, in consequence 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.  Still, the Canadian public ought to know why did the Feds issue a loan guarantee when the hydro project lacked even the certainty of water?
An incompetent guarantor?
On what basis does such an incompetent “guarantor” get rewarded by being kept whole, suffering no shortfall for its folly in consideration of its duplicity, laxity and bad politics?

Editor's Note: Part II will pick up directly from this Part I, without further introduction. A link to the complete article will also be provided.