Nalcor deliberately lowballed Muskrat Falls cost estimates, exec tells inquiry

A senior executive with Nalcor Energy confirmed Monday that cost estimates for the Muskrat Falls project were deliberately lowballed to help Emerawith its application to the Nova Scotia utility regulator.

"I'm acknowledging that's what was done. Yeah," Gilbert Bennettsaid during questioning by lawyer Kate O'Brien at the Muskrat Falls inquiry.

Bennett said this decision was made by then-Nalcor CEO Ed Martin.

"I'm saying that ultimately that decision on what the price would look like, what all these considerations were, that would have fallen to him," Bennett said.

Risks remained

And Bennett also acknowledged that despite removing some costs, certain risks remained.

"Despite the fact you took these amounts out of the estimates you didn't get rid of (the risks). They still existed, right?" O'Brien asked.

"Those risks exist," Bennett replied.

Based on previous testimony from senior politicians and bureaucrats, this was done without the knowledge of the provincial government the lone shareholder in Muskrat Falls,responsible for any cost overruns on the project.

"I would not be communicating this type of information directly to my contacts at government," Bennett said.

Strategic risk allowance removed

Such a scenario was referenced by accounting firm Grant Thornton in its forensic and investigative audit of the decision to sanction Muskrat Falls in 2012.

But Bennett's testimony was the most direct evidence yet that the $6.2-billion cost estimate presented to the public during sanctioning six years ago was not the full picture.

Here's how the conversation unfolded:

O'BRIEN: "You were there at these negotiations. Do you recall one of the things you did to address getting it below this threshold was to either reduce the confidence level or somehow remove strategic risk amounts or ...remove any contingencies, reserve amounts from the numbers in order to get it below that?"

BENNETT: "I'm acknowledging that's what was done. Yeah."

The inquiry has already heard evidence that a strategic reserve allowance, one recommended by an external risk consultant at roughly $500 million, was removed prior to sanctioning.

Nalcoralso increased its appetite for risk in 2010, and began preparing cost estimates for Muskrat based on a probability factor of 50, meaning there was a 50 per cent chance of cost overruns.

Up to that point, Nalcor'sestimates were based on a probability factor of 75, which meant a higher degree of confidence, but would also requirehundreds of millions in additional engineering and planning in order to ensure that level of confidence.

And Nalcorknew it had just a one per cent chance of meeting the mid-2017 first-power schedule from Muskrat, but did not adjust the cost estimate for almost guaranteeddelay.

Decision coincided with Emeratalks

All this occurred during negotiations with Emera, which was building the Maritime Link across the Cabot Strait in order to bring Muskrat Falls power to Nova Scotia.

Nalcor and Emera announced a partnership to develop the massive hydro project in late 2010, and it's now become clear that Emeracould only get approval from the Nova Scotia Utility and Review Boardto proceed with the Maritime Link if the price of Muskrat power was affordable.

The higher the capital cost, the higher the price consumers would have to pay for that electricity.

I know there was a ceiling price. If you went beyond that in comparing to their other alternatives,the Maritime Link and overall construct wasn't going to be successful.- Gilbert Bennett

"I know there was a ceiling price. If you went beyond that in comparing to (Emera's) other alternatives,the Maritime Link and overall construct wasn't going to be successful." Bennett said.

Bennett was aware of the decision to remove strategic risk, and supported the move.

"I understood what the benefits were.I was fully aware of it," he said.

"And did you agree with it?" O'Brien asked.

"Under the circumstances here, yes," Bennett said.

There were benefits, says Bennett

So what were those benefits?

One was the $5-billion loan guarantee from the federal government that would save hundreds of millions in borrowing costs, said Bennett, that offset the removal of the strategic risk allowance.

Another was the ability to move forward with the project, which was being billed as the least-cost option for Newfoundland's future electricity needs, and the first-ever link for Newfoundland with the North American power grid.

"If we can reach a conclusion with Emera, the regional project in Atlantic Canada has an opportunity to come to fruition. We get the benefit of the federal loan guarantee. And that benefit is much greater," said Bennett.

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