BC Hydro executives have mismanaged the Site C dam’s overall budget and cost control process, and they are “not capable” of accurate estimates or controlling costs on the $10.7 billion project, according to an affidavit filed this week by former BC Hydro CEO Marc Eliesen.
“The necessary experience and due diligence rigour required for managing a major hydro project such as Site C is deficient among the executive at BC Hydro,” says Eliesen in the affidavit, noting that it has been more than 30 years since BC Hydro constructed a major generating station.
“The knowledge and expertise required, which formerly resided in the company, has retired or moved on.”
The question that comes to mind is: what did BC Hydro know and when did it know it?
Unpacking Site C’s escalating cost overruns in nail-biting detail, Eliesen quotes from statements that BC Hydro made to the B.C. Utilities Commission (BCUC) on August 30 that Site C was “on time and on budget,” and would cost $8.335 billion.
Just thirty-five days later, the affidavit notes that Chris O’Riley, BC Hydro’s president and chief operating officer, informed the BCUC that BC Hydro had encountered some “geological and construction challenges” and the project’s cost had climbed by $610 million — due to a one-year delay in meeting a scheduled diversion of the Peace River to build the dam structure.
At the same time, O’Riley informed the commission that Site C’s $440 million Treasury Board reserve had been exceeded by $170 million. That placed Site C’s revised price tag at close to $9 billion, only two years into a nine or ten-year construction project.
“It is my expert opinion that BC Hydro knew, or should have known, when the August 30th report was submitted to the BCUC, that the costs for the project were going to be higher than disclosed,” Eliesen says in his affidavit.
“If BC Hydro knew the costs were reasonably likely to be higher than disclosed, they violated their obligation to the commission to be fully transparent and support the commission’s inquiry. If BC Hydro honestly did not know at the time the August 30 filing took place that costs would escalate, then BC Hydro was not competently managing its project as it claimed.”
A ‘paucity’ of information about $2 billion price jump
Eliesen, who is also the former chair and CEO of Ontario Hydro and the Manitoba Energy Authority, points out that O’Riley subsequently told the BCUC that “nothing has occurred that would suggest to us that we are facing the type of large overruns” speculated in a September 2017 report by Deloitte LLP, one of Canada’s leading auditing firms.
Deloitte concluded that Site C’s price tag could exceed $10 billion and might reach as high as $12.5 billion.
Yet less than two months after O’Riley’s statement, Premier John Horgan announced that Site C’s capital costs had escalated by another $2 billion, or 20 per cent.
Horgan set Site C’s new price tag at $10.7 billion when he said in December that the project would proceed, claiming it was past “the point of no return,” an assertion disputed by project financing experts.
“A paucity of information has been provided as to what has driven the additional $2 billion in project costs,” notes Eliesen.
“Clearly, the budget revision exercise that took place in November determined that the additional $2 billion in cost was warranted, while on October 14, 2017, Mr. O’Riley told the Commission that there would be no further budget increases.”
“Either BC Hydro knew, or should have known, about the looming budget increases related to future contracts.”
The average compensation for the top four executives at BC Hydro was $453,350 in 2015-2016.
This 30-page affidavit, filed in B.C. Supreme Court as part of a new legal case against Site C by two Treaty 8 First Nations, reads like a Site C dam financial WhoDunnit. https://t.co/5rM9jnmvsU— DeSmog Canada (@DeSmogCanada) February 3, 2018
Trouble afoot with major Site C civil works contracts?
Five pages of Eliesen’s affidavit focus on major Site C contracts and on what BC Hydro knew about the performance ability of two of the corporations it hired or anticipated hiring.
The affidavit highlights troubling information that Eliesen says could help push Site C’s cost to what will “likely” be $12 billion or more. He also says the project will also likely be delayed by at least another year, putting it at least two years behind schedule.
Eliesen singles out BC Hydro’s recent handling of the second largest Site C contract — a civil works contract to build the dam’s generating station and spillways — as one cause for financial concern.
As a result of the unintentional release of redacted parts of the Deloitte report, it was revealed that BC Hydro estimated the second civil works contract would cost about $1.255 billion — a sum Eliesen says is “much too low.”
He said it is his expert opinion that the contract will exceed $2 billion, a 50 to 70 percent increase over BC Hydro’s August 2017 estimate.
Eliesen also notes that BC Hydro recently experienced “major contract problems” with Flatiron Contractors Canada Ltd., one of four corporations in the partnership BC Hydro has selected as its preferred contractor for that civil works contract. Flatiron has a 27.5 per cent share in the joint venture.
The affidavit points out that Flatiron, in a joint venture with Graham Construction Ltd., was awarded the contract for the Interior to Lower Mainland Transmission Line, a project that Eliesen says was “significantly over budget and delayed.”
As explained by the previous Liberal government, the “serious delays were triggered by faulty steel towers, problems with [the] contractor’s environmental management and protection plans and turnover with its contractors,” states the affidavit, noting that BC Hydro characterized the problem as a “failure to perform.”
BC Hydro has not disclosed the final costs of the transmission line, and arbitration related to the project continues.
“It is surprising that BC Hydro’s due diligence would still qualify Flatiron” to be part of the joint venture for Site C’s civil works contract, Eliesen says in the affidavit.
And then there was the question of Petrowest
Eliesen also questions why BC Hydro qualified Calgary-based Petrowest Corporation to be part of the Peace River Hydro Partnership (PRHP), the recipient of Site C’s largest civil works contract.
He notes that only a month after the $1.75 billion contract was awarded the media reported that Petrowest was operating on “borrowed time from its lenders.”
Petrowest went into receivership last August.
BC Hydro, Eliesen notes, “did not provide an explanation as to how it was unable to determine Petrowest’s compromised financial position when it awarded the contract.”
“It is my expert opinion that the financial failure of Petrowest not only has created a period of instability that has contributed to PRHP’s inability to meet its planned work schedule in the short term, but that it will also continue to have a negative impact on project cost and budget at least through the medium term.”
Eliesen also records that “serious and ongoing difficulties” between BC Hydro management and the remaining Peace River Hydro Partnership management have impacted Site C’s cost and schedule.
Geotechnical conditions are one area of disagreement, with the PRHP alleging that conditions in an area that has already experienced several “tension cracks” — landslides — differ from those disclosed by BC Hydro. BC Hydro disputes that claim.
Eliesen says it is not uncommon for contractors to seek additional payment for things such as unforeseen conditions or construction delays.
But “the number and severity of these claims” and the “stark differences” in views between BC Hydro and the Peace River Hydro Partnership “reflect a dysfunctional relationship that is not conducive to construction of a large hydro dam,” his affidavit states.
Among other issues, the affidavit also notes that BC Hydro was working with two sets of Site C budgets and schedules: its private set and the set that was made publicly available in December 2014 when former premier Christy Clark announced final approval for the dam, then an $8.8 billion project (including the Treasury Board reserve.)
Eliesen, who has multiple years of experience working in utilities while major projects were constructed, including Manitoba’s Limestone Generating Station, said in his affidavit that, “I have never experienced, nor have I heard about, a situation where there are two sets of budgets and two schedules.”
West Moberly First Nations and Prophet River First Nation are seeking an injunction to stop work on Site C until their legal case can be heard.
In January, the two Treaty 8 First Nations filed notices of civil action, claiming that Site C and two existing dams on the Peace River infringe on rights guaranteed to them in Treaty 8.
The nations have requested that the court declare approvals for Site C issued by the B.C. and federal governments to be “unconstitutional.”
Tim Thielmann, a Victoria lawyer who is part of the new legal team assembled by the First Nations, said the nations hope their request for an injunction will be heard in the early spring.
Image: Site C construction, November 2017. Photo: BC Hydro