Muskrat and the p-factor: Nalcor took a risky approach that lowered cost estimates
Lawyer says aggressive strategy erased 'hundreds of millions' from project estimates
A document presented at the Muskrat Falls inquiry this week showed that early planning for the project took a more conservative approach to risk management.
However, that changed by the time the massive hydroelectric project was sanctioned in 2012.
A key assumption
In megaproject parlance, it's called the p-factor formula, and the higher the number, the less chance of cost overruns.
A Nalcor document from April 2010 showed that among the key assumptions for Muskrat Falls was a 75 per cent probability factor — p-factor for short — that the project would come in on budget.
This meant cost estimates would be higher in order to allow for contingencies.
But by the time Muskrat was sanctioned by former premier Kathy Dunderdale and her government in 2012, the p-factor was reduced to 50.
"The difference between a p-50 as opposed to a p-75 was to reduce the cost projections by hundreds of millions of dollars," lawyer Geoff Budden, who represents a group of Muskrat Falls critics, told the inquiry Tuesday.
The difference between a p-50 as opposed to a p-75 was to reduce the cost projections by hundreds of millions of dollars.- Geoff Budden
The Nalcor document gives some hints as to why the p-factor was lowered, and in turn the risk level increased.
A handwritten note on the document questions the decision to use the p-75 factor to calculate estimates, saying it would put "more stress" on project cost, and describing it as a "very conservative approach."
The document was introduced during testimony by Danny Williams, premier from 2003 until 2010.
Williams spent two days on the witness stand and aggressively defended the project and his role in making it a reality.
"This will prove to be a very good project in the end," Williams stated.
Not aware of any misleading
Budden asked Williams during cross-examination if he knew who made the notes on the Nalcor document.
"No, I don't," said Williams.
"So if there's any misleading that went on, you weren't the party who was misleading the public?" Budden asked.
"I am not aware of any misleading that went on," Williams replied.
Williams could not remember reading the document, but said it was likely that he did.
He also said his understanding of the p-factor formula was non-existent prior to his recent preparation before appearing at the inquiry.
"I didn't know if it was something fit to eat," Williams said at one point during his testimony.
A forensic audit has questioned Nalcor's decision to use p-50, suggesting a much higher number would have been more reasonable.
But former Nalcor CEO Ed Martin says regardless of the number, Muskrat Falls was still the better option over maintaining Holyrood.
"If you go from p-50 to p-75 it actually favours Muskrat more, because you also have to go to p-75 on oil prices. The higher it goes in the p-factor, the more it favours Muskrat," Martin told CBC News Tuesday.
Like Williams, Martin said he does not know who made the notes on the 2010 Nalcor document. But he said the document was compiled while Nalcor was reviewing whether to proceed with Muskrat Falls or another potential hydro project on the Churchill River, Gull Island.
He said the p-factor was lowered to 50 after extensive engineering and review of Muskrat Falls had been completed, and "no question we were comfortable" with it, Martin explained.
Martin said other large utility companies, including BC Hydro and Manitoba Hydro, use p-50 on their projects, and "it's not unusual to do that."
When challenged about the resulting cost overruns, which have seen capital costs swell from $5 billion when Williams was premier in 2010 to more than $10 billion today, Martin said he plans to explain that when he testifies before the inquiry in December.
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