This is part II of a report
chronicling Ottawa’s role in the Muskrat Falls project as both enabler and
colluder with the Government of NL and Nalcor. It discusses numerous areas, albeit briefly, where the Feds ignored blatant holes in Nalcor’s business case for the project, each embodying the certainty of project failure. It also describes how they empowered Nova Scotia to control award of the Federal Loan Guarantee (FLG), failed to perform essential due diligence after the project was sanctioned and, inexplicable, failed to intervene as the project’s price tag doubled for reasons it had an obligation to all the taxpayers of Canada to understand.
(Continued from Part I)
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 on a river on which there are two or more plants. Properly, that is to say legally, established it would Nalcor to 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.
signature necessary to confirm its agreement with the WMA. Why did the Feds issue
a loan guarantee when the hydro project lacked even the certainty of water?
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
all know, the Quebec Superior Court upheld HQ’s position, as a result of which the
matter is now headed to the Supreme Court of Canada.
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
The project estimates, described by an articulate albeit
“anonymous” Nalcor engineer as “falsified”, captured no interest in Ottawa
either. Possible malfeasance, when so much money was at stake, ought to have
triggered an immediate audit. But, again, Ottawa exhibited not the slightest
engineers to contribute to a Blog Post entitled: Engineers Break Silence on
Problems at Muskrat Falls. A guest post by renowned Canadian hydro engineer, James L. Gordon, who wrote Engineers’ Competence to Practice Questioned was just one more in a series of such Reports written for this Blog which, taken together, ought to have defeated both Government’s penchant for denial.
the Powerhouse, but was sent to the scrap yard and never completed. The cost? Reportedly $120 million.
monumental failure related to the faulty or “popped cable” which contained an arrant strand. From the factory floor to delivery, storage and erection,
Nalcor’s quality control processes failed to give the problem notice requiring
its removal, replacement and re-installation. Those failures represent hundreds
of millions of dollars in extra cost but even more than that they serve to magnify a group out
of their league.
reports from the Independent Engineer (IE) on the progress of construction. In
a 2016 email to David Vardy, NRCan stated:
site visit and factory visit reports, the Independent Engineer also provides
monthly draw confirmation certificates, as part of the process for releasing of
guaranteed debt to the project entities to be used for project costs.
There is no evidence available to confirm whether the IE performed its responsibility according to its Terms of Reference. We do know that the IE found that Nalcor’s contingency reserve for the project was too low and reported the issue to the Feds back in November, 2013. But there is no evidence that they thought it was important, placed appropriate demands on Nalcor, or ever asked the IE to do anything other than file the requisite reports. If the they could not see, from the very beginning, that Nalcor did not possess the skill-set needed to manage a megaproject, and great risk to the FLG thereby, we have evidence of either culpability or at best that there was a problem of sleep-walking.
IE confirm that the drawdown of FLG funds did not exceed the percentage
completion of the project. The oddity is that when the Province finally ran out
of money, the Feds stepped in with another $2.9 billion guarantee, leaving the
new CEO Stan Marshall to maintain the status quo as far as project management
is concerned, except to remove responsibility for the Labrador Island Link from
VP Gilbert Bennett. By any standard of
oversight, funneling more money into a money pit hardly constituted diligent oversight. Equally, Stan Marshall’s declaration at the outset, following CEO Ed Martin’s dismissal, that the project was a “boondoggle”, ought to have caused concern, given NL’s fiscal condition, that the FLG already represented sunk cost.
Related to this post:
Federal Complicity: The Untold Story of the Muskrat Falls Project (Part I)
Mistake the Intent of the FLG
NL is a tiny entity of 520,000 people; the population of a few Toronto
city blocks. Only a sponsor having far more sway than the bluster of former
Premier Danny Williams could have pushed a highly questionable megaproject
along. The truth is that, against such inherent risks in something so large and
ill-fitting for the NL economy — and after satisfying legal commitments to Nova
Scotia, Muskrat would enlarge NL’s power capacity by only 15%. On this basis, too, only vested interests
with real political power and access to control over release of the FLG could
have made such a deal happen.
provision of the FLG, though he was certainly well aware of the veto power given
Nova Scotia under the Term Sheet.
of the veto with a take-it-or-leave-it refrain as his plane headed for Goose
Bay in 2012 with the announcement of the award.
to accede to the FLG could not have come from this province. Danny Williams had
rendered the Tory-dominated Avalon Peninsula a poisoned chalice. The federal
election, which preceded the FLG commitment, gave Harper’s party not a single Newfoundland
would not come from the likes of Danny Williams, Kathy Dunderdale or Nalcor CEO
Ed Martin. Combined, they were no match for Federal Justice Minister Peter
McKay, the MP representing Nova Scotia.
McKay was at the height of his power during those pre-Muskrat
years, serving variously as Minister of Justice and Attorney General, Minister
of National Defense, Minister of Foreign Affairs, and co-architect of the
merger with Harper’s Canadian Alliance when he headed the Progressive
Conservative Party. McKay held real political clout. In the long-held tradition
of Canadian pork-barrelling, if there were billions of dollars of largesse to
be handed out, he would make sure that Nova Scotia got its share.
from Labrador, Peter Penashue, who, to be kind, held no capacity to assess
Williams’ project or the implications of the scheme McKay had divined. This
short-lived MP merely watched as NL agreed to terms that were commercially reprehensible.
Canada had made global commitments to reduce its carbon footprint. Muskrat was
a source of green energy (by Canadian standards). Nova Scotia would be able to
cheaply reduce its carbon footprint by reducing its dependence on dirty coal. NL
sought to replace Holyrood thermal generation. Only a few “naysayers” ever took
pains to show that Holyrood, because of a brief period of operation even during the winter months, was a
polluter in the minor leagues and that other options were available — all far
cheaper and carrying far less risk than Muskrat.
which shared almost no risk, one far too large even considering Nalcor’s unrealistically high demand projections (now modified), offered the
promise of “clean” energy and “nation-building” too. What could go wrong?
seems, did anyone at the Federal level. McKay simply turned his attention,
first, to making sure that Nova Scotia had the right deal. For him, roadblocks within the Federal Government’s domain could easily be managed. Besides NL could be counted on to pull out any stops locally.
the deal Nalcor had negotiated with Emera. NL’s equivalency of the PUB demanded one far better. Wrote
“JM”, one of the most insightful analysts in this Province on the Muskrat Falls
project and a frequent contributor to this Blog:
morning of that day, the Utility and Rates Board of Nova Scotia (UARB) rejected
Emera’s application for approval of the Maritime Link (ML) stating the deal had
to be sweetened by $700 million to $1.4 billion (Net Present Value); otherwise
the construction of the Link would fail as the lowest cost option for that
later surrendered to the entirely predictable demands of the UARB in a revised
offer called the “Energy Access Agreement” (EAA) which committed virtually all
Newfoundland and Labrador’s surplus power to that Province at a price set by
auction in the New England States. This
capitulation by Nalcor secured one of the pre-requisites for the Federal Loan
Guarantee. However, in doing so, Nalcor
precluded the future allocation of firm power and energy from Muskrat Falls
from use for new industrial requirements in Labrador. It also undermined an
early argument used to justify the project.”
agreement at any price and release the FLG, JM added this prophetic
stating that Nalcor did not even possess the wherewithal to negotiate a
basement selling price, matching the minimum value the UARB sought in its
analysis of Nova Scotia’s lowest cost option.
It is a critical error; one that will cost NL taxpayers dearly should
New England prices further deflate due to the continued expansion of the US
shale gas industry.
wonder that Nova Scotia opposition to the project has been silenced?”
in no position to refuse the UARB’s demand. It didn’t want to, anyway. Seemingly,
CEO Ed Martin and his juniors salivated at the thought of counting themselves
among the ‘big boys’ of the utility game. Nova Scotia’s demands were
facilitated with access to as high as 48% of Muskrat power — more if it
prefers. It held no responsibility for cost overruns. The original 20 for 20
deal (20% of the power for 20% equity) grew to a pale imitation of what was
originally “sold” to Newfoundlanders. Nova Scotia’s investment now represents
only 11% of project costs, other backstopping agreements in Emera’s favour
fortune in dealing with a group with access to billions of dollars, who had already
spent hundreds of millions in advance of sanction.
million investment in the Labrador Island Link (LIL). Emera’s record of growth
and success suggests they had to know the calibre of the folks heading the MF project and gambled that the Feds would not permit NL to default.
the project, even to enter arrangements that took the pricing mechanism for
export power out of NL’s control, is as difficult to understand today as it was
in 2012. But that issue is no more opaque than Nalcor’s assumptions regarding oil prices or native demand or, for that matter, the Feds’ willingness to
ignore how much power could be virtually given away to Nova Scotia with the balance headed for a declining export market, while they, and NL, kept up the
pretense of Muskrat’s feasibility.
Government of Canada Given SNC’s “Buried” Risk Report?
prepared for Nalcor. That’s the one which CEO Stan Marshall informs us
was buried; the one that warned of a “very high risk” of multibillion-dollar-sized
overruns; the one that the company states was presented to former CEO Ed Martin,
evidently having received it with clenched fist.
Government’s agent on the project?
corruption inquiry is, again, tired of light work and can be employed to ask some
tough questions, including some of the ones mentioned. “Under oath” does have a
certain ring, doesn’t it?
Nova Scotia, but Quebec and Ontario Benefitted From Muskrat, too
No one should think that all the benefits of the Muskrat Falls
project triggered by the FLG stayed in NL. “Projected Benefits to Canada,” according
to the tract which Nalcor gave the Feds in pursuit of the “enhanced loan
guarantee,” reminded them that beyond the 4.5 million tonne reduction of CO₂
already cited, the project would deliver $950 million in federal taxes. It
would represent $1.2 billion to labour and business in Ontario and $1.2
billion in Quebec. The project represented 18,000 person years of employment
in Quebec; over 8 years. That’s 2200 full time jobs. A similar estimate of
17,000 person years of employment went to Ontario.
provided only token resistance to the FLG.
It was not about the mines; likely someone realized that the 2200 jobs
created for Quebecers were real and that there might be future consideration, possibly even an Atlantic electricity corridor.
billions to Upper Canada. JM understood what unions, business and governments were too arrogant – or dumb – to take notice of, that the NL economy was already overheated: short on labour and
suffering severe wage inflation.
Related to this Post
Public needs to go to war first with Ball, then Feds
The culpability of the Government of Canada manifested in many ways: in matters financial, economic and environmental. Strangely, they exhibited no concern that Newfoundland’s Crown Corporation, Nalcor, was singularly unsuited to the task of building the project or that the assumptions on which it was predicated were, without exception, faulty. With blinkers on, it watched idly as risks to the Federal Loan Guarantee increasingly became apparent. Some may view such a comment as an invitation to
paternalism. But whether offered by a government or a lending institution,
when is a lack of adequate oversight on $5 billion or $7.9 billion not cavalier?
its interests; it was a condition precedent of the Term Sheet.
Otherwise, the economic
development context given the Loan Guarantee, like the presumption of its economic viability, was an “untruth” to which all, including the Feds and NL, wittingly agreed to be parties, even if irresponsible ones. That is the long and the short of it.
“write-off” of the Muskrat Falls’ debt is on the table, even if most people – and both Governments – are hiding under it.
Essentially, denial is all that left for the parties to this debacle. Eventually a bewildered public will force the Feds to own up, even if the Provincial Government, for the narrowest of partisan reasons, doesn’t want to. The real question that remains is this: if the Provincial Government won’t, is the public politically mature enough to insist that the conversation is held now, rather than wait for the troubles to pile up?