Nova Scotia escapes Muskrat Falls fallout
If there’s a ray of sunlight escaping from the voluminous report of the commission of inquiry into the Muskrat Falls project, it shines on Nova Scotia. The six-volume report lays out, in painstaking detail, the multifarious errors and omissions that contributed to decisions to proceed with the project, even as its true cost was galloping ahead of the estimated cost. The project was approved by the former PC government of Newfoundland and Labrador (N.L.), and proceeded based on an estimated construction cost of about $6.2 billion. The estimate included the cost of building the Muskrat Falls hydro project on the Lower Churchill River, power transmission from Labrador across the island of Newfoundland and the Maritime Link to carry power from Newfoundland to Nova Scotia and beyond. But the actual cost of the project now tops $12.7 billion, including financing costs of about $2.6 billion. That horrendous cost overrun gave rise to the commission of inquiry, led by N.L. Supreme Court judge Richard LeBlanc, who released his report – all 1,800 pages of it – this week. Nova Scotia-based Emera, owner of Nova Scotia Power, is a partner in the project and built the Maritime Link. The deal between Emera and Nalcor, the N.L. Crown corporation that developed Muskrat Falls, has been called the “20-for-20” agreement, whereby Emera gets 20 per cent of the power and contributes 20 per cent of the project’s cost. Except, Emera agreed to contribute 20 per cent of the estimated cost, not the true cost. “Based on the latest cost estimate for the Project, Emera will get 20 per cent of the energy provided (by Muskrat Falls) but pay only 12.1 per cent of the total costs, so the “20-for-20” principle no longer holds,” LeBlanc writes in the report. Emera effectively met its 20 per cent obligation with the completion of the Maritime Link at a cost of about $1.75 billion. In addition, in the summer of 2013 with the project already announced, Nova Scotia’s Utility and Review Board (UARB) withheld approval of the Maritime Link because, “without some enforceable covenant about the availability of the Market-priced Energy, the (Maritime Link) Project does not represent the lowest long-term cost alternative for electricity for ratepayers in Nova Scotia.” That ruling had the potential to scuttle the entire project. UARB approval was required for Nova Scotia to participate, and a federal loan guarantee was contingent on participation of more than one province. Plus, the Maritime Link was vital to get excess power to market, both in Nova Scotia and beyond. To meet the UARB’s requirement, Nalcor and Emera negotiated the Energy Access Agreement that ensures Nova Scotia Power has access to market-priced power generated by Muskrat Falls. The EAA has been described as giving NS Power the right of first refusal to any surplus power generated by the project. The agreements between Nalcor and Emera run for 35 years, after which Nalcor takes ownership of the Maritime Link. But in the meantime, Nova Scotia gets 20 per cent of the power from Muskrat Falls for an upfront cost equivalent to just over 12 per cent of the project’s cost. And, the EAA gives Nova Scotia Power first call on any excess additional power. By virtue of those deals, Nova Scotia’s electricity ratepayers are protected from power rate shocks resulting from Muskrat Falls’ cost overruns. The same can’t be said of power users in Newfoundland and Labrador who, as the commissioner pointed out, “are responsible for repaying the cost of the project through electricity rates and so face the prospect of greatly increased power bills when the project comes online.” The commissioner concluded that Muskrat Falls is a classic and costly case of putting the cart before the horse. “The decision to pursue the Lower Churchill Project ought to have been the conclusion of a rigorous analysis. Instead, a rigorous analysis was not performed because of the decision to pursue the LCP,” LeBlanc writes. His report is a both an indictment of officials who failed to speak truth to power, and a cautionary tale for those undertaking megaprojects. Nalcor’s low-ball estimate of the project cost – upon which the N.L. government based its decision to proceed – was influenced by optimism bias, strategic misrepresentation and political bias, the commissioner wrote. Optimism bias happens when hope for a successful project leads a proponent to overestimate benefits and underestimate difficulties. Political bias or strategic misrepresentation occurs when project teams want their projects to be approved, so they deliberately exaggerate benefits and understate costs. All of those fatal flaws were at play in the decision to proceed with Muskrat Falls. Jim Vibert, a journalist and writer for longer than he cares to admit, consulted or worked for five Nova Scotia governments. He now keeps a close and critical eye on those in power.