Former Muskrat Falls engineer calls for forensic audit to examine 'absurdly low' cost estimates
Nalcor Energy CEO Stan Marshall focused on the future, but not opposed to review of the past
A senior engineer who worked on Muskrat Falls says Nalcor Energy should be subjected to a thorough forensic audit to find out how the Crown corporation arrived at the "ridiculously low" initial cost projection for the hydro megaproject.
"The unit prices used to generate the estimate were far too low and did not represent the reality of harsh construction environment of central Labrador," the engineer said.
"The risks were vastly understated and the contingencies absurdly low."
The engineer — whose identity CBC News has agreed to protect, because he is not authorized to speak publicly about his work on the project — believes that "the purpose of this estimate was not to generate an estimate for project implementation, but secure project sanction."
In late 2012, when the project was sanctioned, the capital cost of the dam and transmission assets to move power from Labrador to Newfoundland was projected at $6.2 billion.
Just over four years later, it's jumped to $11.7 billion — although that number is not a direct apples-to-apples comparison, because it now includes financing costs that had not been factored into earlier estimates.
The senior engineer says those cost increases are incomprehensible — in particular, how much they went up after the change in government after the 2015 provincial election — and a forensic audit is the only way to find out what happened.
'By all means go ahead'
In response, Nalcor Energy CEO Stan Marshall says he is focused on the present, and the future, and doesn't want to get bogged down in the problems of the past.
"I haven't gone back and done a forensic study of what went on here," Marshall said in an interview.
"When I came into the project last year this time, it was in crisis," Marshall added.
"My first priority was to try to stabilize the situation, and start working ourselves out of that crisis. And I think we've done a damn job good of that in the last 12 months. I don't have the time to go back and find out what the explanation would be."
But would he be in favour of a forensic audit?
"That's not my judgment call. My focus is to get this thing done," he said.
"What happened before my time, that's for others to talk about and decide and debate for many years to come."
Marshall acknowledged that a forensic audit "may well" actually help determine what happened before he took charge of the Crown corporation last year.
"If they want to do that, by all means go ahead," the Nalcor CEO said.
He noted that a forensic audit won't help him at all in his current task, and will probably increase costs even further.
"But I have no objection to it. If people have some desire to find out what went on, by all means go and find out what went on."
Chronology of cost increases
Early jumps in Muskrat Falls projections were accompanied by soothing words about how costs were under control.
In late 2012, just before the project was sanctioned, then-Nalcor Energy CEO Ed Martin said the company had a good handle on costs.
"We have a huge amount of bid information actually in hand," Martin said at the time.
"So we know, on all the key pieces of cost exposure over time, we're very clear in the fact that we have a large amount of certainty around that."
At the time, the cost of the dam and transmission links to Newfoundland was estimated at $6.2 billion.
Fast forward a year and a half, to June 2014, and a new number — $6.99 billion.
"We're well within a comfortable envelope of where we expected to be," Martin told reporters at the time.
Martin indicated then that 90 per cent of Nalcor's Muskrat Falls contracts were essentially complete, with either fixed-price or unit-rate contracts.
"I believe that we have narrowed down the risk of additional cost increases very, very, very significantly," Martin noted in June 2014.
The number jumped again, to $7.65 billion, just over a year later.
But the worst news was yet to come. Almost exactly a year after that, in June 2016, Marshall — then-newly minted as Nalcor CEO after Martin's departure from the post — said costs had ballooned to $11.4 billion and the project was well behind schedule. (That number included financing costs that had not been added to initial estimates.)
The last update came in December, when the figure was slightly revised, to $11.7 billion, to reflect the terms of a new deal with a major contactor, the Italian firm Astaldi.
'They were just unrealistic'
Initial cost projections were "generally way too low," Marshall said.
"I don't think the thing ever would have been built at the estimates they had given at the time. They were just unrealistic."
Marshall doesn't know who was responsible.
It was the people who launched this — the ones that made the estimates of what energy prices were going to be — they made a blunder. And the Newfoundland people are going to pay for that, and pay for it big time.- Nalcor CEO Stan Marshall
"I don't know who made the ultimate decisions before my time," he said.
"Whether they came from my predecessor, whether they came from the Confederation Building, I have no idea."
Marshall pointed to a lack of experience as a key contributing factor.
When the project began, he noted, no one in Nalcor's senior management team had ever done a project like this before.
"They were learning as they went along," he said. "And they paid for their education."
Marshall said there was a failure in leadership, and Muskrat Falls should never have been built.
"It was the people who launched this — the ones that made the estimates of what energy prices were going to be — they made a blunder. And the Newfoundland people are going to pay for that, and pay for it big time."
Audit would answer questions
The former senior engineer on the project says a forensic audit would answer some questions about how this could happen.
"It will accomplish first, where did the $6.2-billion [estimate] come from? That is the key," he said.
"It will challenge the very premise upon which the project has been approved."
He said he is coming forward now — albeit anonymously — because the situation got to his conscience.
"It is terrible," he said. "Because I have no other way of putting it, other than it just destroys your soul, it does. I have never seen anything like this."
'The days of those big increases are done'
As for the current $11.7-billion estimate for Muskrat Falls, Stan Marshall says that number is solid.
He says there is no concern about it spiralling up even higher, to the $15-billion range.
"I'm telling you we won't go there. Ain't going there. Barring some stupid decision by somebody, that they tell me I've got to do something crazy — in which case I won't stay on — we're not going that high," Marshall said.
"Yes, we might see some adjustments, because certain things have changed. But the days of those big increases are done. That I can tell you."
