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Former Nalcor Energy CEO says there was nothing misleading in ‘strategic risk’ or schedule
Former Nalcor Energy president and CEO Ed Martin says the estimates for the Muskrat Falls project were “absolutely not lowballed,” regardless of any testimony at the Muskrat Falls Inquiry.
The man leading the Muskrat Falls hydroelectric project and Martin’s second at the time — Gilbert Bennett — has been on the stand at the inquiry hearings in St. John’s. Martin was at the Beothuck Building Thursday to listen to Bennett’s further testimony.
He also addressed news reports of project estimates being intentionally kept low.
It has been reported the costs were “lowballed” or misleading, in order to get an agreement on the Maritime Link transmission line to Nova Scotia. The Maritime Link led to a federal loan guarantee for the separate, but now regional, Muskrat Falls hydroelectric project, ultimately saving that project money.
Bennett was asked Monday by inquiry co-counsel Kate O’Brien about estimates and numbers put to Nova Scotia-based Emera for the Maritime Link.
She asked Bennett, “Do you recall one of the things that you did to address getting it below this threshold (for approval) was to either reduce the confidence level (in estimates) or somehow remove strategic risk amounts, or some of the tactical risk amounts — but remove any contingencies, reserve amounts, from the numbers in order to get it below that?”
“I’m acknowledging that’s what was done,” Bennett answered, adding that it was Martin’s decision on what the agreement would look like for Nalcor Energy.
Did Bennett misspeak? Martin told reporters he can’t speak to that.
Bennett could have been misinterpreted by inquiry lawyers, reporters and others following the testimony.
“Knowing Gilbert, I’m sure he was focused on the actual question at that moment. He’s a very focused individual. They were talking about the Emera negotiations. And taken in that context, we were doing things in the negotiating perspective. He was probably thinking about that. But I can’t say that with any certainty."
— Ed Martin, former Nalcor Energy president and CEO
Martin said he would place value as well on when the issue was raised again, in later questions on Wednesday from his lawyer, Harold Smith.
“There’s been a suggestion that there was a strategic risk removal at Emera negotiations in order to achieve the Emera deal,” Smith said to Bennett. “But we know from your evidence that strategic risk was never part of a budget given to the project management team.”
Bennett replied, “That’s correct.”
“Strategic risk” is risk outside of the control of the project team. Nalcor Energy never did include an amount for it in project estimates. Martin suggested putting any amount of funding for it out in the open can draw inflated claims to the project from contractors looking to get some of the money.
‘To address Emera’s concern’
During questioning, Bennett was taken to a Nalcor Energy document related to the project risk and budget. It was written by a Nalcor Energy consultant, Jason Kean, who stated Nalcor senior management decided to “drop the strategic risk exposure allowance of six per cent from the overall capital cost recommendations for both the Muskrat Falls and Labrador-Island Transmission Link projects (collectively, commonly referred to as just the Muskrat Falls project) in order to address Emera’s concern regarding its ability to sell the strategic risk concept to the Nova Scotia regulator, the Nova Scotia Utilities and Review Board (UARB).”
Kean could not say with certainty where he got that information.
From the perspective of Nova Scotia and Emera, the suggestion remained Emera’s estimates for the Maritime Link included at least some amounts to cover strategic risks — whether called that or not. A statement from former Emera president and CEO Chris Huskilson is clear that his company did not use “strategic risk” as a concept in budgeting, but included money to cover its risk.
During initial questioning and again on Thursday in re-direct, O’Brien said her reading is strategic risk was not covered by Nalcor Energy on Muskrat Falls. The two companies, in other words, would not have been working “apples-to-apples” in their understanding.
No dollar figure on strategic risk
On Muskrat Falls, Westney Consulting completed a risk analysis suggesting the Muskrat Falls project had about $500 million in strategic risk associated with it, recommending the amount be set aside in case issues emerged. As auditors with Grant Thornton told the inquiry, that value was not included in Nalcor’s estimates.
Martin told reporters the $500-million number isn’t a useful one. Identified risks, including some potential areas of risk highlighted by Westney, were largely mitigated, he said, by the time the Muskrat Falls project was sanctioned at the end of 2012.
Martin said he believed the project still faced strategic risks, but he did not have a dollar figure for it.
He told reporters strategic risk is “difficult to quantify.” He said he went to the government citing opportunities for the project to save money or earn money in the long run, suggesting that could counterbalance some or all of the outside risks that might emerge. He said the province knew what amount it was capable of handling financially. He said the government weighed the unknowns and knowns of the budget before giving its final approval.
On the idea the project was approved on a “P3” probability schedule — a high-risk schedule sure to fail — Martin said that just wasn’t the case. The numbers again go back to Westney Consulting. Martin said the consultant was running numbers on a simplified schedule with a limited number of line items, reflecting key dates and processes. Each line item has a range of when it could occur, of probability. He said the consultant was working with a schedule with the riskiest numbers, the extreme on each of those ranges.
The schedule actually used for the project was different, he said. It included a seven-day work-week as opposed to a six-day work-week, for example.
But as O’Brien also noted in her redirect, and as Bennett agreed on the stand, it meant there was no “quantitative risk analysis” to speak specifically to the schedule used when the project was sanctioned.
Martin is scheduled to be on the stand the week after next, Dec. 10-14.
He said he believes former premier Kathy Dunderdale’s understanding of the issues raised matched his at the time of the project’s approval. She is scheduled to testify Dec. 17-20.