Our continuing concern with the Muskrat Falls project hinges on the high risk it imposes on the people of the province, as ratepayers and taxpayers. These concerns have been heightened by recent developments.
The first is the commitment of substantial amounts of additional power to Nova Scotia. The Utility and Review Board (UARB) of Nova Scotia, in its July 22 decision, had demanded as a condition for their approval “market-based” energy additional to the first “Nova Scotia block” already committed to Emera by Nalcor.
This first block amounts to 20 per cent of the energy output from Muskrat Falls for 35 years, beginning in 2017. The draft agreement between Emera and Nalcor, filed with the UARB on Oct. 21, calls for the commitment of at least another 24 per cent of the energy production at Muskrat Falls, rising potentially to 37 per cent or more, over a 24-year period, also beginning in 2017. The result is that 44 per cent to 57 per cent of Muskrat Falls power will be committed to Nova Scotia at spot energy rates that are too low to recover the full transmission and generation costs.
Nalcor has, inexplicably, adopted a policy where export revenues will not be used to reduce domestic rates. The spot market rates charged to Emera will cover only a small fraction of transmission and generation costs. The sale of 44 per cent to 57 per cent of Muskrat Falls energy to Nova Scotia will raise the rates charged to Newfoundland ratepayers, who must pay the full cost of the energy which they will consume, as well as most of the cost of supplying energy consumers in Nova Scotia. Other risks arising from the proposed agreement with Emera include the following:
• This sale of more than 44 per cent of the output of Muskrat Falls will make it difficult for Nalcor to supply their projected local load (Nalcor Exhibit 6B and November 2011 submission to the Public Utilities Board), which did not include growth in demand from new mining projects in Labrador.
• Nalcor is likely to have to build additional high cost generation capacity to meet its obligations to Emera.
• Nalcor must contribute 80 per cent of any cost overruns on the Maritime Link up to the finalization of project cost estimates, which has been delayed by Emera into the New Year.
• Delays in finalizing this agreement will likely delay the “financial close” of the federal loan guarantee. Such delay increases the escalating financial risk to Newfoundland and Labrador.
• We have concerns with the lack of an agreement with Hydro-Québec relating to water management on the Churchill River. NSMPL (Emera’s wholly owned subsidiary) told the UARB there was no risk arising from problems with water flow on the Churchill River and that, “If the energy is not delivered, Nalcor is liable to pay compensation damages to Emera.” (UARB decision of July 22, 2012)
• This draft agreement fundamentally alters the Muskrat Falls proposal as presented to our PUB and demands a reconsideration of the merits of the project.
The second troubling development is the award of a $1-billion contract.
On Oct. 9, Nalcor announced its selection of Astaldi Canada Inc. to construct major civil works, including the construction of the powerhouse, intake, gated spillway and other work. Negotiations are expected to conclude shortly.
Such a massive commitment will make it virtually impossible to turn back. The time has come for an assessment of the cost overruns to date. We recommend that this contract not be awarded until a complete review has been undertaken and made publicly available.
Independent review required
In light of escalating costs, the increasing scale of the commitment to Emera and the uncertainty with respect to the federal loan guarantee we recommend that the government commission an independent financial adviser to review cost variances and commit to tabling the results in the House of Assembly. The terms of reference for the review should cover:
• The revised project cost for completion, based on variances between cost estimates and the value of contract awards, along with an accounting of total commitments and expenditures to date. The House of Assembly should also receive the reports prepared by the independent engineer appointed under the federal loan guarantee agreement.
• The financial consequences to the province of satisfying the conditions imposed by the UARB of Nova Scotia, including the impact on electricity rates in Newfoundland and Labrador.
This report to the House should be completed before Christmas. Until this report is completed and considered by the House of Assembly there should be a moratorium on all further work and the contract with Astaldi should be placed on hold.
The premier owes the people of the province a level of transparency no less than that enjoyed by the people of Nova Scotia. On Oct. 22, one day after the filing, the UARB announced the process for public participation to review the tentative agreement between Emera and Nalcor, pursuant to paragraph 230 of the July 22 decision. This process includes a technical conference to be held within the next few days, along with hearings early in November, at which intervenors may raise questions.
There is no mechanism for such a review here, notwithstanding the painful fact that the stakes for us are enormously greater than those of Nova Scotia. Emera has not started work on the Maritime Link, while Newfoundland and Labrador has committed billions of dollars on a project which was rejected by a joint federal provincial panel of experts and failed endorsement by our own PUB.
We call upon all political parties and the concerned public to ensure that our House of Assembly is provided with answers to all the questions we have posed. Further expenditures should be suspended until that occurs.
Ron Penney, is a former provincial deputy minister of justice and former city manager for the City of St. John’s. David Vardy, is former clerk of the Executive Council and former chair of the Public Utilities Board. They write from St. John’s.