COST OVERRUNS: YOU CAN’T HANDLE THE TRUTH

Nalcor CEO
Ed Martin, last week, delivered an update on Muskrat Falls.  It was a bit like listening to the corrupted Col.
Jessop in the movie, starring Jack Nicholson, “A Few Good Men”. Questioned by Daniel
Faffee, the Defense Attorney, who suspects him the real culprit, the Col. says:
You want answers? To which Kaffee replies: I want the truth!   Col. Jessep responds: You can’t handle the
truth! 

The public’s
right to know is constantly filtered by both the Provincial Government and its
energy Agency.  The truth is what Nalcor
defines.  Ed Martin’s justification for the new slate of cost overruns are those of one fearful the public might know too much, too soon.  

Martin says
he is “comfortable with the cost envelope”. He thinks we, too, should be happy
with his accounting.  He offers no
documentation, no independent verification, and no evidence of the kind of
contracts to which Nalcor is committed. 
We only have his word.

When did Ed
Martin earn our trust?


Even the new estimated
cost figure of $6.99 billion isn’t correct.

He avoids
use of the higher digit; ostensibly $6.99 billion is more palatable than $7.0.  If he includes ‘interest costs’ the that much higher number
might cause alarm. 

Interest
costs are just as important as a bag of cement. The idea that a CEO would put a
price on a multi-billion dollar project without including interest during
construction is so unprofessional and patently dishonest that, were he a
Chartered Accountant, you would have him investigated by his peers. 

If Ed can’t
add the numbers, you and I can.  $6.99
billion added to it $1.2 billion interest costs (that figure will grow, too, as
more equity from the public coffers is needed), that’s $8.19
billion.  The number is far higher than the
$5 billion presented to the PUB in 2010, or the figure of $6.2 in 2012.
  The PUB must surely see some
vindication in all of this.

From $5
billion to $8.19: and the project has barely begun!

That is the
key point. 

The public
should brace for much higher costs yet.  I can offer
you five reasons why:

1.         Work on the Muskrat Falls project is not advanced enough to draw any firm conclusion that costs are contained.  We have no idea how Nalcor’s planning and
logistics have resulted in reduced productivity or inefficient contractor
coordination. A couple of months ago Martin was talking delay; now he is sticking with first power in 2017.  I wonder if the Independent
Engineer is convinced? Every month the project is delayed means higher costs.

2.         “Design Risk” is one of the largest
problems encountered on any construction project. That most of the engineering
design is completed is no assurance of anything. Simply put, the drawings and
specifications have not been tested. 
Errors, omissions, new information, and a plethora of other reasons
consistently drive the necessity for “Change Orders” and, in turn, drive up
construction costs.  

With no work
begun on the North Spur, the power house or the transmission line, as well as on
other major components of the Project, no experienced builder would give the
kind of assurances Martin is attempting. Martin has no such experience
himself.  He relies on an inexperienced
construction team.  Next time he should
bring along an “independent” report of “change orders” and their costs.
Credibility must be earned.

3.         We do not know the nature of the
Contracts to which Nalcor has agreed.  Ed
Martin told the media: “I believe that we have narrowed down the risk of
additional cost increases very, very, very significantly”. I have also noted
Martin uses “unit pricing”, rather than fixed pricing, (which would imply
Nalcor’s risk will increase if the number of “Units” increases). “Unit pricing” is distinct from a “fixed
priced” contract.
  Martin has not
said how much labour cost risk Nalcor has assumed, though this scribe has
learned the Agency has assumed a great deal.

We also know
Nalcor has experienced difficulty attracting “fixed priced” Bidders. 
Without
Nalcor coming clean on the risks to which it is exposed, bland assurances about
cost overruns are meaningless.

Nalcor has also
added risk by having taken responsibility for procurement and delivery of
certain items. If these items are not available, within the time frame
committed, a claim will be made for any costs the delay has caused the
Contractor.

Then, too, ‘fixed
price’ contracts are rarely actually fixed. Any time there is a significant
interference (that is not the contractor’s fault), the contractor will also
make a claim that the interference delayed its progress of the work. Up goes
the price again.

Owner’s often
put contractors in the field because they are either fed bullshit by the
engineers or they need to get contractors in the field for political reasons.
This might explain why Nalcor has so many people employed on the Project but has
little to show for it.

4. Hydro
Quebec’s challenge of CFLco’s right to sell power in excess of the original Recall block from the Upper Churchill has the potential to defeat the Water Management Agreement.  We await adjudication of the Case in the
Quebec Superior Court.  A defeat would mean far less power from Muskrat than its 824 MW capacity.  That would be financially catastrophic.


5. This Province is responsible for 50% of the cost overruns on the Maritime Link.

“Can I say
that there could never be another cost driver”, asks Ed Martin? “Well, I can’t
say that”, he answers his own rhetorical question.  “But I think what we’re focused on now — I
don’t think, I know — it’s the execution of the project”, he adds.   
He had better be
focussed on execution; what else, at this point, would preoccupy him?
 

We have gone
from $5 billion to $8.19 billion. He refuses to release the Power Purchase
Agreement which defines how ratepayers will be charged.

The latest cost
increase is worth only $8.00 per month to ratepayers, says Ed Martin, unconvincingly.  What’s another $8!

The problem
is Ed Martin will be back again and again. 

With all the
construction risk still in front of Nalcor the figure will be much higher, soon.

How much?

Ask Ed
Martin. But, like Colonel Jessop, he probably thinks you can’t handle the
truth.   
Des Sullivan
Des Sullivan
St. John's, Newfoundland and Labrador, Canada Uncle Gnarley is hosted by Des Sullivan, of St. John's. He is a businessman engaged over three decades in real estate management and development companies and in retail. He is currently a Director of Dorset Investments Limited and Donovan Holdings Limited. During his early career he served as Executive Assistant to Premier's Frank D. Moores (1975-1979) and Brian Peckford (1979-1985). He also served as a Part-Time Board Member on the Canada-Newfoundland Labrador Offshore Petroleum Board (C-NLOPB). Uncle Gnarley appears on the masthead representing serious and unambiguous positions on NL politics and public policy. Uncle Gnarley is a fiscal conservative possessing distinctly liberal values and a non-partisan persusasion. Those values and opinions underlie this writer's views on NL's politics, economy and society. Uncle Gnarley publishes Monday mornings and more often when events warrant.

NALCOR (Masquerading as ‘Hydro’)LIVES IN AN UPSIDE DOWN WORLD

If a Big Mac costs McDonalds $10 to produce and it is sold for $1.50, McDonalds will go out of business. They would not declare a profit!

REMEMBERING BILL MARSHALL

Bill left public life shortly after the signing of the Atlantic Accord and became a member of the Court of Appeal until his retirement in 2003. During his time on the court he was involved in a number of successful appeals which overturned wrongful convictions, for which he was recognized by Innocence Canada. Bill had a special place in his heart for the underdog.

Churchill Falls Explainer (Coles Notes version)

If CFLCo is required to maximize its profit, then CFLCo should sell its electricity to the highest bidder(s) on the most advantageous terms available.