Re: Submissions of the Muskrat Falls Concerned Citizens Coalition regarding a request for suggestions of potential topics for Phase III of the Inquiry.Read Now
February 22, 2019
Commission of Inquiry Respecting the Muskrat Falls Project
5th Floor, Suite 502, Beothuk Building
20 Crosbie Place, St. John’s, NL A1B 3Y8
Re: Submissions of the Muskrat Falls Concerned Citizens Coalition regarding a request for suggestions of potential topics for Phase III of the Inquiry.
Thank you for the opportunity to provide suggestions on potential topics and witnesses for Phase 3 of the Inquiry.
The following are our suggestions:
THE NORTH SPUR
At paragraph 41 of the Commissioner’s decision on the Terms of Reference he states that “I must consider whether appropriate or proper consideration was given and actions taken regarding potential risk to the environment, human safety and property relating to the stability of the North Spur and methyl mercury contamination.”
We have provided you with a copy of a report prepared by Dr. Stieg Bernander and Dr. Lennart Elfgren in response to a peer review of their earlier work on the North Spur.
We had hoped that they would have been called during the second phase given the Commissioner’s statement above.
They submitted their report to the Minister of Natural Resources on October 2, 2018 and recommended that an independent review panel be appointed to review the stability of the North Spur. There has been no response from the Minister.
We ask that you set aside time during phase 3 to hear their concerns. Given that the reservoir will be filled this Fall it is important that their concerns be given a public airing at the Inquiry. Perhaps members of the Nalcor appointed peer review committee could be called to respond.
At paragraph 44 of the Commissioner’s decision on government oversight he notes that as part of the oversight of government he will examine “the governance models employed” by both government and Nalcor.
This issue is also canvassed in paragraph 48 of the decision where the Commissioner refers to “governance and transparency issues related to public accountability.”
It is evident that there was considerable deference shown to Nalcor by senior government officials.
The Inquiry has engaged expert opinion on the governance of crown corporations but not on public administration.
We suggest that an expert in public administration be engaged to provide an opinion on best practices in public administration with particular reference to the relationship between the public service and crown corporations who propose major public works projects.
Both Mr. Vardy and Mr. Penney have had extensive public service experience at the highest level and would be happy to participate in a round table with the author of such an expert report.
BALANCING RATEPAYERS’ INTERESTS WITH THOSE OF TAXPAYERS
At paragraph 49 of his decision the Commissioner notes that section 5(e) of the Terms of Reference require him to “consider the need to balance the ratepayers’ interests with those of taxpayers in carrying out a large-scale publicly-funded project. He goes on to state that he takes “this to mean that the Commission must look to how to balance or apportion the financial costs of an electrical generation project like Muskrat Falls as between power consumers and all of the Provinces’ taxpayers.”
We recognize that following the calling of the Inquiry the government has referred a series of questions to the Public Utilities Board on rate mitigation.
However, the questions are all related to what measures can be taken to ameliorate the costs to the ratepayers but do not address what will likely be required from taxpayers. That will only be known once the PUB gives estimates on what revenues can come from the initiatives it suggests.
While we recognize that it will not be possible for the Commissioner to determine what that figure will be, given that the final report from the PUB will not be available to the Commission before it is due to submit its report, it is clear from the Reference question that it was anticipated that there would be a requirement for a contribution from the taxpayer, notwithstanding public comments to the contrary from the Premier last Fall.
As part of the answer to the reference question we believe it is important to understand what the fiscal capacity of the Province is to take on some of the financial burden of Muskrat Falls and what impact the project will have on the Province.
We ask that the Commission appoint an independent financial expert to quantify the “balance” described in section 5(e) of the Terms of Reference by measuring the allocation of costs and risks among the various parties to the Muskrat Falls project, namely the ratepayers of this province, its taxpayers, Emera Energy and the federal government, based on the agreements and arrangements at the time of project sanction and how the balance has now changed. This assessment should include the risks associated with the completion guarantee and with any indemnification or guarantees for which the province may be responsible as a result of the federal loan guarantee.
In undertaking this examination, we ask that the annual costs of the project, otherwise known as “revenue requirements”, be placed on a consistent and comparable footing, using the traditional “cost of service methodology” and not on the “escalating supply price” methodology which Nalcor has used to defer a large share of the cost of equity capital from early to later years. The expert should measure the costs and risks imposed upon the province through the use of the “escalating supply price” methodology for generation assets and compare it with those which would exist if the cost of service methodology which Nalcor has used for the Labrador Island Link were applied to the entire project.
Both Nalcor and the government of Newfoundland and Labrador treated the project as self-supporting. The expert report should measure the likely revenues from rates and assess the prospect that the project will be self-supporting. Finally, we ask that this review provide an assessment as to how the project impacts on the overall financial position of the province and its credit ratings, particularly if the project is not self-supporting.
Fortunately, we have had reports from our Auditor General and the Parliamentary Budget Officer on the state of our public finances and our long-term financial sustainability and we suggest that they be invited to present their findings to the Inquiry during Phase 3 along with the report of the independent financial expert whose work is described in the previous paragraphs.
Finally, we have heard evidence presented during Phase II which confirms that the Government did not undertake a Risk Assessment of the Muskrat Falls project on the provincial treasury. A focus of discussion during Phase III ought to place a spotlight on Risk and the necessity for governments to undertake risk analyses in relation to decisions to invest in large-scale projects, whether hydro, oil and gas or others, taking into consideration our (limited) fiscal capacity, population size and demographic trends.
Trusting the above to be satisfactory.
Yours very truly,
BUDDEN & ASSOCIATES,
WILLIAM A.F. HISCOCK
COMMENTS ON THE RELEASE OF THE GRANT THORNTON FORENSIC AUDIT ON THE CONSTRUCTION PHASE OF THE MUSKRAT FALLS PROJECTRead Now
(February 18, 2019 – St. John’s, NL) As was the case with Phase One of the Muskrat Falls Inquiry, the construction phase of the Inquiry has commenced with the release today of the forensic audit conducted by Grant Thornton.
The audit sets the stage for the examination of witnesses crucial to the understanding of how the project went so badly wrong. Our detailed review is attached here.
EARLY WARNING SIGNS
The key finding of the forensic audit is that between the decision to sanction the project on December 17th, 2012 and the financial close of the project several months later, “bids were received from contractors whom ultimately were hired which collectively, exceeded the the DG3 budget by approximately $600 million, a 25% overage.”
The result was that the contingency set aside at that point of $368 million “was exhausted.”
When the project manager, Paul Harrington, was asked why Nalcor did not reexamine the cumulative present net worth (CPW) of the project given those facts, he responded “not my call.” When asked to clarify whose call it was he said “senior management [Ed and Gilbert] ...and Government.”
This is crucial because up to the point of financial close it was still possible to have given sober second thought to the wisdom of continuing with the project without incurring financial penalties other than the costs of some early contract awards. Once financial close occurred we were locked into completing the project.
This was an early warning that the project was going sour and we need to know who knew and why they didn’t exercise the due diligence which was owed to the taxpayers and ratepayers of the province.
The key questions are:
We expressed concern at a very early stage about the award of the main contract to Astaldi given the fact that this would be their first contract in North America and that they had never done a project in the north. As we now know our concerns were well placed. Their bid was an outlier, well below two bids from experienced Canadian contractors. And that contract accounted for almost one third of the cost-overruns, $1.2 billion.
In addition, the estimate of labour hours in the Astaldi bid was 6.82 million hours as compared to Nalcor’s DG3 estimate of 3.66 million hours, a difference of over 2 million hours.
THE TRANSMISSION LINE
The next largest overruns came from the transmission line contract with Valard , 20%, or $649 million. The original tendering strategy was to divide the project into four separate contracts, consistent with the approach used by Hydro Quebec. The forensic audit has revealed that no geotechnical work was done to support the estimate which in turn led to the use of an “open book negotiation” rather than the normal competitive tender process.
We look forward to hearing from the managers responsible for this project as to why there was only one contract and why the normal competitive bidding process wasn’t used.
ENGINEERING, PROCUREMENT, CONTRACTING AND MANAGEMENT (EPCM)
Originally it was planned to use SNC Lavalin as the EPCM contractor, but as we know from the first phase of the Public Inquiry that approach was abandoned in favor of an “integrated management team”, composed of the Nalcor Management Team and SNC Lavalin. The increased costs of the change amounted to another $406 million.
CORE MANAGEMENT TEAM
The forensic audit notes that “the core management team, with the exception of Ron Power, did not have any hydro experience.
The Muskrat Falls Concerned Citizen’s Coalition - General Meeting, February 13, 2019
Thanks for coming to our meeting either physically or through Facebook Live.
We have finished the first phase of the Inquiry, which has focused on the events leading up to sanction.
The second phase, focusing on the construction phase, will be starting next Monday in Happy Valley-Goose Bay. Similar to the first phase, this phase will start with the forensic audit conducted by Grant Thornton.
The witness list has just been released and I am confident that we learn a great deal about what happened to cause the project to be so over budget, just as we did during the first phase on what led up to sanction.
The first phase required a large volunteer effort by the Board to assist our lawyer, Geoff Budden, in preparing for his examination of witnesses.
We have access to all the evidence but given the overwhelming volume of materials we focused on the witness interviews conducted by Inquiry Counsel, which, for the most part, were only received a few days before a witness was called.
I want to acknowledge the work of Dave and Des, in this regard. Between the three of us we read every interview, as much of the documents as we could absorb and divided up attending almost every hour of the testimony.
We recently give it will be difficult for us to maintain that pace for the next phase and we hope that others, particular those with engineering and project management experience will step up and help us out.
We also had a small group of engineers work with us, some of whom wish to remain anonymous, and their help was invaluable in assisting Geoff in his preparations.
I want to thank Geoff for his excellent work. Some of the most important and dramatic incidents during the first phase came as a result of his examination, in particular the Commissioner’s outburst against Ed Martin. It was the highlight of the Inquiry so far for me!
Mr. Martin will return for the second phase and we, and Geoff, look forward to his testimony.
In addition the three of us were interviewed by the media many times during the course of the first phase which I hope helped in advancing the public understanding of the Inquiry and if the Inquiry.
Many of you will have seen my guest blog about my analysis of the first phase in Uncle Gnarley.
To summarize, many insults were thrown our way by Mr. Williams, a former Clerk of the Executive Council, Robert Thompson, and Ed Martin.
As I have said to my friends, being called a “bottom feeder” by Mr. Williams is a badge of honor. I have suggested to our Treasurer that we produce t-shirts from a design suggested by one of our members. An excellent fundraising idea!
My key insight from the hearings is that the communication skills of Mr. Martin, and his entree to the highest levels of government, overwhelmed the public service of the province, whose critical skills seemed to fail them on this key public policy issue.
We really depend on a knowledgeable public service, who can deal tactfully with politicians in telling truth to power.
The public service failed us badly and I hold them largely responsible for this public policy debacle. The politicians have the ultimate responsibility but our system depends on a strong public service, which there was no evidence of during the first phase of the Inquiry.
Nalcor controlled the flow of information going to the government, including so-called independent reviews and we learned that they successfully edited many of those reviews, with, in many cases, the support of senior government officials.
We have been asked by Commission counsel to make suggestions on the contents of Phase 3 of the hearings, which is a two week period which is expected to be less formal than the first two phases of the Inquiry.
We have until February 22 to provide suggestions and welcome any thoughts which you may have. Remember that they have to be within the terms of reference as interpreted by the Commissioner.
One of the key problems we have identified goes to the democratic deficit in Newfoundland and the lack of independent civil society.
We are so dependent on Government in all aspects of our life that there is a reluctance to enter in debate or to dissent.
So far the Commissioner has been reluctant to get into what is our fundamental problem but we may make another effort to convince him otherwise for this third phase.
Before concluding I would like to thank Geoff’s staff for all their help. Keisha Follett, has been great in getting all the information to us and doing so much for us over the past few months, and Wanda Lawlor for organizing our meetings with the Coalition. And, of course, Jenn Deon for creating our website and helping to organize our meetings.
Unlike the Province, the Coalition raised more money than it spent even if our success was modest. We had hoped to engage in a concerted fundraising effort but the demands of Phase I of the Inquiry dominated our time.
Still a number of donors responded to our invitation to contribute.
In addition, Cabot Martin agreed that the unused funds raised to fly Dr. Stig Bernander to the Province for his field work in Labrador and presentations here in St. John's, should be added to the account of the Coalition.
In all, $14,250. was raised. Expenditures amounted to $3,450. leaving a balance of $10,800 for continuing expenses of the Coalition.
As you know, the fees of our legal Counsel are paid by the provincial government.
Expenses by the Coalition relate to venue and set-up costs for events such as this and construction of our web site in relation to which I want to thank Tor Fosnaes for registering and paying for our domain name.
We did not use the site as well as we might have last year because the demands on our time, as interveners, simply did not leave time to do better communications except through the media or the Uncle Gnarley Blog. We are working towards using the web site more productively in the coming weeks and we have an offer of assistance to help make this happen.
The biggest need for additional funding is research. At times, the volume of witness interviews and other exhibits, some posted just a day or two prior to the appearance of a particular Witness, imposes a huge demand on our time and on that of the experts who also help with the material and who work pro bono.
At times, we have a need to research public statements by Nalcor officials and Government statements.
While we will continue to be niggardly over the expenditure of funds donated, on-going donations will be welcomed. Finally, we wish to thank all who have made donations and thank all our members for their support.