Expanding Churchill Falls
Quebec controls finances, gets most electricity
In 1998, Quebec and Newfoundland and Labrador started to negotiate a deal that would - from Newfoundland and Labrador’s perspective - address the inequities of the 1969 contract through an expansion of the Churchill Falls plant and through construction of the Lower Churchill projects. While renegotiating the original contract was not an option at the time, Newfoundland and Labrador looked for creative approaches to compensate the province for the inequity of the original deal. One of those was a disproportionate share of the new construction’s output.
That same idea could have been used in the New ‘69 Deal announced last week in addition to any higher payments for electricity by Hydro-Quebec. Instead, Hydro-Quebec will control construction of the major new additions, make some key financial decisions for Newfoundland and Labrador including a redirection of the payments supposed to compensate the province for the 1969 deal, and get the lion’s share of all new generation.
The idea that there is electricity from the old Churchill Falls plant that Hydro-Quebec will pay more for between 2025 to 2075 is a fiction. Let’s be clear about that. After all, the deal announced last week calls for a complete overhaul of the existing plant so it can produce more electricity and an addition of two more turbines in a separate powerhouse to tack on another 1,100 megawatts of generating capacity to the plant.
There is a part of the deal that supposedly requires Hydro-Quebec to pay more for some electricity than it used to. That was covered in Monday’s column but as it appears, Hydro-Quebec will get a large block of electricity for what is essentially a flat price of 2.2 cents a kilowatt hour rather than pay a higher amount or an escalating amount as claimed.
There has been some pushback about Monday’s column based on the claim that according to the memorandum of understanding, HQ will get less of the “old” electricity because its share of megawatts goes from 4765 megawatts down to 3660 MW. Therefore the whole idea of HQ paying a flat rate is wrong because it will be taking less electricity in the process.
Simply put, this isn’t true. First, appreciate that HQ and Newfoundland and Labrador Hydro will not buy megawatts, which is a measure of power, but energy, which is what happens when you put the power to work. Energy is electricity, measured in watts per hour or, as the numbers are large, in multiples like kilowatt hours. Schedule H of the MOU simply describes amounts of money to be paid for amounts of electricity. The fact HQ will be associated with fewer megawatts of generating power at the original plant has no bearing, really, on what it pays for the block of energy it will receive. And as it is, the 3,660 MWs of the new deal could actually produce *more* than the current 30 terawatt hours of electricity HQ current buys from Churchill Falls.
That’s important because a huge part of the hype around this project by both Quebec and Newfoundland and Labrador is that it compensates Newfoundland and Labrador for the inequity of the 1969 power contract. Part of that is accomplished supposedly by paying more for electricity from the part of the plant that is effectively paid off, even allowing for an upgrade to the existing turbines.
That doesn’t appear to be the case not only because of the pricing of this block of electricity described in Schedule H but also - as you will see - because of other aspects of the deal. To understand that, you have to go back to the late 1990s.
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In March 1998, Lucien Bouchard and Brian Tobin flew to Churchill Falls to announce a new deal that would add more generating capacity at Churchill Falls, add a new megaproject at Gull Island to bring 2,250 megawatts of new capacity to the Churchill River, and compensate Newfoundland and Labrador for the 1969 power contract in which Hydro-Quebec bought Churchill Falls electricity for absurdly low prices.
The year before, that is, in February 1997, Hydro-Quebec president Andre Caille wrote to Malcolm Rowe, then Clerk of the Executive Council in Newfoundland and Labrador and outlined the goals of the talks that led to the Bouchard-Tobin announcement. This is important for the talks themselves. It’s also important because it gives the lie to the idea that until now there has been some sort of endless feud between Quebec and Newfoundland and Labrador.
As you can see from that letter, the two provinces wanted to discuss a number of related projects on both sides of the border and had mutual benefits at heart. One of the issues was the continued financial health of the operating company at Churchill Falls, owned by NL Hydro (not quite 66%) and Hydro-Quebec (a bit over 34%).
Two parts of the agreement solved that. The Guaranteed Winter Availability Contract or GWAC, pronounced gee-whack have Hydro-Quebec guaranteed additional electricity during the winter months and HYdro-Quebec paid CF(L)Co about $35 million annually ever since. In another deal, Churchill Falls (Labrador) Corporation recalled electricity from Churchill Falls, as it could legally under the 1969 contract, Newfoundland and Labrador Hydro discovered they didn’t need it after all, and so Hydro-Quebec agreed to buy it outside the contract for five cents a kilowatt hour. That’s the electricity that NALCOR started selling to Emera in New York in 2009.
In the context of the New ‘69 Deal, notice the idea of expanding Churchill Falls, which is an element of the 2024 deal. There’d have been no improvement to existing turbines but the 1998 deal included two new turbines at Churchill Falls plus a new, larger deal that would add on to the existing contract with different financial arrangements. Bear in mind at that point, the original debts hadn’t been paid off so scrapping the 1969 contract wasn’t really an option. Still, the two provinces tried to find a way to make the projects and the relationship work better for Newfoundland and Labrador.
The images are extracts from a slide deck shown to the Newfoundland and Labrador Cabinet in late 1997 on the progress of the talks that started earlier that year. In the end, this part of the deal didn’t happen largely because no one had done the survey work to make sure it was physically possible to redirect the headwaters of the Romaine River complex into the Churchill river and the Smallwood Reservoir.
It wasn’t and so the project died. But note that in the cabinet paper accompanying the slide deck, Cabinet approved a series of objectives, set goals, and identified issues that the talks would address. Cabinet was also prepared for some haarsh alternatives if HQ became obstinate.
The goals of the whole project, as outlined to Cabinet in 1997 were:
“Address the inequities of the Upper Churchill power contract
“Develop potential of our hydro resources on the Lower Churchill for domestic use and for export sales
“Secure future provincial energy requirements at competitive prices [for] Labrador [and] Island.”
There were issues to be addressed:
“Can this package become a basis for settlement of the Upper Churchill Contract?
“The diversion proposal is not as advanced as the Gull Island project (environment and engineering)
“GWAC would make CF(L)Co viable
“There would be early returns on the 130 MW recall
“HQ proposals can facilitate Labrador hydro developments
“Does not address provincial power requirements
“Requires significant borrowings by NLH; equity borrowings not covered by price guarantees.
The Cabinet also considered options - some of them very aggressive - if Hydro-Quebec became obstinate. None were necessary and talks continued despite the failure of the CF expansion.
Cabinet endorsed the principles and objectives of the talks described in the Cabinet paper that backgrounded them on the project.
“The hydro projects should produce unbalanced benefits for Newfoundland and Labrador.
“The projects should be capable of meeting the future power requirements of the province, and
“The projects should produce a royalty to the province as the resource owner.
Consistent with these principles, the discussions should proceed according to the following guidelines the Newfoundland and Labrador Cabinet asserted:
a) Increase [Newfoundland and Labrador] ownership of the Gull Island project (generation and transmission) while maintaining guarantees, in a manner which minimizes to the extent possible Quebec Hydro's ownership of this resource project in Labrador.
b) Newfoundland and Labrador should receive full credit for previous engineering work at Gull Island.
c) The extra power at Gull Island as a result of Upper Churchill Diversion (150 mw) should accrue to Newfoundland and Labrador without charge.
d) There should be a royalty regime related to revenue that accrues to the resource owner in respect of earnings above a specified rate of return.
e) Newfoundland and Labrador will retain ownership of all emission credits associated with these projects.
f) In respect of the Upper Churchill Diversion, Newfoundland and Labrador should receive a share of the power ownership that is disproportionately larger than its share of the project costs.
g) Muskrat Falls should be re-integrated into the project structure in order that the overall project mix is capable of providing future power requirements for the province as well as providing sufficient power for external sales to justify the developments.
Since most of this relates to Gull Island, we’ll come back to it on Friday when we review that part of the new deal. For now, let’s look at some aspects of the upgrades and expansion to see if they reflect the notions of disproportionate or increased benefit to Newfoundland and Labrador to compensate the province for 1969 in addition to requiring that Hydro-Quebec to pay more for continued electricity from Churchill Falls for a very long term. That doesn’t seem to have happened on pricing so perhaps there are some other benefits or offsets.
More Water?
As far as the current proposed expansion goes, we should note that the earlier version of this required significant additional water in order to make it viable. Altogether, three rivers would have been redirected to add to the Smallwood Reservoir. The deal announced last week proposes the installation of more generating capacity in two forms:
the CF Units Upgrade, which is the installation of new turbines to produce a 10% increase in generating capacity, and
CF Expansion Project, which would be a second power plant at the site consisting of two new 550 megawatt turbines.
The total upgrade/expansion would produce an added 1,600 megawatts of generating capacity on top of the roughly 5,500 megawatts already installed.
There is *no* additional water source identified. Does this matter? We don’t know but it may affect the viability of the project. In light of the 1998 failure, the extra water would seem to be an important issue NL Hydro needs to address.
Disproportionate Ownership: Quebec has the financial control
This notion that Newfoundland and Labrador could have disproportionate control it benefit does not seem to exist at all under the New ‘69 Deal. HQ will lead both the expansion and Gull Island, the more significant of the two new generation projects.
Curiously, the MOU gives HQ the power to decide how NL Hydro will finance its portion of the expansion project. HQ can decide to use payments due to CF(L)Co for a block of electricity that carries on from the 1969 contract [Schedule H] as NL Hydro’s equity in the expansion project. So much for the idea that Newfoundland and Labrador gets a billion dollars next year or any year.
This is described in Section 2.2 (c) (iii):
the Parties agree that HQ will elect to implement one of the following two options in the Definitive Agreements with respect to the CF Expansion Project: either (A) the return of deemed equity for the CF Expansion Project will not be lower than the interest rate applicable to the CF Expansion Project debt, or (B) the equity-to leverage ratio for the CF Expansion Project will be established at 25% equity and 75% debt, with the payments set forth in Schedule H to be used by NLH to fund its equity portion. [Bold and italics added]
In other words, if HQ opts for the equity-to-leverage ratio of Option B, the money laid out in Schedule H will be NL Hydro’s 25% equity portion. Since that money comes from HQ, it will be captured by CF(L)Co when it arrives, if it arrives and definitely not go to the treasury. The notion that HQ would make financial decisions for NL Hydro is astonishing but the words mean what they mean.
Disproportionate Ownership: HQ gets most of the electricity
As with the 90/10 split in 1969, the New ‘69 Deal gives Hydro Quebec 80% of the power capacity across all the projects. As well, “HQ has access to and will purchase any volumes from the Development Projects being subject to NLH’s recapture rights until any such volumes are actually recaptured by NLH.” Essentially, that’s the 1969 deal all over again. Unless NLH exercises its options, HQ gets it all.
To be fair, NL Hydro may exercise its recapture rights at the earliest opportunity. But even if it does, the lion’s share of the electricity of the entire Churchill Falls upgrades and expansion, as well as Gull Island go to Quebec. To be fair, we do not know the prices to be paid by the two companies but under the circumstances it is unlikely that Hydro-Quebec will pay more and NL Hydro less since there is clearly now. They will likely cover costs and nothing much more. Let's see what happens.
People ask if this is a good deal or a bad deal. No one has enough information to judge at this point. There are many questions that the ordinary people who will bear the cost of these megaprojects deserve to know before they make up their minds. The fact that the Government of Newfoundland and Labrador is not giving answers, that the Premier wants to rush approval of the project through the House of Assembly without giving full answers or even having final agreements in place, and that the Premier is taking victory laps nationally already are all highly suspicious.
They should raise very large red flags even before anyone reads the words on the 17 pages of the memorandum of understanding. The 17 pages raise more questions than they answer. The spectre of Muskrat Falls looms over us all and it looms especially ominously over the politicians and bureaucrats pushing this project in a way that makes the fiasco of Muskrat Falls look like a model of transparency rather than the appalling manipulation it was. The proponents of this new deal that looks uncomfortably like old deals should not expect automatic trust and deference, especially in light of the low standards of accountability this government has followed over the past four years.
This first series of columns are a test of the claims based on the skimpy information available. They also add important historical context so people can understand better what has happened before and what other ideas are available to judge what’s going on. We’ll get to Gull Island on Friday and early in the New Year, we’ll take some higher level, overall views to see where the lumps and bumps are in this New ‘69 deal. The House of Assembly will open on January 6. That’s no time at all.
But the timeline on these deals?
Well, the Churchill Falls contract extension will go from 2025 until 2075. These new generation projects? They go 50 years after first power, which in the case of both, optimistically, would run into the mid-2080s. We can wait for good answers to hard questions.
Wait until you see what Friday brings to know why.
And, I didn’t win the gd lotomax again last night! What’s a guy got to do?
You are not making the bafflegab, terabits and wattsalot, any clearer to us mathematically, economics, megadeal finances challenged.
By the time i hopped from the original deal, to the current, no pun intended, deal to the latest only thing I am assured of is the Quebecers are still offering us the shit end of the stick, which we will gladly grab because we are drowning in debt and need a lift out. But then , according to you, even that is a flim flam.
Perhaps the two Andrews and the Siobhan have a handle on what it means? And, what it means to my electricity, is that power, energy, or whatever, bill into the future. Not clear at all. Maybe I am too old to understand, like when Granddaddy bought the new tv to watch men land on the moon, but being born in 1894, went to his grave convinced it was a hoax because there were no reports of green cheese.
Show us the cheese Ed, make it simple, use small words, 50 words or less, please.