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Critic in charge

Critic in charge

Why Stan Marshall was the CEO Nalcor needed, and what that means for Muskrat Falls

Technically, Stan Marshall didn’t use the word “boondoggle.”

The new head of Nalcor Energy, Newfoundland and Labrador’s energy corporation, was asked by a reporter during a media briefing in June if Muskrat Falls — the province’s hydroelectric project, billions over budget and years behind schedule — was indeed one. Marshall, not known for mincing words, simply said: “Yes. Right now, it is. My task is to ensure that in four years, it will not be.”

Not that reporters at the June briefing — Marshall’s first since becoming the CEO of Nalcor, Newfoundland and Labrador’s Crown energy corporation — were at a loss for soundbites afterwards. Marshall was unsparing in his assessment.

“Muskrat Falls was not the right choice for the power needs of this province,” got right to his point, as did, “It was a gamble, and it’s gone against us.”

Marshall, appointed by Liberal Premier Dwight Ball during a messy divorce from Nalcor’s previous CEO Ed Martin and board of directors, has never been a fan of the project. The former CEO of Fortis Inc., Canada’s largest gas and electrical distribution company, had said, in 2011, that Fortis passed on investing in the project.

“We do not get involved with minority situations with Crown corporations,” Marshall told reporters at the time. For Marshall, the aversion to minority interests was simple: “When things go wrong, we’d like to be able to rectify them,” he said, adding that the agenda of a government project can be “very, very different” from a private enterprise.

Not that the provincial government will be pulling the plug on the project. Even Marshall has acknowledged that’s not an option, with the $6.7 billion already spent or committed to with the provincial government, not to mention the 35 years of free power Nalcor is contractually obligated to provide to Emera.

St. John’s blogger and longtime Muskrat Falls critic Ed Hollett puts the point of no return earlier than the project’s 2012 sanction, earlier than Nalcor’s deal with Emera, earlier than any money being spent on the project at all.

“Oct. 22, 2003,” Hollett told Atlantic Business Magazine. That was the day after the election that brought the Progressive Conservatives to office. “Since Danny Williams became premier, it’s been impossible to stop this. He’s been hell-bent on doing this.”

Stan Marshall

The Lower Churchill project was never about supplying the province’s energy needs and always about politics, says Hollett. “It was never, ever about actual consumer need,” he said. “It was always a political project driven solely by issues that had nothing to do with supplying electricity to consumers in Newfoundland.”

Not true, said Williams in July, speaking up in defence of the project for the first time since Marshall’s hiring.

“This is a legacy for the people of Newfoundland and Labrador,” he said. “In my opinion, I’ve done OK, so my legacy was established. I didn’t have to risk it on something I thought was risky. I’ve come out and said I’d put my money in this. I think it’s a good investment, I think it’s good for the people of the province.”

It’s impossible to discuss the justification for the Lower Churchill project without mentioning the Upper Churchill, and the contract the Newfoundland government signed with Quebec in 1969 that sees la belle province get the bulk of profits from the electricity generated upstream; in 2010, when the Lower Churchill deal was reached, figures from the provincial government indicated Quebec had made more than $19 billion in profit from the Upper Churchill, with Newfoundland and Labrador earning just $1 billion.

The Upper Churchill agreement is a deal that doesn’t end until 2041, a deal that has been unsuccessfully challenged in court — and challenged again — by Newfoundland and Labrador, a deal that is still spoken of darkly in the province by participants and spectators in the political arena.

In August this year, Nalcor lost its appeal of a 2014 court ruling that was the latest attempt by Newfoundland and Labrador to escape the long-lamented arrangement.

The Quebec Supreme Court did not agree with the Churchill Falls (Labrador) Corporation, a subsidiary of Newfoundland and Labrador Hydro, that the contract represents “an abuse” of the Newfoundland and Labrador people.

“Were the court disposed to grant the relief sought by CFLCo, it would effectively be disregarding one of the principal benefits negotiated and received by Hydro-Québec in consideration of its assumption of the various financial risks and costs associated with the project, that of future cost certainty and protection from inflation in operating costs,” wrote justice Joel Silcoff in the 2014 decision.

“The court cannot disregard the will of the parties, as it is being asked to do, relying on some nebulous overriding principle of fairness or good faith in the circumstances in order to require Hydro-Québec to share with it the alleged ‘windfall benefits.’”

Muskrat Falls site

The Quebec Court of Appeal issued its ruling Aug. 1, siding with Hydro-Québec . “The uncontradicted evidence established that the parties knew that the value of hydroelectric power was likely to fluctuate and have voluntarily agreed to fixed prices for energy,” wrote the judges.

The 1969 agreement is also a deal that former premier Williams often cited as a reason why he became involved in politics in the first place, and one he futilely pressed to have renegotiated in 2009 — a long shot at best, given the court decisions upholding the deal. In the wake of the Lower Churchill deal, Williams said Muskrat Falls would eclipse the Upper Churchill agreement.

“(Today) is the day, hopefully, when Newfoundlanders can finally let go of the Upper Churchill and say, ‘Done. It’s over,’“ he told reporters at the time. Tellingly, though, Williams immediately demonstrated that letting go is easier said than done.

“A word of caution: We’re not giving up on redress,” he added.

Even in 2010, the scope of the project had been scaled back considerably from its original conception, which was to have seen an even larger hydroelectric project built at Gull Island, between Muskrat Falls and Churchill Falls, first. Gull Island isn’t in the cards right now, but as recently as last year, then-energy minister Derrick Dalley said the estimated cost of the Gull Island portion was $12 billion.

Hollett said scaling the project back was a clear sign of a problem.

“Nalcor and Williams turned around the definition of the project and said, ‘Well, we’re going to build the little dam first,’ the one that had never really been studied,” he said. “We’ll call it building the little one first and we’ll build the big one second, but the reality was that they couldn’t sell any power, they couldn’t finance it themselves, they couldn’t afford to build Gull Island, which was the one that always made the most sense, so they created Muskrat Falls.”

After Williams’ departure from provincial politics at the end of 2010, said Hollett, Muskrat Falls became a “giant make-work project” for the province, instead of one that needed to be done, and that problems with the project bear out Nalcor’s inability to do the job properly.

Hollett points to Nalcor’s problems with lead contractor Astaldi, which signed a $1.1-billion contract to build the project’s powerhouse, which is months behind schedule.

A report by independent consultant EY released in April highlighted the problem: Nalcor’s contract with Astaldi tied payments to labour costs instead of performance, as in cubic metres of concrete, leaving Nalcor vulnerable to potential overruns.

“This mechanism did not capture the potential for poor contract management of labour and the consequent decoupling of labour paid for from work completed,” reads EY’s report. “As of December 2015, the proportion of contract value paid to the contractor is significantly greater than the proportion of the concrete that has been placed.”

When questioned about the contract by the St. John’s Telegram, Martin defended the contract, which he said would “drive efficient use of labour.”

But at Nalcor’s 2015 annual general meeting, Martin was asked if the Astaldi contract was a fixed-price contract, and Martin said it was. “They get a unit amount for every bit of concrete that they install,” said Martin. “So it’s called a unit-rate contract. Provided we don’t change the engineering specs, it’s essentially a fixed-price contract.”

Former premier Paul Davis, elected in 2010 as the Lower Churchill was being touted as the deal for Newfoundland and Labrador to get out from under Quebec’s thumb, said the new Liberal government needs to go to the federal government to extend the federal loan guarantee, which would help keep financing costs down.

“It was estimated that the loan guarantee was going to save a billion dollars off the project,” he told Atlantic Business Magazine.

That might not be as simple as it sounds. The federal government has already guaranteed $6.3 billion in bonds for the project (including $1.3 billion for the Maritime Link transmission line being built by Emera); and being asked to guarantee another $4 billion may be a hard sell. The province brought down an austerity budget in May, with a second fiscal update in the fall expected to bring more bad news. Moody’s Investors Service in July downgraded Newfoundland and Labrador’s credit rating from Aa2 to Aa3, the lowest rating in the country, citing the province’s “exceptionally high” debt-to-revenue ratio and years of projected deficits contributing to rising debt.

Prime Minister Justin Trudeau, leading a Liberal government bringing down its own deficit budgets, may be wary of tying the federal government closer to Muskrat Falls. But if the project collapses — and even Marshall, on the record with his criticisms of the project, says cancelling it is not an option anymore — the federal government will have to be accountable to the bondholders.

But in Muskrat Fall’s favour, points out both former premiers, is Trudeau’s recent hyping, at the Three Amigos summit with U.S. President Barack Obama and Mexican President Enrique Pena Nieto, of the wish to source half of the countries’ energy requirements from green sources like hydroelectricity.

“Last year, when I hosted the Canadian premiers here, all the Canadian premiers came to an agreement on a Canadian energy strategy, which deals with sharing movement and opportunities across provincial boundaries that could have a positive impact on other neighbouring provinces,” said Davis.

Williams said Muskrat Falls will put Newfoundland and Labrador in a prime spot to benefit from other jurisdictions looking to get more of its power from renewables.

Danny Williams

“They’re saying that North America is going to be 50 per cent green by 2025,” he said. “Well, that’s not coming from windmills. Hydro’s going to be a big part of that, and we have now opened up access to these markets by going our own way.”

And, as Davis notes, if the federal government is concerned about the project collapsing, extending the loan guarantee will help ensure that doesn’t happen.

“The overall result would be a benefit to the country, I believe,” he said. “(Trudeau) has been very supportive. One of the very strong branches of his campaign and prime ministerial office has been about green energy, helping the environment and so on, and this is a green project and a great example of where he can demonstrate his committee to green energy.”

Williams was confident the project would not be stopped. “That’s like getting your house half-up and then deciding, well, no, I’m going to stop and just leave a shell there and let the rain and everything else come in on it,” he said.

The Newfoundland and Labrador government is, naturally, pursuing the option of an extended loan guarantee. Finance Minister Cathy Bennett confirmed in an interview with Bloomberg News the Province and Nalcor have spoken about that possibility with her federal counterpart Bill Morneau as well as federal Natural Resources Minister Jim Carr.

“We certainly are looking for the federal government now to see if they would be willing to revisit the loan guarantee,” said Bennett. “Hopefully we’ll hear something later on this year as to the federal government’s position. I’d certainly be very optimistic.”

That extension will be important in preventing consumer power rates from soaring, which Marshall says is his top priority.

“We have four years in order to address the rate,” he said in June. “A lot of things can be done in four years that can’t be done in the two months I’ve had so far. So I’m going to step back and think.”

Marshall added that equally important in keeping rates down will be talks with Emera and Hydro-Québec; the Nalcor CEO doesn’t appear to share Williams’ ingrained mistrust of Hydro-Québec, saying he wants to “establish a normal business relationship” with the utility.

Davis said he’s been encouraged both by Marshall’s decision that the project should continue to move forward, as well as his focus on keeping rates down. “I’m sure Mr. Marshall is going to look at all of the opportunities that exist: Building markets, building sales, partnering with other jurisdictions, and also managing the project from a perspective where you keep costs low, keep it effective.”

A June poll by Corporate Research Associates said 54 per cent of respondents completely or mostly support the Muskrat Falls development, down from 65 per cent in May 2015. On the flip side, 35 per cent of respondents said they mostly or completely oppose the project, up from 29 per cent in the previous poll.

Williams attributes some of that to Marhsall’s frankness. “The worst thing we could be doing now, while oil prices are down and load is down, in panicking,” he said. “Because any company worth its salt in the world, including Hydro-Québec or anybody else, would love to come in and pick this up when the current CEO is saying it’s nothing but a boondoggle and never should have been built in the first place.”

It’s particularly troublesome, said Williams, given the provincial government’s desire to have the loan guarantee extended. “Why this wording, and this attitude is going on from the person who’s running the corporation is beyond me,” he said, noting that Marshall was opposed to the project from the outset.

“So we now have somebody in charge of this project who never agreed with it in the first place. So he’s not going to go in, obviously, and publicly change his mind overnight.”

Willams reiterated his defence of the project — as he has every time he’s been asked about it for years. “This is a good project, and I can guarantee you people will be lined up to gobble it up if anybody ever tries to parcel it out or tries to sell it,” he said. “And my concern is that impression might be given out there.”

And while Williams stresses his defence of the project isn’t a partisan one, Davis placed the blame for declining public confidence on the Liberal government’s shoulders.

“The public faith in our current government has been lost, and has been significantly impacted over the last few months by a large number of decisions and actions that the government has taken, or inactions, depending on what it is,” he said. “And I think that’s impacting everything that the government is involved in. If people have lost confidence in our premier, in Premier Dwight Ball and the government, then every time you raise any matters about anything that involves the government, then people are going to question it, and I think that’s probably been a big impact on it.”

But Natural Resources Minister Siobhan Coady said there’s more scrutiny because the Liberals are being more open about the project than the PCs were, adding the EY report also provided recommendations on greater oversight that the government is implementing.

“The former administration sold this project to the people of the province as a best-case scenario, and they sanctioned using the best-case scenario,” she said, adding that the $11.4 billion (and possibly counting) pricetag and its effect on rates is concerning to the province’s residents. Marshall’s straightforwardness is part of the greater openness the Liberals have pledged, said Coady.

“We committed to opening the books on Muskrat Falls,” she said. “We committed to being comprehensive and transparent in all that we do, and I think what you’re seeing is this government fulfilling that. We inherited this project, we’re trying to ensure it’s managed in the most effective way possible to completion.”

As the project lumbers to its conclusion, the goal is to prevent the pricetag from continuing to spiral upwards, and to prevent Newfoundlanders and Labradorians from rate shock as their power bills go up to pay for the project, she said.

Marshall’s first big move as Nalcor’s CEO was to split Muskrat Falls up into two components: one focused on power supply-transmission-related activities; the other on power development-completion of the Muskrat Falls facility itself. Marshall said he hoped the division would help Nalcor focus on the project’s priorities and “improve performance and execuction as well.”

Marshall also said that despite the cost overruns and delays, there would no major personnel changes at Nalcor. He appointed Gilbert Bennett, then vice-president of the Lower Churchill project, as executive vice-president of power development, and John MacIssac, then-president of N.L. Hydro, as executive vice-president of power supply. He also brought Jim Haynes, who retired as president of N.L. Hydro in 2013, back into his old position.

Davis said Marshall’s support of Nalcor’s personnel is significant. “Mr. Marshall has kept the team in place that was there with Mr. Martin,” he said. “He’s made a structural change in how the project is being developed and how it operates, but key players that are there, he’s kept in place, and I think that speaks of the confidence he has in the people who have been developing the project from the start.”

Marshall says he’s got four years to make the project less of a burden to taxpayers, and he plans to look at all possible ways — whether it’s exploring markets or other ways to use the facilities.

With the transmission line scheduled to be finished two years ahead of the generating facility, said Marshall, there’s no reason not to use that transmission line for recall power from the Upper Churchill.

“That’s the cheapest source of power we’ll have if we utilize the line, because the line’s already there,” he said. “That’s one thing we can do in two years, that’ll help bring down the costs, in some way, on Muskrat, because we’d apply it to the project.”

Nalcor’s Muskrat Falls problems have also raised questions about what the delay would mean for partner Emera.

Emera has had its own troubles with building the Maritime Link; in July, it replaced contractor Abengoa, because the Spanish company’s financial troubles (it filed for creditor protection earlier this year) were, said Emera, hampering productivity.

However, Rick Janega, president and CEO of Emera’s Newfoundland arm, told Atlantic Business Magazine that the company is stepping up its work to hit completion in 2017 as scheduled. “We have three very good contractors engaged in our power-line transmission construction,” he said.

Even with delays on the Nalcor end of the project, said Janega, the Lower Churchill project will still allow Nova Scotia to meet its green energy targets. “In 2020, Nova Scotia has to increase its renewable energy content, and the target is for 40 per cent renewable,” he said, adding that wind-generation projects have helped the province to its current level of about 25 per cent renewable. “With Muskrat Falls’ last units coming on in 2020, we still believe that Nova Scotia will be in a position where they can clearly meet their objectives.”

Marshall told Atlantic Business Magazine in late July that there has been “significant progress” in negotiations with Astaldi, and in early August Nalcor announced that it had reached a “bridge agreement” with the company, which will see Astaldi continue work on the project. The details of the agreement are confidential, and Nalcor and Astaldi still need to hammer out a final commercial agreement by the end of the year. A press release from Nalcor said the new agreement sets out firm production targets and financial incentives to continue construction of the powerhouse.

Marshall couldn’t say when a final agreement would be reached, but cautioned against expecting any quick fixes. “It took three years to dig into the hole that we’ve dug ourselves, so we shouldn’t expect to climb out very quickly,” he told Atlantic Business Magazine.

For Marshall, big-picture cost mitigations like the loan-guarantee extension are for the province to work on, while he focuses on the immediate challenges. “My approach is rather that sort of sit down and try to negotiate grand-scheme things, I take it a step at a time.”

But with only so much that can now be done to keep costs down, Marshall is also keeping his eye on the revenue side of the ledger, noting that the province will need only about one-third of the power Muskrat Falls will generate.

“My task is to rethink this, and see if we can get something for the two-thirds, and see if those transmission units can be used by others, or if we can use them a different way. Can we now use those facilities to supply the Maritimes, to get more money for our product? That’s the bigger project.”

Williams said Muskrat Falls’ problems are short-term challenges that shouldn’t detract from the long-term benefits of the project.

“You don’t want to see costs go up, but that’s a fact of life,” he said, ticking off other large projects — such as the Hebron oil project and Long Harbour nickel processing plant — that went well over budget. “Now, that doesn’t justify it or make it right, but big projects go over.”

Williams recalls similar criticism early on of the Hibernia oil platform, and contrasts it with a recent statement by the president of Exxon Mobil Canada that suggested Hibernia is the company’s “crown jewel.”

“This is a half-century to a century project,” said Williams. “You cannot take it five or six years later and go, ‘Uh-oh, it’s July 2016 and the numbers aren’t exactly the way we thought they were going to be.’ Well, average this out and look at it in 10, 20, 30, 50, 60 years, and I’m willing to bet that this will be probably one of the biggest deals, and the cheapest deals, ever done in the country.”

Feedback: dchafe@atlanticbusinessmagazine.com
@AtlanticBus; @DanMacEachern; #PowerPlay

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