Muskrat without full oversight was a 'big risk,' says energy expert

Newfoundland and Labrador's approach to regulatory oversight of Muskrat Falls does not meet the standards of other provinces that have undertaken major energy projects, saysan expert in the regulation and governance of the energy sector.

"Regulatory agencies in Alberta, Nova Scotia, and Ontario have played central roles in evaluating, monitoring and reviewing megaprojects," Guy Holburn told the Muskrat Falls judicial inquiry on Tuesday.

Holburn was referring to the Maritime Link project in Nova Scotia, the refurbishment of a nuclear power plant in Ontario, and a transmission line project in Alberta.

These projects have been completed or started over the last decade, with budgets of more than $1 billion.

And in all three cases, an independent utility regulator or system planner conducted unrestricted evaluations of the projects.

"To date these projects have been largely completed on budget and on schedule," Holburn said.

By contrast, Muskrat Falls and another massive hydroelectric project in Manitoba did not undergo unrestricted independent reviews.

'Significant risk'

Both are massively over budgetand the subjects of widespread concern and controversy.

"In the absence of a positive recommendation from an independent, expert regulator, the government took a significant risk when it sanctioned Muskrat Falls that it would be the lowest-cost approach to securing the province's electricity future," Holburn said as he read from his report.

In the absence of a positive recommendation from an independent, expert regulator, the government took a significant risk when it sanctioned Muskrat Falls.- Guy Holburn

It's the latest evidence to be delivered at the inquiry that calls into question the decision to exempt the project from oversight by the public utilities board, better known as the PUB, prior to sanctioning in 2012.

The provincial government has defended the decision, saying other hydro projects in the province were also exempted from board oversight. There were also questions at the inquiry about whether the board was capable of carrying out such a review, and what a delay in sanctioning the project might mean for Muskrat Falls.

But in his research, Holburn found "it's rare for a government to sanction a project without endorsement from a regulatory agency," though in making his point, he was referring to oil pipeline projects that were approved by the National Energy Board.

Difficult to sanction

Holburn said it's not possible to know with certainty what might have happened if Muskrat Falls had been reviewed by the PUB, but said it might not have been found to be the best option.

"If the PUB had explicitly concluded after a comprehensive review that Muskrat Falls was not needed at that time or was not the lowest-cost alternative, it would have been more difficult for the government to justify a sanction decision," said Holburn.

The role of a utility regulator like the PUB is to balance the interests of utility companies like Newfoundland and Labrador Hydro, which is a subsidiary of government-owned Nalcor Energy, with those of electricity ratepayers.

The PUB is required by legislation to protect consumers by setting fair and reasonable rates based on the utility's cost of service, while allowing the company to earn a reasonable profit.

One of the key tasks of the PUB is to determine reasonableoperating and capital costs for NL Hydro and Fortis-owned Newfoundland Power, but the regulator was not permitted to carry out that role with Muskrat Falls.

The PUB was asked by government in June 2011 to review which would be the least-cost option: Muskrat Falls, known as the interconnected option, or maintaining the isolated power grid in Newfoundland.

But the board was unable to complete its work in the time frame allotted, saying it required more information, including the latest cost estimates.

And it was not permitted to carry out a full review of all the possible options for future electricity needs.

New information could have changed things

Holburn said if the PUB had been given 18 months in 2013-14 to do a full review, instead of going ahead with sanctioning in late 2012, the outcome come have been entirely different.

"New information and events could have made the interconnected option less attractive," he said, referring to the 50 per cent drop in oil prices in 2014, and lower-than-anticipated electricity demand on the island.

"These factors could have reduced the probability of the PUB finding in favour of the Muskrat Falls project," Holburn explained.

If the PUB had explicitly concluded after a comprehensive review that Muskrat Falls was not needed at that time or was not the lowest-cost alternative, it would have been more difficult for the government to justify a sanction decision.- Guy Holburn

Muskrat Falls was sanctioned at a construction cost of $6.2 billion, with first power scheduled for 2017.

The cost has since ballooned to $10.1 billion nearly $13 billion when financing and other costs are included and completion is not expected until 2020.

Under the terms of the federal loan guarantee, the cost of generating Muskrat Falls power must be recovered from ratepayers on the island of Newfoundland, which gives the PUB very little influence in the setting of power rates.

Holburn said this scenario provided very little incentive for Nalcor, which owns the project on behalf of the province, from managing construction costs as tightly as possible.

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