in December of 2012 was a huge mistake, one which has spiralled into a major
economic and environmental catastrophe.
The warnings of the joint federal
provincial panel were ignored, as were those of the Public Utilities Board.
These warnings relate to the lack of a business case for the project, the high
risk for a small province, the adverse demographic factors, the lack of export
markets and the high unit cost.
Gamble that failed
In a Telegram article dated May 25, 2013 the
Honourable John Crosbie said that “Muskrat Falls is worth the risk”, quoting T.
S. Eliot on the subject of risk: Only
those who would risk going too far can possibly find out how far you can go.
Since then we have sailed on a sea of risk and reaped the whirlwind.
|David A. Vardy|
challenge now is to prevent the risks from destabilizing the provincial
economy. The risks of operating the project may prove to be just as daunting as
those of building it, due to the impact of high power rates. The incidence of
these power bills is likely to be placed on those with the least ability to
avoid the burden, namely residential customers, whose only recourse will be to
leave the province.
known risks would not turn against the project, risks of escalating costs,
declining oil prices and decreasing demand for electricity. Cost estimates were
contrived to ensure project sanction, by using unrealistic numbers, cost
estimates that were known to be too low. It has been alleged they were
deliberately falsified to encourage sanction by government in December 2012.
forecast in 2016, indicating that the load forecast used to justify the project
was as questionable as the cost estimates. A more cautious approach would have
built capacity incrementally rather than incurring the large capital cost of overbuilding,
taking the risk that lucrative markets to recover costs could be found for
power surplus to domestic needs.
borne by ratepayers
to embark on this project, placing all the risk on ratepayers. The “take or pay”
power purchase agreement will place the majority of the burden on residential
customers. By sanctioning this project government ignored the huge demographic
transformation, with more senior citizens, declining working age population and
shrinking overall population.
of economics, the law of demand and price elasticity, which rules that people
will substitute other alternatives when prices rise. Demand will decline rather
than grow in the face of surging power rates. Government and Nalcor relentlessly
insisted that we “need the power”, failing to recognize that unaffordable rate
increases will likely result in such drastic reduction in demand that no
Muskrat Falls power will be used within the province.
Position with Quebec
Falls and the Anglo-Saxon Route would strengthen our position with Quebec. The
two submarine crossings and the relationship between Nalcor and Emera have not
helped us. We became prisoner to Nova Scotia in our quest to finalize a loan
guarantee agreement with the federal government, who demanded an
interconnection with the rest of Canada across the Cabot Strait, as a
Falls and offers no redundant capacity to carry either Churchill Falls power
after 2041 or power from Gull Island, which continues, inexplicably, to be the
Crown jewel for ambitious politicians. The unnecessary investment in high cost
Muskrat Falls power precludes us from benefiting fully in 2041 from access to
low cost Churchill Falls power, because Muskrat Falls more than satisfies our
needs for the medium and long term.
that most of the demand is located on the Avalon and that we will still need
emergency power based at Holyrood. It was a huge mistake to think that Holyrood
could be shut down and that our emergency power would be supplied from Nova
Scotia. We cannot depend on 1500 km of transmission lines crossing a variety of
climatic zones where icing and high winds will knock out lines and iceberg
scouring in the Strait of Belle Isle will threaten the submarine cables. We
could never choose between Muskrat Falls and Holyrood because Holyrood, or its
replacement, will continue to be needed.
posited a choice between two complementary projects which were never
alternatives. This false premise was compounded by precluding the PUB from
examining other alternatives, such as wind, solar power, energy efficiency and
demand side management.
management structure, with SNC Lavalin taking the lead in engineering,
procurement, construction and management (EPCM). This changed over time with a
downgrading in the role of SNC Lavalin and with Nalcor assuming the lead,
relying on SNC Lavalin for engineering design, but with Nalcor officials
signing off on procurement, contract awards, change orders and disbursements.
This departs from the way Brinco built the Churchill Falls project and Muskrat
Falls has suffered from the departure from the Brinco model.
expertise and they retained Acres Canadian Bechtel (ACB) to undertake
construction at Churchill Falls, bringing it to completion within budget for
$946 million and ahead of schedule. (See https://www.ieee.ca/millennium/churchill/cf_history.html)
Canadian Bechtel (ACB) consortium acted as agents for CF(L)Co, charged with
responsibility for engineering and construction management. The construction
organization in the field had ultimate responsibility for contract administration,
inspection and construction coordination.
the project was carried out by contractors. More than 180 construction and
services contracts were awarded, ranging widely in value, but with a maximum of
$75 million for a single contract.
Note that the Astaldi contract began at $1.1
billion and has risen to $1.830 billion, without explanation. Along the way
they built a canopy or dome for $120 million but subsequently discarded it as
junk. Brinco and Acres Canadian Bechtel had a limit of $75 million for any
single contract. The limit in Hydro Quebec is $50 million for a single
contract. Smaller contracts allow for more competition. We should at least have
pre-qualified the bidders, probably removing Astaldi from consideration, due to
its lack of Canadian and northern experience. Instead we opted to maximize the
Tendering and Cost Plus
anything but transparent, and outside of the public tendering rules followed by
the rest of government. Nalcor has never provided convincing evidence why it could
not operate through public tendering nor have they explained why they did not
place a cap on the value of large contracts, as was done for Churchill Falls.
The Astaldi contract was essentially a cost plus contract, despite the
statement by Ed Martin at the 2015 Nalcor AGM that it was a “lump sum” project,
fixed in terms of the projected amount of concrete to be poured. This point was
confirmed by EY in their April 2016 report when they said that the payment mechanism is based on
person-hours expended rather than m³ of concrete poured. This mechanism did not
capture the potential for poor contract management labour and the consequent
decoupling of labour paid from work completed. It was Nalcor, namely NL
ratepayers, who took the risk, and not Astaldi!
and water management
apart from the large reservoir, was the hydraulic head of 312 metres, compared
with 35 metres for Muskrat Falls, 100 metres for Gull Island and 176 metres for
Bay D’Espoir. The head is how far the water falls from the reservoir to the
with Churchill Falls and that is a major advantage. However the lack of an
effective water management agreement with Hydro Quebec makes it quite
impossible to achieve the 824 MW of capacity that has been touted. The Quebec
Superior Court decision rendered by Justice Martin Castonguay last August
confirms that Nalcor’s solution to the problem, approved by the PUB in 2009, is
not practical or realistic. Resolution of this problem requires either a
negotiated settlement with Quebec or winning our appeal of the Castonguay
decision to the Supreme Court of Canada. This is another unresolved risk.
Clays at the North Spur
confirmed the high risks, risks which should have been mitigated in advance of
sanction. We now know that this report did not get the attention it merited.
One of the high risk areas identified was the North Spur and the potential for
sensitive clays to liquefy, due to water pressure, when the dam is impounded.
with this issue as part of its hearing into supply issues and reliability of
hearing began with DarkNL and is continuing. The
PUB accepted Nalcor’s argument that consideration by the PUB of the risks of
the North Spur and of the ineffective water management agreement was outside
the scope of the hearing. They also contended it would have defied the
Exemption Order which prevented the Board from exercising its normal regulatory
authority over the Muskrat Falls project. The PUB allowed the filing of
evidence relating to the reliability of the transmission line but disallowed
evidence concerning the generation project itself, including the North Spur and
water management. These inexplicable decisions of the Board left these two
issues bearing enormous risk unresolved.
independent validation of the safety of the North Spur. A recent thesis by a
graduate student at the Lulea University of Technology in Sweden confirms that
safety is a huge problem. An article written by his thesis supervisors, Dr.
Lennart Elfgren and Dr. Stig Bernander, adds credence to the argument that the
remediation at the North Spur must be reviewed by a panel of eminent
North Spur places people in danger, along with the capital investment,
demanding appointment of a review panel.
Will Muskrat Falls be mothballed?
to dig a hole for the province as we pour money into this money pit. The
surging rates will knock electricity demand back to the point where no demand
for MF power will exist. Export markets will return only two cents per KWH,
making a negligible contribution to rate mitigation. Vital equipment is being
sourced in China and may be unreliable. The 2013 SNC Lavalin report on risk
said, based on past experience “quality, performance, warranty service and
schedule problems can be anticipated with these Lump Sum turnkey packages
(i.e., major claims and delays.”) Quality control is a problem
because Nalcor does not have the experience to manage a project of this
incremental costs will be around $800 million annually and rising. Between $120
and $200 million of Bunker C might be displaced but the economics of replacing
$200 million of oil with $800 million in capital costs again defies economic
logic. The $800 million is the same order of magnitude as the tax increases and
other revenue measures introduced in the 2016 budget, many of which were rolled
back because of public resistance. This is likely to become a big white
elephant, one we cannot afford to operate, as consumer resistance to high rates
Falls has not materialized. EY produced only an interim report. The Muskrat
Falls Oversight Committee has failed to produce the quarterly reports which
were issued prior to the election, attempting to fill the void by posting a
serious of vacuous monthly reports. The Oversight Committee was too close to
government (and to Nalcor) to be effective, being solely comprised, until
recently, of government officials.
(Montgomery, Watson and Harza, MWH) was taken over more than a year ago by
Stantec, a big Nalcor contractor, without remedial action to correct the
conflict of interest. These oversight bodies were far too reliant on data
supplied by Nalcor, without critical testing. The PUB remains neutered while
Nalcor continues as an unregulated government-owned utility, with unusual
powers (e.g., exempt from public tendering) exceeding those of other crown
precarious than that of Puerto Rico, which is now under a federal board of
supervision. Nova Scotia is running a surplus, without the high oil royalties
we continue to enjoy. Our public sector is far too large, as shown by a recent AIMS report.
with the problems. No emergency sessions have been convened to avert a growing
crisis. Nor is the provincial Cabinet focused on the issue of Muskrat Falls.
Oversight mechanisms are mostly inactive. Minimal information has been released
by the new Board and Nalcor’s CEO. No
explanation has been given for the burgeoning cost of the Astaldi contract or
whether the flaws in the original contract have been corrected. Citizens are
left in the dark and this is not acceptable.
of 2017 expenditures were $154 million dollars. At $500,000 per person year
this project cannot be rationalized as a make work project nor can it be
explained as part of a rational energy strategy or economic development plan.
It is simply a fiasco and one which poses an existential threat which many
citizens have yet to perceive.
blasé about its future? Are our institutions serving us well, including the
provincial and federal governments, Nalcor Energy, Newfoundland Power and the
PUB? Memorial University appears to be punching well below its weight in
failing to encourage public engagement on this issue and the fundamental
economic and fiscal crisis of which the Muskrat Falls fiasco is a part? They
have failed to respond to the challenges issued by Edsel Bonnell and others to
create a new forum to bring forward possible solutions
rational thought, having taken refuge in the wisdom of Stan Marshall. Stan
refuses to seek an independent review of the North Spur and government will not
overrule or rile him. Stan has failed to deliver a rethinking of this project
or even a change in the management team.
government? We could not have sanctioned the project without the loan guarantee
of $5 billion, which has now been increased to $7.9 billion. Should we commend
or condemn the federal government for their role in enabling us to embark upon
this risky undertaking? The loan guarantee agreement was designed to ensure
that the ultimate responsibility and financial risk was deflected back to
provincial ratepayers, minimizing the risk to the federal government. The
province is obliged under the 2012 agreement to ensure after the project is
completed that “the regulated rates for
Newfoundland and Labrador Hydro (“NLH”) will allow it to collect sufficient
revenue in each year to enable NLH to recover” costs incurred.
ratepayers in NL. Should we now ask the federal government to reactivate the
inactive Lower Churchill Development Corporation (LCDC) and to share in the
financial risks of both construction and operation? It is clear that the
federal government will be called upon to take a larger role, beyond simply
raising the cap on the loan guarantee. It is also questionable that we as a
province are going to be able to operate the facilities on our own and to bear
the full cost burden.
bearing 49% of the risks, be the best vehicle to finish the project and to
operate the facilities once completed? Or will we take the far greater risk of
going to Quebec for a comprehensive agreement which will enable us to complete
the Muskrat Falls project, as part of a package involving water management,
Gull Island and extension of the Churchill Falls contract beyond 2041? This
might offer short term gain but a mountain of long term pain.