1969 Redux
A fixed price, a longer-than needed term, and no look at options.
People laughed when Furey said “Show me the money”
But he’d said to Legault, “You had me at hello”
Francois Legault showed up suddenly and unexpectedly in St. John’s in January 2023 with a promise of righting a supposed historic wrong.
He offered some cash up front for the remaining 17 years of the 1969 Churchill Falls power contract’s term if Andrew Furey’s provincial government would continue Quebec’s access for a long time at a very cheap rate. In addition, there’d be an expansion of Churchill Falls to produce more electricity and the development of Gull Island. Legault got exactly what he wanted.
Legault was far more experienced at politics, governing, and negotiations than Furey, far more knowledgeable of the relationship between the two provinces and of Labrador hydro. After all, in 1998 Legault was a junior minister in Lucien Bouchard’s Parti Quebecois government when Bouchard signed a deal with Newfoundland and Labrador Premier Brian Tobin to expand Churchill Falls and build Gull Island. Furey was a 23 year old needucal student at the time.
Legault came town saying all the right things. He flattered. He fawned, playing to Furey’s outsized ego. Legault got what he wanted: long-term access to 15% of his province’s electricity supply at a very low price for another half century. We’ll talk about that aspect of the New ‘69 Deal in this column.
On Wednesday, we’ll look at the proposed expansion of Churchill Falls and take a look at the 1998 version and why it didn’t happen. To round out the week, Friday’s column will look at the latest try at building Gull Island. We’ll come back to *how* Legault achieved this historic agreement for Quebec next week along with a more detailed discussion of the alternatives to what Furey gave Legault on the Churchill Falls part of this deal.
Depth and Detail, Detangled. Easy to Understand.
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There’s been lots of talk since 2023 about righting the horrible wrong of the 1969 power contract. Last week, the talk of it was unending. There’s been lots of bogus comparisons with 1969 and the renewal contract price for electricity. The traditional criticisms of the 1969 contract all date from after 1975, when Frank Moores’ administration created Newfoundland Hydro (as they called it at the time) and bought out BRINCO’s interests to give the new company the majority ownership (65%) of the Churchill Falls company with Hydro-Quebec holding almost 35%.
Generally, there are three criticisms of the 1969 deal:
A fixed, low price - initially four tenths of a cent (0.4 cents) per kilowatt hour /renewed at 0.2 cents per kwh - over a very long term (40 years plus an automatic renewal of 25 years at the lower rate),
the lack of an escalator clause to change prices, thereby ignoring changes in the market over a long term, and
a lack of alternatives.
Let’s look at the extension of the Churchill Falls part of last Thursday’s agreement in those three aspects. The information comes mostly from the memorandum of understanding signed on Thursday and available from a very Muskrat Falls-like website called ourchapter.ca. We'll start here because this is actually the most important aspect of the deal for Quebec and it was the one where Newfoundland and Labrador supposedly had the upper hand, if you listened to Andrew Furey two years ago.
As Legault explained this week (translation):
I'm in a really good mood this morning.
In 2016, when the CAQ was still in opposition, I put forward a plan to revive Quebec's energy sector by talking about my desire to create a 21st century James Bay. I've been working on it ever since and it's finally coming to fruition. The first major part of this plan was to reach an agreement with Newfoundland [sic] on the Churchill Falls power station in Labrador.
On Thursday, I was with the Premier of Newfoundland [sic], Andrew Furey, to announce that we had reached an agreement.
The Churchill Falls contract renewal is why Legault came bearing gifts. It’s what captured Andrew Furey’s eye and it’s so important in comparison to all the others that last week Legault actually talked at one point about the two new builds as if they were mere possibilities.
Let’s begin.
Term
It’s easy to understand why the initial contract had both a long term of 40 years. The project was huge and the costs were enormous at the time. It would take a bit beyond the usual 30 years to pay the debts off from building. Quebec added a 25 year extension because it had the upper hand during talks at the time with a cash-strapped BRINCO, the original majority shareholder in the Churchill Falls corporation.
In the New ‘69 Deal, there’s no obvious reason for a 50 year term - 2025 to 2075 - except that Quebec wanted it. There is no review period or other opportunity to reconsider part way through in light of what could be significantly changed circumstances 25 years from now. In effect, the new deal gives Hydro-Quebec guaranteed access to Churchill Falls electricity for the first century of the power plant’s existence.
But why?
Price
Money, you say.
This should be the easiest part of the deal to explain but for some reason, this is the part that is the most clouded in different claims from the parties to the agreement.
According to the official Government of Newfoundland and Labrador website ourchapter.ca, there’ll be “17 years of increased benefits starting now —not in 2041 — on average $1 Billion per year, every year.” Partly true, but wildly misleading to the point of being misinformation.
There won’t be anything close to $1.0 billion coming to the provincial government annually starting in 2025. On paper, it looks that way but the payments are retroactive only once a deal is signed. Plus of that “benefit” will actually be the first installment of a payment of $3.5 billion in 2024 dollars paid by Hydro-Quebec to Newfoundland and Labrador Hydro (not the provincial treasury) for the right to develop Gull Island. The money is spread out unevenly over 10 years. It’s laid out in Schedule H to the MOU and in some years will be zero dollars. And NL Hydro will decide what to do with it.
The other part of the “benefit” next year will come from $475 that will go to the Churchill Falls (Labrador) Corporation. Again, not the provincial government and even more removed from the provincial treasury than NL Hydro. CF(L)Co is owned 35% by Hydro-Quebec and what - if any - of that cash comes to the provincial treasury isn’t clear. It’s supposedly the first payment at a new higher price for the 30 terawatt hours of electricity covered by the old contract.
But what is the price? The 2025 installment is only $475 million. That doesn’t line up with the claim the new price for Churchill Falls is 5.9 cents per kilowatt hour as news media got in the technical briefing. Ourchapter.ca says the same thing, claiming the New ‘69 Deal “changes the effective price per kilowatt hour from 0.2 cents to 5.9 cents – or thirty times the current price.” Italics are added.
Well, 30 twh at almost six cents a kilowatt hour works out to $1.77 billion that would be headed to CF(L)Co’s bank account. That would be a fantastic price, especially since HQ got 10.3 cents a kilowatt hour in 2023 from exports and averaged 6.3 cents a kilowatt hour for its exports over the past 25 years, as documented in Hydro-Quebec’s American securities filings.
Consider too that six cents would be decent, but it would lock in for another 50 years the average price over the past 25 with no reference to the market of the future. So, if your sixth sense is already jabbing at your temples, swallow some Ibuprofen and buckle up, ‘cause this is wild. But that first offering is not six cents a kilowatt hour.
Nor does that $475 million promised in 2025 match up with the average price for the old electricity of four cents per kilowatt hour as Michael Sabia of Hydro-Quebec described it in a message to his customers last week. At four cents, those 30 twh would bring CF(L)Co $1.2 billion a year. Again, a decent amount but nothing near the official claim from the Government of Newfoundland and Labrador. That 2025 payment of $475 million works out to about $1.6 cents a kilowatt hour. Nothing close to what’s been claimed.
This is a good point to remind you not to be taken in by the con job of comparing prices now to 1969 prices. It’s a complete false comparison and is one of the basic deceits in the official version of all this. Every single conventional media outlet fell for it. It’s like saying you bought a basic Chev in 1969 - like the Malibu, for instance - and paid $2,500 and now you bought a basic 2025 Chev - again the Malibu - and paid $25,000 for it. Those prices are 100% real, by the way. Not made up. Sure you paid more, but it’s still a basic Chev. Well, we need to sort out first of what the price is for CF electricity. Then we have to figure out what the current bargain-basement price is to see if this deal is better.
Put it another way: 1.6 cents a kilowatt hour is a super cheap price for electricity today. HQ’s domestic wholesale rate is still around three cents a kilowatt hour for that first year’s payment is roughly half of HQ’s cost of delivering what is the lowest consumer electricity in North America. They’ve been able to do that thanks to Churchill Falls. Four cents - the average HQ claimed - is only marginally better.
Almost six cents would be good but that’s clearly not what Newfoundland and Labrador is going to get if the deal is finished by April 2026, the deadline set in the MOU. That’s allowing - as noted already - that six cents would be what Quebec’s paid on average in the past 25 years. There are other comparisons: HQ paid NL HYdro five cents a kilowatt hour for electricity from Churchill Falls in a 1998 deal. In 2003, an outline development agreement for Gull Island set a floor price for the electricity at three cents a kilowatt hour but pegged it to the New England Hub. If the Hub wholesale price went above that floor in Canadian dollars, then NL Hydro got a higher price for Gull Island electricity. There’s nothing that clear or effective here, as you’ll see.
Brace yourself. The actual price for the old Churchill power under this new ‘69 deal is 2.209 cents a kilowatt hour. You can figure this out by reading the MOU. The “new pricing terms applicable to the amount of volumes attributed to [Churchill Falls] as it currently exists (i.e., the volumes that do not reflect the CF Units Upgrade), which terms will be retroactive to January 1, 2025 (to the extent the New CF [power purchase agreements or PPAs] are executed following such date), which will have a forecasted net present value of $33.8 billion as it relates to payments to be made to CF(L)Co by HQ throughout the term of the New CF PPAs.”
There will be a price for electricity coming from Gull Island. That’s going to be a different price. The Churchill Falls extension will be another price. We have no idea what they will look like because the details of them aren’t coming. But both Newfoundland and Labrador Hydro and Hydro-Quebec agreed to a total value of $33.8 billion in 2024 dollars for the 30 terawatt hours of electricity that HQ will get annually from the original Churchill Falls plant over the next half century. The math is simple, by the way. Multiple 30 twh by 50 years and then divide the price of $33.8 billion 2024 dollars by what incredible number of watt hours you worked out. The result is 2.209 cents per kilowatt hour.
That’s an average of $663 million a year paid to CF(L)Co. Not paid to the provincial treasury. Since the operating costs of the plant will be low, HQ could get a third of that back as a dividend. The money could go to pay for the upgrades since the companies have to drop in 25% equity for the expansion at Churchill and for the new Gull Island. It's not a benefit to the treasury, necessarily.
That gives another convenient comparison, by the way. The money could help pay for Muskrat Falls. But the total paid for the 30 twh block would not cover the cost of Muskrat Falls, which is almost a billion dollars a year now and grows into the future until the last payment is due in the early 2070s. That shows you both how bad Danny Williams’ Muskrat Falls deal was and how undervalued this deal makes Churchill Falls. The total cost of Muskrat Falls, including interest and return on equity for investors - including the provincial government - is over $40 billion under the current administration’s rate “mitigation” scheme.
The Non-Escalating Escalator
The new price for Churchill Falls electricity doesn’t peg it to the market price at any given time as the 2003 Gull Island draft agreement did. That would be the simplest way to price the electricity from now on and ensure that the price Newfoundland and Labrador receives represents a fair market value based on whatever situation exists in the future. There could be a floor price to cover the chance that prices would fall, as they have at the New England Hub in the recent past. But there’s nothing like that described in this agreement at all.
This agreement seems to raise the amount Quebec pays in arbitrary stages but that’s not a real escalator. This Andrew Furey one sets a cap on total payments and then makes up a schedule to pay it out. This approach also puts a de facto cap on payments. Let’s say there is a market-based escalator formula for pricing even though there’s no mention of one in the MOU. Use your inagibaton. If HQ pays along based on some sort of market price calculation, the total it pays in any one year has to be constantly checked so it cannot go above the $33.8 billion (2024 base year) cap.
If that figure of $33.8 million wasn’t intended as a cap on total payments, there’d be no reason to include it in the formal agreement. If there was a market-pricing plus escalator clause with a floor, like 2003, then you’d see a mention of it somewhere in the MOU. There’d be no schedule of payments by year because there’d be no way to calculate the total payable except roughly and even then it would be a useless guess. But no one would need a prediction because they’d just be assured that the pricing would reflect what you expect would be fair in the future markets.
In 2003, the deal worked out by Roger Grimes’ chief of staff Robert Dornan and Clerk of the Executive Council Debbie Fry, plus other officials reflected the lesson of 1969. It was a simple, robust idea. By contrast, this one has a cap on total payments and, as such, it effectively fixes the price for the life of the agreement just like the 1969 deal did. Plus, it resets the price to one that is absurdly, insultingly low for Newfoundland and Labrador. There's nothing in return.
And just to make sure you are clear the Schedule is not just for show, the MOU states in another Schedule on pricing principles, that “the block pricing structure, to be agreed upon in the coming months following the date of this Agreement, shall be established to target the agreed upon annual schedule of forecasted payments.” The only forecasted payments in the MOU are for the continued supply of the original CF block of roughly 30 twh. There you go! We got a cap and by God, we will wear it.
Alternatives
The 1969 deal saw the Churchill Falls company sell about 90% of its output to one of the partners, with a minority shareholder - at the time - taking about 10%. That still happens in this new deal, with HQ taking roughly 80% of the total electricity supply, if all the extension projects go ahead along with Gull Island. NL Hydro will get 20% *if* it takes up all its recall/recapture allowed.
As far as alternatives go, BRINCO - the original majority shareholder - did look at ways to get electricity to the United States but given the technology at the time and the costs involved, the company could never get the costs of the electricity and new transmission down to the price point that Consolidated Edison in New York was prepared to pay. There was also a thought given to wheeling power to the United States through Nova Scotia but ultimately that came to nothing for reasons that had more to do with economics than politics.
In this case, the provincial government and NALCOR/Hydro apparently never looked at any alternatives. A team appointed in 2022 didn’t produce its reports on time before talks started in 2023. As noted here before, it appears that the provincial government accepted Legault’s proposal at face value and started negotiations immediately even though it has never admitted doing so or released any details of any kind about the ongoing negotiations.
That’s actually the same as Muskrat Falls: NALCOR never looked at alternatives for local supply other than Muskrat Falls itself but then again, the *only* goal Danny Williams gave Ed Martin was to build a dam on the river. He did. And NALCOR made up a fake comparison. In 2012, the provincial government paid someone to make up another fake comparison.
Unforced and Other Errors
We’ll come back to the whole agreement next week as there are other issues in it. For now, let’s wind up by noting that whoever wrote the copy for the government’s marketing materials clearly has no idea what is going on. It hypes this deal, which supposedly will replace “the 1969 Upper Churchill contract and pursue new projects on the Churchill River to nearly double its capacity, from 5,400 MW to 9,190 MW.”
There’s actually more than 6,000 megawatts of capacity on the river now, if you include Muskrat Falls. And you have to include MF because it’s one of the three projects on the Churchill River. Water management of the three dams will give potentially even more electricity than forecast in this deal, which is another reason why the pricing schemes are important.
There’s that kind of basic mistake that runs all through last week’s announcement both in the talk from the politicians and bureaucrats and in the conventional media coverage. Plus there are problems with wording in the MOU - there’s a sentence that should be “and” instead of the “or” in the text - or another Schedule about conditions for cancelling the new projects that should be in a bulleted or numbered list but instead is just a paragraph and a bunch of sentences. These sorts of things may seem like nothing but in such a complex deal, they can and likely will matter. Words mean something and what people think they meant when they wrote something could be wildly different from what their actual words mean when someone else reads them.
Size matters, too. On the face of it, this deal has three elements: extending CF 1969, expanding CF capacity, and building Gull Island. From the talk, those other two may be expendable. But the agreement demands the parties must settle all three sets of megaproject agreements by April 2026. That puts huge pressure on the provincial government here and makes it all the more important that GNL gets the details right. We must also be wary that any trade-off from CF to the other two deals might be giving away much with no compensation if the others don’t happen.
The negotiations on all those individual megaprojects *before* were complex and took years. Danny Williams’ crowd took three years to finish the details of Muskrat Falls and they were talking mostly to themselves. *This* deal must produce new power purchase agreements and development deals for two more megaprojects (the Expansion and Gull) and add new transmission lines with the agreements on all of them coming within a mere 16 months from today.
Bear all *that* in mind when you consider that with two years of complete secrecy, the folks behind this deal could not simply *and* accurately explain what they’d done and why. The Furey plan is apparently to debate this deal in January but with a lot less information from the Government of Newfoundland and Labrador than we had for Muskrat Falls. Look how that turned out.
There’s no shortage of irony in all this. Andrew Furey tore up sheets of paper as if this deal were completely different from the 1969 original it would replace. Furey also said in one news release that “it starts as of 2025 with a billion dollars a year flowing to the province from the Upper Churchill compared to the $20 million we receive today.” That bit about the billion dollars is obviously not true and as you can see from a simple comparison of 1969 with what Furey announced, his new deal on Churchill Falls is just another version of the old one.
Even the words Furey and his publicists use - our chapter, our power, our time - sound eerily familiar to Joe Smallwood’s announcement at the groundbreaking ceremony when he talked about all of it was our power, and our river, and our water.
Wasn’t true then.
Apparently not true now.
Thank you, Ed. The big spenders in office act like they just won the lottery. Please keep the analysis coming.
For me, the glitter on this deal started to dim after 30 minutes watching these two politicians perform "The art of the deal". Within 24 hrs I thought this was another bad deal for our province, not a fair deal. I was anxiously waiting the detail analysis by Ed Hollett, Dave Vardy, Sullivan, and M Adams and others. I worked with Acres Canadian Becthel on the Upper Churchill as a student engineer and later, as an electrical engineer, with Nfld Hydro for 5 years at high voltage (230kv) terminal station design and controls and protection. Then angered at the blunder by Danny Williams to saddle us with the massive debt with the boondoggle of MFs, which I knew would would not be a reliable not cost effective power source. Now another scheme that shows little fairness. This site should be lit up with comments.