A Churchill Falls Explainer
Clearing the Air on Labrador Hydro
Everyone says they want a better deal on Churchill Falls the next time, but no one knows what that looks like.
Not surprising given that most people have no idea what’s going on today and has been the case since 1975.
Let’s fix that. Here’s a simple explanation. We can use this as a tool to decide about whatever comes out of the negotist6ions between Quebec and Newfoundland and Labrador now.
Some of you have seen this before. Some might be seeing it for the first time. Either way, no one can say the explanation and the information is not out there in public.
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Both the Government of Newfoundland and Labrador and the Government of Quebec own the company that owns and operates the generating plant at Churchill Falls and transmission lines that connect the plant to the electricity grid in Quebec. Newfoundland and Labrador owns about 66% of Churchill Falls (Labrador) Corporation through Newfoundland and Labrador Hydro (NL Hydro). Quebec owns about 34% through Hydro-Quebec (HQ). That’s the way it’s been since 1975.
That wasn’t always the case. In 1969, the majority owner of CF(L)Co was BRINCO, a group of seven private companies including several mining companies, A.N.D Corporation, and Rothschilds. The Government of Newfoundland and Labrador had a small interest around 10% at the time.
Hydro-Quebec’s 34 percent was originally owned by the largest electricity company in Quebec at the time but in the early 1960s, the Quebec government took over all electricity generation and distribution in the province. In the early 1970s, the Government of Newfoundland and Labrador decided to do the same thing. They created Newfoundland and Labrador Hydro and bought out BRINCO’s shares in CF(L)Co.
That’s important to know because when people talk about what Quebec did to Newfoundland and Labrador in 1969, they are not talking about what actually happened. Hydro-Quebec signed a contract with a privately owned company, the majority of which was owned by other private companies. BRINCO also had the rights to develop the Lower Churchill, which is started to do in 1967. When the provincial government in Newfoundland and Labrador created what is today NALCOR-Hydro, CF(L)Co became a company owned by two governments and the Lower Churchill became a provincial government project in Newfoundland and Labrador.
There is a power contract between CF(L)Co and HQ as well as various other contracts and side-deals with what is now NALCOR-Hydro. All the contracts and agreements - except the shareholder’s agreement between HQ and NALCOR-Hydro expire on 31 August 2041. Under all those agreements, CF(L)Co sells all its electricity to the two shareholder companies since 1975 - NL Hydro and HQ - at the same price.
The two companies sell the electricity to their customers, mostly in their respective provinces at rates well above what they paid for the electricity. In both provinces, some of the customers, mostly large businesses, are charged or were charged much less than the going rate. There are a couple of reasons for that. In Quebec, it’s a government policy to give away electricity at low cost to encourage businesses to start up here. That was a policy in Newfoundland and Labrador as well on the island.
Slight difference for Labrador. In Labrador, the mining companies and the towns in Labrador west got cheap electricity because they had built a plant at Twin Falls long before there was a Churchill Falls plant. Plus, they were in on Churchill Falls through BRINCO, so they set aside a block of power to supply themselves in exchange for shutting down the Twin Falls plant to give more water to Churchill Falls. That contracted ended in 2014.
Residents in Labrador west still pay relatively cheap electricity prices: about three cents a kilowatt hour compared to 12 cents on the island. But the principle is still the same: NALCOR-Hydro pays only two tenths of a cent for every kilowatt hour and resells it for 15 times as much.
That isn’t what most people believe, of course. The popular belief about Churchill Falls is rooted in a misunderstanding and a misrepresentation about plans the Newfoundland and Labrador government had under Frank Moores and Brian Peckford to get a large block of electricity from Churchill Falls or Gull Island. The government wanted to meet future demand in the province, give some of it to new industries, and sell the rest in the Untied States for profit.
In other words, they wanted to copy what Quebec was doing. The efforts by Moores and Peckford failed for different reasons, but the cost of building new transmission lines across Quebec was always a major obstacle no one could overcome. That’s the same problem BRINCO had, by the way. They could not get electricity to the United States at a price the American market would pay. And just so everyone is clear that was always the assumption by BRINCO about Churchill Falls and the Lower Churchill. They would sell electricity to Newfoundland and Labrador, Quebec, and into the United States.
The reason is simple: geography matters. The idea for Churchill Falls came from plans to develop the economy of Labrador beyond what it was in the 1950s. There were supposed to be aluminum plants, as in Quebec, lured to Labrador by cheap electricity. Those ideas carried on into Bay d’Espoir and the eight different industries that would grow from its electricity at two tenths of a cent a kilowatt hour. People who complain about the renewal contract might ponder that one for a second or two. They also carried on into Muskrat Falls. In 2008, the NALCOR-Hydro’s favourite economist was letting slip stuff he was fed from NACLOR-Hydro that the Lower Churchill would power aluminum smelters. He even said an announcement was coming any day.
What wasn’t used in Labrador would go to Quebec, since that was close by. Labrador hydro power is a huge resource but it is very far from the likely markets. Transmission is expensive, even if you get it right. As Muskrat Falls showed, the biggest cost is getting power from the wilds of Labrador to markets that are very far away. That’s why the next best market for power from the Churchill River after Labrador is Quebec.
By the way, Muskrat Falls was a reminder that as with the so-called Anglo-Saxon Route, the Nova Scotians are the real tough crowd to deal with. In the early 1960s, in a dispute with Quebec over the Churchill Falls project, Joe Smallwood cooked up the idea of sending electricity down through Newfoundland and into Nova Scotia to bypass Quebec on the way to the United States. Hugely expensive and completely impractical.
Danny Williams resurrected the idea not because there was no way to get through Quebec - American market rules solved that problem in 1998 - but because he needed a quickie deal so he could get out of politics. In a deal finished off literally the morning of the announcement, the Nova Scotians got free electricity for 35 years plus a piece of every kilowatt hour shunted down the line from Labrador. In effect, Danny Williams agreed to *pay* Emera not just give the electricity away for free with local residents paying double for electricity to make it all happen. As bad deals go, 1969 is a blessing compared to the 2010 mess everyone now ignores.
Still, some claim that Quebec always blocked electricity transmission. Again, you are dealing there with more fiction than fact. Quebec drove a hard bargain, for sure. It’s not like Newfoundland and Labrador didn’t try other options with help from the federal government. And it’s not like there wasn’t a viable agreement in 2003 to develop Gull Island with a price for electricity that would have paid for the plant and delivered a tidy profit eventually. That deal died not because of Quebec but because of domestic political squabbles in Newfoundland and Labrador.
Since 1998, thanks to new energy regulations in America, Newfoundland and Labrador has been able to export up to 265 MW of power from Labrador across Quebec using existing lines to customers in the United States and Ontario. The myth of the “stranglehold” is so strong that Danny Williams and the people behind Muskrat Falls used it successfully as an excuse for their scheme to double local electricity rates and give free electricity to Nova Scotians. The myth of the Quebec demon is so strong that even today you will find people who say the “fundamental reason for the Muskrat Falls debacle was to demonstrate that we could bypass Quebec.” Be assured: nothing could be further from the truth.
There are other bits of fairy dust mixed into this story. No doubt you’ve heard the claim that under the 1969 contract Quebec has made $28 billion and this province only $2 billion from Churchill Falls. Well, take that with a grain of salt. For starters, no one has ever explained how they make up that number. It’s likely rooted in the claim about Quebec doing something different than Newfoundland and Labrador does. Well, that’s not true.
Plus it’s based on the unworkable idea that the company that makes a product or delivers a service is entitled to a share of whatever income someone else derives from that product or service. Imagine the next time you buy a pair of socks someone says its so much for the socks, plus another percentage of your salary because you will wear them while you earn a living. The idea is nutty.
But with that information, you can probably see why all the suggestions people have to “fix” the flaws in the 1969 Power Contract - like escalator clauses or reparations for the lost income - won’t work. For starters, if you put an escalator clause in, it would work for all the electricity, including the stuff bought by NALCOR-Hydro.
Second, the money would not go to Newfoundland and Labrador. It would go to CF(L)Co. That means one third of it would go back to HQ, if the company declared a dividend.
Third, if we believe CF(L)Co has a right to HQ’s profits, then it also has a right to a share of NALCOR-Hydro’s profit as well.
Fourth, we’d only get the money if CF(L)Co shareholders took a dividend., They haven’t in decades. They’ve left the profit in the company to keep everything running.
You can keep going with this for a while. But we still have to figure out what a “fair” deal might look like. Well, as noted the other day and in a few columns since the middle of January, there’s not easy way to decide that. We can just set out a range of possibilities any of which the shareholders might think were fair.
The simplest one would be to keep doing what they have both been doing since 1975: split up the power and decide what you want to pay yourself for the electricity. The two provinces might adjust the share of the electricity a bit. Maybe 4000 for HQ and 1500 for NL, instead of the 5,000 and 500 split today. Then they’d just pick a price. Most likely, they’d settle on a very low number since both agree right now that CF(L)Co just needs to stay running, not do anything more than that.
They might add Gull Island into the mix, as a separate project. They could add wind, more rivers in Quebec or whatever they want. They could mix Muskrat Falls into the pile.
Either of those or any combination could be accepted as fair or realistic by the two provincial governments involved. But the public might see it very differently simply because they have a completely different idea of what’s going on right now. Even that electricity give-away idea is hugely controversial and has been for a while. There are huge political risks involved in what they are doing, including the risk of not getting a deal at all.
And that’s about where we stand right now. You cannot say you did not know.
Scheduling Note: Barring some radical changes, we will shift gears the next few weeks and start talking provincial finances and other issues as the House resumes. There’s a budget on the horizon. The recent AG report has some huge stories in it plus there’s the announcement today that the government will be playing with foreign debt - they signed the agreements last week, apparently - all of which affects the Churchill talks and everythign else.