Post by Muskrat Falls Concerned Citizens Coalition Members David Vardy, Ron Penney and Des Sullivan
that the second phase of the Inquiry has begun it may be helpful to take stock
of where we are and what we have learned to date.
Here are fifteen key issues on
which the Inquiry Commissioner, Richard LeBlanc, must opine and about which the
public should be informed. We have not attempted to assign priorities to them
but we can say they that, while they are important, there are others issues that have been identified. We will
post them another time.
1. When the Muskrat Falls project was
sanctioned there was only a three per cent probability that the project would
be completed on time, based on evidence provided by Nalcor’s risk consultant
2. The joint environmental panel recommended
that the availability of Churchill Falls power in 2041 should be central in the
province’s energy planning. The evidence is that Nalcor did not include the
2041 option in its planning, nor did they include the prospect of buying power
from Quebec on an interim basis to bridge from the present to 2041.
3. Muskrat Falls was sanctioned without
the federal loan guarantee, whose completion took place at “financial close”,
November 29, 2013, almost a year after project sanction by the province on
December 17, 2013. In addition, it occurred only after Nalcor offered to supply
Nova Scotia with additional power as demanded by the Utilities and Review Board
of Nova Scotia. The federal loan guarantee depended upon sanctioning by Nova
Scotia which in turn was contingent upon UARB approval, given on November 29,
2013. It is worthy of note that the “Limited Notice to Proceed” (LNP) issued to
Astaldi took place on the date of Financial Close, namely November 29, 2013 –
which illuminates Nalcor’s lack of concern for the risks the project held for
the province (see #4 below).
4. Before financial close Grant Thornton
reported that bids for Muskrat Falls construction work were coming in 25%
higher than DG3 estimates. Yet there was no indication that this information
prompted reconsideration of the sanction decision before financial close took
place and before committing the province to an irrevocable commitment to finish
the project regardless of cost. In addition Nalcor did not communicate this
information on major cost overruns which could have led to reconsideration of
the sanction decision. The Minister of Natural Resources at the time, Derrick
Dalley, said he was not informed of the overruns.
5. No oversight was put in place to
trigger a reconsideration of the sanction decision on the basis of early cost
overruns nor was there consideration of entering conditional contracts for all
major components before sanction or financial close in order to increase the
level of certainty of costs and reduce risk. There is evidence that Nalcor had
been advised to adopt the practice of finalizing bids and securing firm cost
information from contracts before committing the province to providing a
guarantee that the province would supply sufficient equity to complete the
project whatever the cost may be, known as a “completion guarantee”. This
matter was raised by MFCCC counsel when questioning Nalcor witness Pat Hussey.
6. Grant Thornton concluded that their “findings
and observations indicate a potential understatement of costs at the time of
sanctioning of the Interconnected Island Option (Muskrat Falls Project) which
in turn would understate the CPW of this option.” (The CPW or Cumulative
Present Worth is a metric used to compare the two options on a present value
7. Nalcor spent over $140 million on the
proposed Gull Island Hydro project prior to Muskrat Falls Sanction. This is a
huge investment on a project which had not been sanctioned by government and is
indicative of the determination of the government of the day to build a project
on the Lower Churchill, with or without a viable business case.
8. The testimony from the Inquiry
indicates that government was determined to build a Lower Churchill project.
The shift from Gull Island to Muskrat Falls took place just before the Term
Sheet announced on November 18, 2010 when Nalcor and government concluded that
the Gull Island project was not ready for sanction. At that time the focus
shifted from the export of Gull power to the use of Muskrat Falls power for use
on the Island and to replace the thermal plant at Holyrood. In short, the
evidence suggests that the option having the lower financial risk to the
province (the Isolated Island option comprised of small hydro, wind and
thermal) was never seriously considered.
9. Despite Nalcor’s prediction that rates
would rise even if costs remained at the DG3 level of $7.4 billion (including
financing cost) and despite declining population Nalcor predicted that demand
would rise by 60% over 50 years. Nalcor has now dramatically reduced its
forecast of load growth. Without load growth it will be impossible for Nalcor
to recover the capital cost of Muskrat Falls. Grant Thornton reported that the
load forecast used in the sanctioning decision may have been overstated. They
went on to say “In addition, an overstatement in load forecast may impact the
decision of the need and/or timing of adding generation sources.”
10. The revenue requirements for Muskrat
Falls will greatly exceed estimated revenues, which may actually decline rather
than increase. Nalcor had wrongfully assumed that demand was highly inelastic
to rate changes.
11. When Muskrat Falls comes on stream the
cost of our electrical system will rival the cost of education, including
primary, secondary and post-secondary education. The annual cost of our power
system will rise from $800 to $1.6 billion.
12. Nalcor is using a system of accounting
which shifts the return on equity into the distant future and thereby
understates revenue requirements in early years. In the early years, even
without “rate mitigation”, the province will be heavily subsidizing the cost of
electric power. The prospect of future recovery of these subsidies is remote
without significant load growth. The unorthodox methodology adopted by Nalcor
was intended to reduce “rate shock” but it has the effect of shifting both cost
and risk to the province and understating the cost of the project.
13. The joint environmental panel called for
an independent financial review of the project. This review never happened. The
federal government was warned by concerned citizens that they should not give a
guarantee without an independent financial review. The 2012 review by the PUB
was based on inadequate engineering design because they had access only to the
DG2 cost estimates, which were based on less than 10% of the engineering design
being completed. The PUB was denied access to the DG3 cost estimates which it
needed to provide the advice requested by government. MHI was retained by
government to review the DG3 estimates but they were denied access to the risk
report prepared by Westney and did not review the business case of the project
or its financial viability.
14. Manitoba Hydro International (MHI)
admitted they had no mandate to review the business case for Muskrat Falls.
Evidence given at the Inquiry confirmed that a senior bureaucrat in the
Department of Natural Resources revised the drafts MHI Report leading
Commission Counsel, Barry Learmonth, to suggest that the language was
“watered down”. The “tone is much milder” he said. The
existence of a $500 million strategic reserve was also not disclosed to MHI
either. The MHI Report played a key role
in the Government’s public justification for Sanction of the project.
15. Neither the province nor the federal
government had an independent review available to them either before provincial
sanction or financial close, which took place a year later.