17 May 2016

Six Rationalisations Pretending to Be Policy #nlpoli

Policy solves problems.

At it's simplest level,  policy answers a question.

Cancelling Muskrat Falls is a good example.  We are facing a financial crisis.  Muskrat Falls is a huge expense.  There's the problem.  Turn it into a question and it becomes whether or not we should cancel Muskrat Falls.

To answer the question, you'd have to look at other issues. Muskrat Falls  was supposed to be the answer to our power needs. We'd have to look at that issue:  do we need the power?  We'd have to look at finances:  can we afford it? What would it cost to take one course versus another?  We'd have to ask about legal implications:  what do our legal commitments say we must do?

Implicit in those questions is the idea of alternatives.  What choices do we have?

A written report on those questions would have some structure to it.  You'd expect it to start out with a clear statement of the question the author reviewed.  It might even be posed as three options: continuing as we are,  halting the project completely, or an intermediate options like slowing the project,  cancelling bits of it, and so on.

The paper would review the existing state of the project and then project ahead based on what we knew.  Then it would have to branch off from today to examine each of the answers to our string of questions.  Given the size of Muskrat Falls and the complexity of itl you'd imagine any serious discussion of cancelling the project would take months to prepare, would involve a great many people, and would certainly take more than 10 sheets of paper.  Just to make sure you appreciate the magnitude of what we are talking about, go back and look at just a tiny bit of the paperwork prepared for the public utilities board review of the project.  The Manitoba Hydro report was enormous.

Now read the 20% of a document prepared for Dwight Ball's cabinet released to CBC under the access to information law.This briefing note is apparently about the implications of cancelling the project.

Even with all the redacted pages included, we have a briefing note on opne of the most serious policy issues of our time that is a mere 20 pages long.   There is nothing in the four pages we have that even hints at a lengthy review, a consideration of alternatives, a statement of a question or series of questions or any alternatives. There are six reasons to keep going - all of which are either wrong or seriously misleading - and only one alternative that has absolutely no advantages. The disadvantages of cancelling the project are little more than restatements of the reasons given for continuing.

Notice that the briefing note was finished on March 7 this year and was prepared by "Nalcor". Notice as well that all the blacked out sections are justified as exemptions based on solicitor-client privilege or litigation privilege.

On the face of it, this looks very much like the original decision to build Muskrat Falls, taken in 2010.  The assumption is that the project will proceed.  Nalcor presented a straw man alternative in public afterward but, as we now know, the company never examined alternatives to Muskrat Falls to determine whether or not it was the lowest-cost way of meeting domestic power needs. To meet the need for an announcement in 2010 for Danny Williams' retirement, Nalcor said this was the Lower Churchill project but with the little dam built first. As such, they relied on alternatives to an entirely different project to justify Muskrat Falls in order to avoid having to start the planning and management process from scratch, as they should have done.

Well, in the case of the note about whether or not to stop, we have an apparent assumption that the project will go ahead. That's reasonable given the number of times the current Premier has said the project will not be cancelled.  Now let's turn our attention to the specific reasons.  Ron Penney and Dave Vardy have already had a look at this via Uncle Gnarley, but it's worth going into this memo from a slightly different perspective.  After all, Vardy and Penney don't make the obvious point that none of Nalcor's arguments in favour of the project are either false or grossly misleading.

Need for Power

This is actually the oldest claim for Nalcor and the one that's been equally long discredited.  The first rejection came from the joint federal-provincial review of the entire project.  That came in 2010 before Danny Williams announced Muskrat Falls.

Even using Nalcor's optimistic assumptions about increased demand,  we won't really need more generation until sometime in the 2030s.

Nalcor claims the current date by which we must have power is 2018-2019.  While that was the latest public date Nalcor talked about last year, Muskrat Falls currently won't likely produce power before 2020. That's the date they are using for price projections and it also jives with estimates by engineers who have assessed Nalcor's progress to date. Nalcor's claim of an urgent need by Date X has proven to be a movable date that always coincides with the most recent initial operating capacity date projected for Muskrat Falls.

Nalcor's memo writer cites recent failures at Holyrood as proof that existing generating capacity won't hold up.  As we knew at the time someone wrote the memo, the failures at Holyrood are due to Nalcor's chronic mismanagement, not ageing equipment. And there are ways to sort out the Holyrood issue without Muskrat Falls.  The memo to cabinet doesn't discuss that.

Sunk Cost Fallacy

"As at the end of 2015,  over 50% of the work on the project has been completed."

At the time someone wrote that memo, Nalcor knew the project was less than half complete and - in the case of the crucial powerhouse - it was only 15% finished.  The rest of us found out the truth later on.

The memo notes that any delays would increase costs, on top of the $9.0 billion already committed. That's true but it also incorrectly states that cancellation would increase project costs. The memo doesn't contain any new cost estimates:  we can tell because the summary of recommendations doesn't include any cost estimates that have been blacked out.

What you have here, in other words, is nothing more than the sunk cost fallacy. We are in too far to pull back.  It's a very common decision-making problem and one that fits nicely with some of the other decision-making problems Nalcor and the government have displayed on this project.

Federal Loan Guarantee

The federal loan guarantee section makes a boogie man out of the possibility that the federal government may decide to take control of the project. What's more significant is what the memo doesn't discuss (see below).


The memo incorrectly assumes that any project decision includes all three components:  the Labrador link, the Nova Scotia link, and the generating plant in Labrador.  As a result any observations about consequences exaggerate the impact of a decision about the project that doesn't involve all three components equally.  (See below)

Economic benefit

Note that the short-term benefits of the massive project get the first mention. This is a re-hash of the argument that Muskrat Falls is a giant make-work project.  Nalcor has made unsubstantiated claims for long-term benefits, in this case a claim of $60 billion in benefits to the province.  If that claim includes any revenue stream,  we have to automatically discount the portion attributable to the increased electricity rates required under the loan guarantee to cover the cost of the project.

The only confirmed source of revenue from the project is domestic electricity rates. Thus the economic benefit from the project has to be counterbalanced by the economic weight of the project due to a doubling of electricity rates.

Environmental Impact

This is a re-statement of the claim that the project is green and will reduce the province's already meagre reliance on fossil fuels for some contingency generation.  Nalcor's arguments in favour of Muskrat falls have never acknowledged the company's plans to continue relying on thermal generation for the foreseeable future.

The Missing Bits

What's in the Nalcor brief is not as important as what is missing.

  • Cost to complete the project.  You can't compare the cost of not finishing the project until you know how much it will cost to finish it.
  • Revised date for project completion.  
  • Water Management.  In the absence of confirmation Nalcor can control water on the river as they plan to do, Muskrat Falls may not generate enough power to supply the Nova Scotia block.
  • Alternatives to completing the power plant as well as costing on those options. One option is to complete the lines to the mainland but not complete the dam project. That's the costliest bit and it is the one that is furthest behind schedule.  The lines from the mainland allow Nalcor to export electricity to Nova Scotia from existing or new-build generation from sites like Cat Arm.  They also allow Nalcor to import cheap electricity from outside the province.
  • Cost of importing electricity.  Nalcor officials already know there are times of the year when they can import electricity more cheaply from outside the province. That's why the provincial government gave Nalcor a monopoly on electricity wholesaling. Given the massive cost increases in Muskrat Falls, those times are likely to be most of the year.
  • Alternate sources of supply for NS.  The Emera agreement requires that Nalcor provide a block of power for Nova Scotia.  There is no firm date for delivery. The power does not have to come from Muskrat Falls. 
  • Impact on government of pursuing Muskrat Falls and running large deficits at a time of constrained capital.  If the provincial government can't raise the cash required to finish the project, how much will it have to divert from program and other capital works?
  • Impact of the combined government and Muskrat Falls debt burden on NL consumers.  Neither Nalcor nor the provincial government has ever assessed the impact of Muskrat falls on the only people who are required to pay for it.  Newfoundland Power's financial advisors have raised concerns about it as - apparently - have the provincial government's own bond raters.

In order to make an informed decision,  provincial cabinet ministers should have had access to an analysis that covers those topics if not others.  There's no indication they have received it. Certainly they have not received it from the Nalcor memo.


Monday:  The Nalcor memo and how government decides