Tuesday, September 18, 2012

Time right for an Upper Churchill summit: Vic Young - Power Struggle Part 8 of 12

“How can a collective vision for Canada exist when one of our nation’s richest hydro resources produces huge returns for Quebec, while Newfoundland, as the owner of that resource, receives virtually no benefit?”
 “Who could imagine a situation where Alberta was forced to sell its oil to British Columbia, which in turn gained hundreds of millions of dollars in annual benefits from the subsequent resale of Alberta’s oil to the United States? Why was this inconsistency so unimaginable when it came to oil and gas and yet so accepted for hydroelectricity? Any sense of fairness dictates the need to bring some reasonable balance to this inequitable situation.”
— Both quotes are from Vic Young in 1999. 

Eighth 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 8th in a series of 12 articles published in The Independent.

Vic Young, former chairman 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 River situation. The following article (the first half of which was published in the last post) was first published in the 1999 book 50 Golden Years and 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 frustration of Newfoundland regarding Quebec’s dominance over its Labrador power resources was never more evident than when Premier Smallwood commissioned a study of a transmission line from Labrador to the island of Newfoundland, across the Cabot Strait into Nova Scotia and New Brunswick and then down into the United States.

The scheme, which became known as the “Anglo Saxon Route,” proved to be uneconomic. 

Nevertheless, it became a startling example of the lengths to which Newfoundland was being driven to transmit its hydropower from Labrador to export markets without having to deal away economic benefits of the project to Quebec. 

Newfoundland could not find a way to circumvent the discriminating national energy policy and Canada did not change it. I always wonder if the same situation would have prevailed if Newfoundland had been geographically situated between Quebec and the rest of Canada. 

Considered in the context of national policy, therefore, Churchill Falls is not simply an issue between two provinces. 

It is a national issue, which requires an upfront recognition that Quebec’s stranglehold over Newfoundland’s ability to export its energy resources must be changed for future projects (Lower Churchill) and revised, at least in economic terms, for past projects (Upper Churchill). 

This stranglehold has been perpetuated by a flawed national energy policy which treats energy resources from oil and gas in one manner and electricity in quite another. 

The profound impact of this policy on the manner in which Churchill Falls was developed demands the involvement of the Government of Canada in helping to resolve this issue. 

How can a collective vision for Canada exist when one of our nation’s richest hydro resources produces huge returns for Quebec, while Newfoundland, as the owner of that resource, receives virtually no benefit? 

At the same time, Newfoundland continues to have one of the highest per capita debts, lowest per capita incomes, highest tax burdens and lowest credit ratings of any Canadian province. 

Just imagine how different Newfoundland’s overall economic situation would be today if the Churchill project had been developed in a manner that had provided for an equitable sharing of the huge financial returns over the life of the project. 

It is difficult to understand why we continue to accept this disparity that Canada’s national energy policy created by its inconsistent treatment of different forms of energy. 

Who could imagine a situation where Alberta was forced to sell its oil to British Columbia, which in turn gained hundreds of millions of dollars in annual benefits from the subsequent resale of Alberta’s oil to the United States?

Why was this inconsistency so unimaginable when it came to oil and gas and yet so accepted for hydroelectricity? Any sense of fairness dictates the need to bring some reasonable balance to this inequitable situation. 

My involvement in the Churchill Falls situation dates back to 1978 to 1984 when I was Chairman and Chief Executive Officer of the Newfoundland and Labrador Hydro Group. 

At that time I was part of a serious attempt, fully supported and largely financed by the Government of Canada, to develop the energy potential of the lower Churchill River.

The federal and Newfoundland governments invested $15 million in the Lower Churchill Development Corporation, but failed to trigger the development of either the Gull Island or the Muskrat Falls power sites because of an inability once again to strike a deal with Hydro-Quebec for the wheeling of power surplus to Newfoundland’s needs.

During the same period I was involved in two unsuccessful court cases initiated by the province of Newfoundland to access power from Churchill Falls for energy requirements on the island. 

In addition, I appeared on several occasions before the National Energy Board in an attempt to gain the support of the board pertaining to the situation where Quebec was offering power to United States utilities “as surplus to Canadian needs,” while refusing to offer such power to Newfoundland. 

Our persistent failure before the board only served to reconfirm the lack of will by federal authorities to help bring about some element of fairness in the Newfoundland/Quebec energy interface. 

While oil and gas flowed freely between other Canadian provinces, Canada’s energy policy and institutions firmly maintained Quebec’s total dominance over Labrador’s hydroelectric resources — past, present and future.

On a far more encouraging front, I chaired discussions between Newfoundland and Labrador Hydro and Hydro-Quebec in 1984, aimed at renegotiating an overall settlement to the Churchill Falls situation. 

While this particular set of negotiations eventually failed, it was extremely significant that during the source of our discussions, Hydro-Quebec agreed in writing “to devise a formula whereby Newfoundland would receive a fair and equitable return for the electricity produced, taking into account the need to adapt the terms of existing arrangements to the new reality which had arisen since the original arrangements were entered into.” 

There have been subsequent negotiations with Hydro-Quebec which also proved unsuccessful despite a demonstrated will by both sides to try and find a settlement. 

In hindsight, these negotiations could not have been expected to succeed. The unbridgeable gap between Quebec and Newfoundland was made all the larger by the absence of the Government of Canada from the negotiating table. 

This, afterall, is a dispute which can only be resolved with the participation of the three parties who helped shape Churchill Falls arrangements in the first place, i.e., Newfoundland and Labrador, Quebec and Canada. 

The two provinces can agree to develop Gull Island and Muskrat Falls and they can agree to solve the financial viability of CF(L)Co, but no settlement of the inequities of the Churchill Falls contract can be made without Canada. 

Firstly, the dollars involved are too great and secondly, more importantly, Canada’s policies were at the heart of Quebec’s ability to crucify Newfoundland in the first contractual arrangements. 

I wrote Prime Minister (Jean) Chretien in December of 1996 to express my frustration at the lack of action on the Churchill Falls issue and to suggest a possible solution. 

I recommended that the Prime Minister convene a Churchill Falls Summit of the three involved parties. 

On the agenda for this Summit would be the blueprint for a tripartite agreement to resolve this long-standing energy dispute. The blueprint would involve terms and conditions resembling the following:

Newfoundland and Quebec would agree to an equitable sharing of future benefits from the Churchill Falls project. 

Such an arrangement would recognize Newfoundland’s position as the owner of the resource while also recognizing Quebec’s significant support, which made the project possible. 

It would involve greater access to Churchill Falls power and energy by Newfoundland; an improvement in the existing rental and royalty payments to Newfoundland; and revised financial arrangements so that CF(L)Co, as the operator of the project, would retain its ability to earn a reasonable return over the life of the contract. 

It is noteworthy that past offers from Hydro-Quebec have recognized the need for making changes along these lines.

Quebec would agree to revise the most draconian elements of the contract, i.e. the 25-year extension, which imposes declining energy rates. 

While the 65-year term would stay intact, the energy rates during the final 25 years would be changed as part of the arrangements to protect CF(L)Co’s long-term financial position and to give Newfoundland an equitable share of the benefits.

The Government of Canada would agree to revisions in its overall fiscal arrangements with Newfoundland to compensate it in a reasonable manner, for some portion of its lost benefits from the project. 

These fiscal revisions, which could take place over some reasonable time period, would acknowledge the undeniable role of national energy policy in the development of the Churchill Falls resource. 

This is the essential element, which has been missing in all previous attempts to bridge the gap between Newfoundland and Quebec.

Newfoundland, Quebec, and Canada would agree to expedite the development of the lower Churchill with appropriate wheeling of energy, surplus to Newfoundland’s needs, to customers in Ontario and or the northeastern United States. 

The project would bring immense economic benefits not only to Newfoundland, but also to Quebec and Canada. 

It would be a multi-million dollar development involving thousands of jobs in Newfoundland and Quebec and billions and billions of kilowatt hours of renewable energy for Canada’s future. 

The Prime Minister’s response was swift and negative. 

His letter stated: “This dispute surrounding the terms of the contract is best resolved by the two contracting parties. Should both the Province of Quebec and the Province of Newfoundland ask the Federal Government to act as a facilitator in resolving the issue surrounding Churchill Falls, I would be prepared to assist.”

He missed (or pretended to miss) the two key arguments I had presented. The first was “It is not just between two parties,” and the second was that “Canada must be at the table as a full-fledged partner,” not just a facilitator. 

While the Prime Minister refused to become involved, Newfoundland and Quebec have since proceeded with a major announcement that they are going to attempt to negotiate the development of the Lower Churchill sites and possibly expand the existing Churchill Falls site. 

In and of itself, this is tremendous news for both provinces as it provides a vital opportunity to create jobs, energy and economic wealth which comes from the efficient development of low-cost energy resources. 

These negotiations will also provide an opportunity to sort out CF(L)Co’s financial viability. 

They will not, however, provide an opportunity to settle the Churchill Falls inequities. 

Should there be a favourable deal negotiated with respect to Gull Island and Muskrat Falls and the expansion of the Churchill Falls project, which brings billions of dollars of long-term benefits to Newfoundland, as owner of the Hydro resource, we must not interpret this as making amends for the past. 

These are the kinds of returns due to our province as the resource owner of the Churchill sites. The kinds of returns that we were denied in the Churchill Falls contract. 

Regardless of the benefits derived from the Lower Churchill, they cannot even begin to make amends for the Upper Churchill. 

It would be another sad day in our history if the benefits of a new deal were placed before the people of Newfoundland and Labrador in that context. If there is ever to be a fair and equitable settlement of the Churchill Falls arrangements, it will require a tripartite process which takes into account the legitimacy of Newfoundland’s ownership position; builds upon the goodwill demonstrated by Quebec in past negotiations; but more importantly and essentially, involves a Government of Canada willing to acknowledge its vital role in resolving a situation which was inextricably aligned to a flawed national energy policy. 

There will be those who argue that it is time to get on with the future and not dwell in the past. 

Churchill Falls, however, is very much about our future. 

The unconscionable inequities of the contract will continue to unfold for another 42 years until the year 2041, unless a resolution is reached. 

This is not an issue that is going to go away and it is not an issue that we should allow to become “water under the bridge.” 

There must be some reasonable accommodation made by the three parties involved and it can only happen if we hold the feet of the federal government to the fire until they come to the table with a political will to be part of the solution. 

God Guard thee Newfoundland!

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