Introduction
When the Government causes a catastrophe in our name, we are all collectively responsible. Such is the case with the Muskrat Falls project.
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.
Due
Diligence Processes Missing
 |
| Muskrat Falls Spillway |
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:How is it possible that even as project costs headed higher, finally in pursuit of $12 billion figure, Ottawa remained silent?
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.
