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We will pay dearly for Muskrat Falls


Media reports of the announcement by Nalcor CEO Ed Martin on Sept. 9 that the cost of the Muskrat Falls project has increased referred to a 10 per cent increase. However, since the project was announced in November 2010, the cost has actually increased by 46 per cent, from $6.2 billion to $9.05 billion, a difference of $2.85 billion.

The capital cost of the project as announced in 2010 and presented to the Public Utilities Board in November 2011 was $5 billion. Nalcor’s estimate of financing costs during construction provided to the PUB in 2012 was $1.2 billion, for a total of $6.2 billion. These cost estimates were Decision Gate 2 (DG2) estimates, based upon Class 4 estimation procedures with only 10 to 15 per cent of the engineering design work completed.

We believe these DG2 cost estimates constitute the appropriate baseline for comparison given that much of what is known about the project was presented publicly through the PUB hearings which began in February 2012. They were used in the March 30, 2012 PUB final report (and were the same as those used in the public announcement of the term sheet on Nov. 18, 2010).

The DG3 estimates on which the project was sanctioned in December 2012 were $6.2 billion to which $1.2 billion in financing costs must be added, for a total of $7.4 billion.

In June 2014 the cost of the project was updated a second time, from $6.2 billion to $6.99 billion. Financing costs of $1.3 billion brought the total to $8.3 billion.  

Nalcor’s recently released revised cost estimates raised the project costs to $7.65 billion. To this must be added the cost of financing during construction, which the provincial government’s oversight committee has conservatively estimated as $1.4 billion, for a total of $9.05 billion.

It is very likely that the project cost will go well over the $10 billion mark and, as pointed out by “JM” in his recent Uncle Gnarley Blog, full power is unlikely before 2020, resulting in potential litigation from Nova Scotia along with further escalation of financing costs.

We believe, for reasons laid out in the public record through The Telegram, that the project as originally presented was indefensible at best and, at worse, totally irresponsible. The financial circumstances of the province have changed, with the province now running a deficit of over $2 billion on combined current and capital account. This project is likely to increase the gross debt of the province by over 50 per cent.

Other recent developments — the collapse of international oil prices and the overall decline of the provincial economy — as well as the associated reduction in the demand for electricity, make the decision to sanction this project one of the most unfortunate public policy decisions in the history of the province.

While the agreements with Nova Scotia may have been vital to securing the federal loan guarantee, they have made a negligible contribution to the business case for this project. A minimum of 44 per cent of the power from Muskrat Falls is committed to Nova Scotia and is immune to any cost increase, leaving the full impact of cost escalation to be borne by consumers in Newfoundland and Labrador. Nova Scotia is the main beneficiary of this project, because it has been so well protected by its regulator. Our regulator has been banned by government from performing its oversight role.

The sanctioning of Muskrat Falls was based on a specious choice between Muskrat Falls or Holyrood. We believe that Holyrood will continue to be needed for reliability purposes and its refurbishment could add in excess of $1 billion to the final cost. We expect that power rates will double current levels very quickly.

Why has the Muskrat Falls project not been a central focus during the provincial election campaign? Why have we allowed this disastrous project to place an albatross around the necks of our children and grandchildren?

It is time for an urgent reassessment of the financial precipice toward which this flawed project is leading us. The board and management of Nalcor have demonstrated that they are incapable of managing this project and should be immediately replaced.

If it is decided to continue with the project, experienced project managers should be brought in. A new government should commit itself to immediately reasserting the powers of the PUB, both to monitor project implementation and to report on the options for the future, whether to continue this project under new management, to downsize the project, or to abort it fully and cut further losses.

Ron Penney, former provincial deputy minister of Justice,

and former city manager, City of St. John’s

David Vardy, former Clerk of the Executive Council and former chair of the Public Utilities Board

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