Wednesday, September 19, 2012

A Canadian tragedy - Power Struggle Part 7 of 12

“I submit that no one in Canada could seriously suggest that we accept as a country and exist as a country in a system under which each Province could practically have a right of veto on power transmission through its province, or even become the sole buyer of that form of energy and resell the surplus to another province at a profit.”
— Former federal Energy, Mines and Resources Minister Marc LaLonde during debate in the House of Commons over legislation that would have permitted the National Energy Board to expropriate land for the building of interprovincial power lines. 

Seventh in a 12-part series. 

The defunct weekly provincial newspaper, The Independent (2004-2008), carried out extensive research and investigation into the Upper Churchill. From the contract’s signing in the 1960s, to the realization of its incredible lopsided nature towards Quebec, the shadow of the deal looms today over the potential development of Labrador’s Muskrat Falls. The following is the 7th in a series of 12 articles published in The Independent.

Vic Young, former chair and CEO of Fishery Products International (1984-2001) was also chair and CEO of Newfoundland Hydro and Churchill Falls Labrador Corporation (1978-84). He corresponded with then-prime minister Jean Chretien in 1996-97, calling for a tripartite resolution to the “unconscionable” Churchill Falls situation. The following article, first published in the 1999 book 50 Golden Years, was based on the details of Young’s correspondence with Chretien. The dates and figures have not been updated. The fundamentals of Young’s arguments — including a strong focus on the 25-year contract extension — have remained intact and make a major contribution to the ongoing debate over Churchill Falls. 
The mighty Churchill Falls development continues to haunt Newfoundlanders and Labradorians, some 23 years after its eleven powerful turbines came on stream and the infamous Churchill Falls contract went into effect in 1976. 
The project was the driving force behind the largest private financing ever on Wall Street in 1968. It then became the most successful construction project in the history of our province with the first power coming on stream in 1972 and the plant being completed in 1976.
The dreams and aspirations of politicians, financiers, engineers, contractors and construction workers were all fulfilled during the heady days leading up to the completion of one of the largest and most profitable hydroelectric developments anywhere in the world — then and now!
The magnificent construction project, built by Brinco in the early 1970s, was not only supported by Newfoundland and Quebec, but had the direct involvement of the Government of Canada. 
Indeed, the project would not have been possible without the introduction of the Public Utilities Tax Transfer Act by the federal government in 1975. 
It specifically put in place a series of tax rebates, which significantly enhanced the viability of the Churchill Falls project. 
More meaningfully, Churchill Falls was developed in the context of a national policy that permitted Quebec to be the sole dealer in the subsequent export of Newfoundland energy to the northeastern United States. 
It was such a national policy, which became the fundamental cause of what has become known as the “unconscionable inequities” of the Churchill Falls project.
Some years ago, the National Advisory Committee on Energy Options, chaired by Mr. Tom Kierans (now president of the C.D. Howe Institute), captured the fundamental essence of Canada’s energy policy in the following statement: “Energy is about Canadians, about our dealings with each other, directly and through our institution. Our management of this issue speaks tellingly of our respect for each other’s rights as well as our willingness to coalesce for mutual support. Canada’s energy policy should reflect our sense of self and our collective vision of the nation. History tells us that we strain the bonds of our federation when we fail to formulate policies that meet these standards.”
This statement serves as a fitting overview as to why the overall Churchill Falls situation has been straining the bonds of our federation for the past 22 years, with its extremely negative impact on the relationship between Newfoundland and Quebec. 
The ongoing dispute between our two provinces has escalated because (1) a national energy policy which prevented Newfoundland from transmitting its power to export customers in the United States; and (II) the incredibly one-sided contractual arrangements which govern the long-term sale of Churchill Falls power to Quebec. 
The total hydroelectric resources on the Churchill River in Labrador have the potential of producing 50 billion kilowatt hours of energy annually, the equivalent of over 80 million barrels of oil. 
Of this amount, 34 billion kilowatt hours, the equivalent of 55 million barrels, is already in production at the Churchill Falls plant and the bulk of this energy is being exported from Labrador to the province of Quebec. 
There are several other undeveloped sites on the Churchill River. 
The two most prominent are downstream from the present Churchill Falls plant and are located at sites known as Gull Island and Muskrat Falls. 
These are known as the Lower Churchill developments and their potential is for production of 16 billion kilowatt hours — the equivalent of 26 million barrels of oil annually. 
The Churchill Falls project has a power capacity of 5,500 megawatts and was built in the early 1970s at a cost in the order of $1 billion. 
Even today, it is one of the largest hydro projects in the world. Potentially, Gull Island would be a 1,700-megawatt development which would cost in the order of $4 billion to construct. 
Muskratt Falls, the smallest of the three projects at 600 megawatts, would cost in the order of $2.5 billion. 
The Lower Churchill sites are two of the most effective undeveloped hydro projects remaining in North America. Why then have these renewable Canadian resources not been developed?
The answer lies in the unresolved dilemma which continues to face Newfoundland, Quebec and Canada related to (1) the need to permit the flow of Newfoundland energy through Quebec to receptive markets in a manner similar to the unimpeded flow of oil and gas between provinces; and (II) the need to resolve the inequities of the existing contractual arrangements associated with the Churchill Falls development. 
The inequities of the Churchill Falls contract are founded in the reality that Quebec gains virtually all of the economic benefits from this Newfoundland-owned resource, as part of contractual arrangements, which extend until the year 2041. 
In oil equivalents, there are 55-million barrels a year in production at Churchill Falls which are being sold to Hydro Quebec at a price of $1.80 per barrel, deescalating over time to a price of $1.20 per barrel, under the terms of the unprecedented 65-year contract. 
It is unbelievable that one Canadian province (Newfoundland) has been supplying another (Quebec) with the equivalent of 55 million barrels of oil a year at the price of $1.80 per barrel over the next 43 years. This is a true Canadian tragedy. 
The relevance of using oil equivalents is to make the point that had Churchill Falls been an oil-related project, Canada’s energy policy would have permitted the building of an oil pipeline corridor through Quebec. 
This would have allowed the benefits, which flowed from that oil to accrue to Newfoundland as the resource owner. 
National energy policy, however, never has permitted the same free flow of electricity and this was a major contributing factor in the inequities, which emerged from the Churchill Falls arrangements.
Since 1976 Hydro-Quebec has been exporting large quantities of Churchill energy to the United States market at huge financial returns, estimated to be in the order of $400-$600 million a year. 
There is no provision in the Churchill Falls contract for the sharing of these returns from exports to the U.S. market — a market to which Newfoundland was denied access by the refusal of the Government of Canada to force the issue of a power corridor through Quebec. 
Despite the inequities, which have unfolded over the last 22 years (and which will continue to magnify over the next 43 years), it is important to acknowledge that Hydro-Quebec was a vital contributor to the Churchill Falls project. 
It would never have been developed without the full participation of Hydro-Quebec, not only as the purchaser of power but more importantly as the provider of a completion guarantee for the construction project. 
It was the completion guarantee and the power contract that allowed Brinco to proceed with its bond financing over a forty-year period. 
The crucial role played by Hydro-Quebec in the financing and the project’s completion is ample justification for it being the recipient of a fair share of the very substantial benefits which already have been produced by the power project. 
In searching for ways to ensure that Newfoundland also receives its fair share of these benefits, there are many issues that need to be resolved. One issue, in particular, however, cries out for revision. 
It is the 25-year extension in the term of what originally was intended to be a 40-year power contract. 
This contract extension was beyond anything that was required by the bond financing and it includes a provision for a further reduction in power rates to Hydro-Quebec. 
These power rate reductions lead to: (1) the inevitable insolvency of the project; and (II) the eventual need for cash infusions by Hydro-Quebec which in turn resulted in its takeover of Churchill Falls. 
In my research, I have been unable to find anybody associated with the project who could provide any reasonable rationale for this contract extension, which was added in the very late stages of the negotiations. 
The apparent answer is that Brinco was plagued by such significant financial difficulties at the time that it had no choice but to agree to Hydro-Quebec’s last minute and totally unreasonable demands for the incredible 25-year extension to the year 2041. 
This issue, more than any other, symbolizes the grave inequities and unfairness of the Churchill Falls arrangements. 
So Quebec has a lot to answer for in terms of using their geographical stranglehold over Newfoundland to negotiate incredibly one-sided arrangements. 
This stranglehold, of course, was supported fundamentally by Canada’s National Energy Policy at the time. 
Some years later when the Honourable Marc LaLonde was Minister of Energy, Mines and Resources, he introduced legislation into the House of Commons that would have permitted the National Energy Board to expropriate land for the building of interprovincial power lines. 
In debate on the legislation, which, by the way, was never promulgated into law, Mr. LaLonde said: “I submit that no one in Canada could seriously suggest that we accept as a country and exist as a country in a system under which each Province could practically have a right of veto on power transmission through its province, or even become the sole buyer of that form of energy and resell the surplus to another province at a profit.”
Unbelievably, this is exactly what happened to Newfoundland when Quebec exercised its right to veto on power transmissions of energy from the Churchill Falls project. Yet, the Government of Canada did not see fit to step in to try to correct the situation. By its very actions or lack thereof, it ensured that Quebec became the sole buyer and reseller of Labrador hydroelectric resources. 

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