MEASURING AND MANAGING THE FISCAL IMPACT OF MUSKRAT FALLS

Guest Post by David Vardy
Measuring and Managing the Fiscal Impact of Muskrat Falls

Is it possible for us to manage the fiscal burden of Muskrat Falls? Moody’s downgrading of our credit rating raises serious questions as to whether we can handle this massive burden. It was Premier Dwight Ball, speaking at the St. John’s Rotary Club, who said “you cannot manage what you cannot measure”.  This is a variation on a quote from W. Edwards Deming, the father of modern quality management theory.  Can we really find a remedy to the problem if we cannot diagnose it and measure it? Surely the burden can be measured.

The PUB is relying on Nalcor’s revenue requirements in 2021 as a measure of the burden to be carried. We know that this does not take into account the 8.4% rate of return on equity on the generating assets in Labrador, an equity burden already being carried on the books of the province but deferred for future recovery from ratepayers.

"ANONYMOUS ENGINEER" REFLECTS ON INQUIRY

Guest Post by the "Anonymous Engineer"
EDITOR'S NOTE: The author of today's article is the whistleblower, dubbed the "Anonymous Engineer", who disclosed – on this Blog - falsification of the estimates for the Muskrat Falls project. That was January 30, 2017 . His comments were recorded in a post entitled Muskrat Cost Estimates "A Complete Falsification". A second post called Muskrat: Allegations of Phony Cost Estimates provided significant additional details of low-balling which ultimately were used to justify the Sanction of a project. His assertions have been confirmed by Forensic Auditor, Grant Thornton and by various Witnesses who gave testimony at the Commission of Inquiry. — Des Sullivan

Nalcor - A Documented History of Deceit
Now that the Inquiry is reaching a conclusion – after almost 130 days of hearings and at least 125 witnesses of all stripes – left exposed is an unmistakable narrative, a trail of deceit and misinformation that is beyond belief. 

Let’s look at this trail from the very beginning: 

MUSKRAT: DOES DANNY BLAME THE PUBLIC, TOO?

It sure seemed that the words of Joseph de Maistre, the 18th century French Monarchist, moralist and philosopher, were being invoked once again — this time by Nalcor CEO Stan Marshall at the Muskrat Falls Inquiry. “Every nation gets the government it deserves,” asserted de Maistre, an advocate of social hierarchy (a system based on class division) in the period immediately following the French Revolution.

The Consumer Advocate’s legal Counsel, Chris Peddigrew, was questioning Marshall's assertion a day earlier when he opined that the vast majority of people in the province had supported the Muskrat Falls project and that, accordingly, we are all to blame for what has occurred.

LeBLANC’S ADVICE TO BALL AND SIX OTHER TAKEAWAYS

 The completion of testimony by Premier Dwight Ball on Friday, June 5th brought Phase II of the Muskrat Falls Inquiry to a close. His comments can easily be described as anti-climactic given the larger narrative that the Commissioner, Judge Richard LeBlanc, has heard. Yes, it was important to hear the Premier’s version of the events that led to Ed Martin’s departure as Nalcor CEO, and about the mess he faced having taken Office. But the Commissioner’s advice to the Premier at the end had far more relevance than anything Ball shared.

 It wasn’t as if the Premier had had the intestinal fortitude to let Mr. Martin grovel in front of a Judge pleading for his severance package. Or even that his lack of forthrightness leaves us doubtful how both “ratepayers” and “taxpayers” will escape Muskrat’s underestimated and misunderstood financial burden.

STAN MARSHALL’S MUSKRAT BARGAIN: CAVEAT EMPTOR!

Nalcor CEO Stan Marshall gave testimony this week at the Muskrat Falls Inquiry.  During his examination he referred to the need to see the “big picture” as to the economics of Muskrat Falls. He said that this can best be done by explaining the cost of Muskrat Falls in cents per Kilowatt Hour, which makes it easier to understand than by using large numbers in the millions and billions.

His theme was that the project is not really all bad, the costs not unreasonable. When you look closely a different picture emerges from the one Stan has presented. The “big picture” is not nearly as rosy. Was his presentation an attempt to explain away the “boondoggle” or to rationalize it? 

BRENDAN PADDICK: NALCOR'S CHAIR OR CHEERLEADER?

Listening to Brendan Paddick, cable guru and Nalcor Board Chair, testifying at the Muskrat Falls Inquiry two weeks ago, constituted one of those “pinch me” moments when people esteemed for their successes, broad range of business and life experience, simply disappoint. 

That is not to dismiss or diminish Mr. Paddick’s accomplishments. Indeed, he may well be an inspiration to entrepreneurs seeking to discover the dimensions of their business acumen. And, it is right to acknowledge his and the Board Member's pro bono service which, while poor public policy, especially on heavily demanding Boards, still carries the obligation of their best work. 

QUEBEC APPEALS COURT BREAKS HQ STRANGLEHOLD ON MUSKRAT

The Decision by the Quebec Court of Appeal to overturn the Quebec Superior Court and grant CFLco the right to sell power in excess of the “Annual Energy Base” (AEB) seems to have reduced the province’s stress level. The obligations of CFLco in relation to the AEB is integral to the issue of water management and the abilty to efficiently run the Muskrat Falls plant. 

The Annual Energy Base was established in the original Upper Churchill Contract and states an amount of energy used to calculate minimum monthly payments by HQ to CFLco (and “ensure(s) a certain degree of stable revenue for CFLCo.”. This figure is also in dispute (footnote 53 of the Decision) but the amount is thought to be 28.97 million MWh — the figure used in three successive Nalcor Annual Reports.

MUSKRAT: THE BIGGEST GAMBLE OF ALL

Guest Post by David Vardy

Recent disclosures at the Muskrat Falls Inquiry confirm that the project is on track to become a financial tsunami. Former Finance Minister Cathy Bennett told the Muskrat Falls Inquiry that the Department of Finance was marginalized in the decision-making process. This was confirmed by former Deputy Minister Donna Brewer when she was on the stand this week. Yet the provincial government played a pivotal role in the financing of Muskrat Falls. In fact this pivotal initiative was the biggest gamble ever taken by this province.

PAUL DAVIS KEPT LID ON RELEASE OF COST OVERRUNS PRIOR TO 2015 GENERAL ELECTION

The Commission of Inquiry into the Muskrat Falls Project has heard plenty of evidence regarding how Nalcor CEO ED Martin failed to report to either the Board or the Government the truth about cost overruns and the delay in the project schedule.

Nalcor’s deceit is only one sub-text of a larger issue, to be sure. Another is that the Board and the Government — politicians and bureaucrats — supported and accommodated Nalcor’s secrecy, most effectively by suppressing bad news under the guise of “commercial sensitivity”.  

The Inquiry has now heard evidence that the September 2015 costs, which had grown to $7.65 billion (up from $6.99 billion announced in June 2014), were significantly understated. First power would be late by two years, too. Concerns that Nalcor had understated those issues made their way into a new EY Report in the early part of 2015. The Report’s existence created a big problem for the Paul Davis Government. The bureaucrats on the Oversight Committee understood foot-dragging well and Nalcor were never found without reasons why the truth hardly mattered.

FINANCE DEPARTMENT LEFT OUT OF MUSKRAT RISK ASSESSMENTS

Guest Post by David Vardy

Department of Finance Bypassed
Former Finance Minister Cathy Bennett told the Muskrat Falls Inquiry this week that upon her appointment to the Finance portfolio in 2015 she discovered the Department had been marginalized. Bennett said she was not going to allow it to continue. She invoked the Financial Administration Act (FAA) which provides broad powers to the Minister. She said that where there is conflict with Nalcor and its governing legislation, the Energy Corporation Act (ECA)  the FAA will trump the ECA.

Nalcor had been successful in bypassing not only the Department of Finance but also the Executive Council Office as well. Previous premiers had allowed the Nalcor CEO direct access to the Premier’s office and this allowed the Nalcor CEO to tell provincial officials that his actions had been approved by the Premier so they had better watch out. Most of these meetings went without formal record, unlike the Cabinet system where the Clerk issues official records of Cabinet decisions.