How the Labrador Hydro talks might play out
How the Labrador Hydro talks might play out
The legacy of 2006 is more potent than the lessons of 1969
Konrad Yakabuski writes for the Globe and Mail and for Le Devoir.
A couple of weeks ago, Konrad told his Le Devoir audience about Quebec’s long-standing interest in developing the Lower Churchill. He rattled off the times over the past 50 years when there have been serious talks between Quebec and Newfoundland and Labrador about getting Gull Island built.
That’s what makes Konrad stand out from most of the commentary coming from the Globe editorial last Monday, the Herle Burley interview with PAF, and an opinion piece from Michel Auger in La Presse.
All three rely on the mythology of the 1969 contract and the blood feud supposedly waged between the two provinces ever since. It’s essentially one version or another of the revanchist mythology that Danny Williams exploited relentlessly.
This simplistic version of history - told entirely for political purposes by folks like Williams - gets swallowed up by people like the Globe editorialists who don’t know any better and are proud of their ignorance. Far worse, this story gets swallowed whole by people like Andrew Furey, local media in Newfoundland and Labrador, and others in this province. That’s why they back really dumb ideas like Muskrat Falls and all that goes with it.
For the Furey-stans wincing right now, remember his “rate mitigation” scheme is basically the same scam Danny Williams approved in 2010 with a few very minor tweaks. It doesn’t work and will collapse. Plus, to put his own stamp on it, Furey’s version of the Danny scam created an enormous problem with the Labrador Innu that will only make future developments in Labrador more difficult than they needed to be.
Anyway, let’s build off Yakabuski’s short version and give a bit more colour to a far more interesting story. We’ll do the whole post-Confederation history of Labrador hydro development on Wednesday in a tight, easily understood package. For now, let’s just focus on the efforts to develop Gull Island and the idea that Quebec is, was, and always will be a bitter enemy.
Yakabuski says that Legault is coming to Newfoundland and Labrador with a proposal to enlarge the Churchill Falls power plant by another 1,000 megawatts and to build Gull Island (another 2,200 MW).
That is almost exactly what Lucien Bouchard and Brian Tobin agreed to talk about in 1998. They actually started talking in early 1997, according to a briefing presented to the Tobin’s cabinet in September, 1997. What the two Premiers announced the following year was largely the same except in a few details.
The proposal would redirect three rivers to flow into the Churchill above the falls in order to increase the water volume available. With a couple of new turbines, there’d be about 1,200 MW of new generation for a total extra output of 5.5 terawatt hours a year. Gull Island would add another 2,200 MW.
The extra generation from Churchill Falls would have been about 10% more than Muskrat Falls, by the way, just for the sake of comparison. Muskrat Falls wasn’t part of the original proposal nor was it part of the subsequent announcement except as a possible add-on for Newfoundland and Labrador alone with federal government financial assistance. Muskrat Falls would be for domestic use.
Hydro-Quebec would buy the electricity, with a fixed minimum price and an escalator of some kind. Quebec was also willing to discuss side-deals and other arrangements to deal with the lingering resentment over the 1969 contract and the financial health of the company that operated the Churchill Falls plant.
The 1998 talks never really stopped. Bits of it fell away, particularly the Churchill Falls bit once a survey revealed that the plan to redirect the La Romaine river into the Churchill would be unrealistically expensive given the geography.
By 2000, then energy minister Paul Dicks would announce the provincial government had decided to carry on with Gull on its own but sell power to Quebec and other export customers. “It's a lot cleaner for [Quebec] to buy power than to get into a construction project in another province,” Dicks told reporters. Gull Island had an estimated cost of $4.0 billion at the time while the original proposal carried a cost of $12 billion according to some estimates.
Dicks - who became a leadership contender later that year – may have said publicly the province would go-it-alone. The truth is the talks between the two governments and their Crown corporations never stopped. Once the Liberal’s settled their leadership, the serious talks resumed with an eye to developing Gull Island. The result was a basis for detailed negotiations that fell victim to the fight for Premier’s Office in the run-up to the 2003 election and the divisions within the Liberal Party that lingered after the 2001 leadership.
The framework agreement allowed that Newfoundland and Labrador would build and own the power plant, while Quebec would build and operate transmission infrastructure on the Quebec side of the border. Quebec would buy the plant’s output for 45 years with a pricing scheme that included a p[rice below which prices would not go. Newfoundland and Labrador had the ability to recall up to 500 megawatts for its own use.
There were some significant differences between the original proposal in 1998 and the eventual framework agreement that both sides abandoned in place in 2003. What’s important to note here, though, is the continuity of the ideas in it and the relationship between the two provincial governments reflected by the lengthy discussions.
There was a Guaranteed Winter Availability Contract, for example, signed in 1998. Under the GWAC, Quebec buys more electricity from Churchill Falls than provided in the 1969 contract. The GWAC was essentially a continuation of a five year Operating Agreement that ran from 1991-1996. It made CF(L)Co financially stable.
There was also a five-year agreement by which Newfoundland and Labrador recalled up to 300 megawatts under the 1969 contract and then re-sold it to Hydro-Quebec at five cents a kilowatt hour. Again, this was a way of putting more money into CF(L)Co. Newfoundland and Labrador renewed the agreement once. In 2009, Danny Williams sold the electricity to Emera instead of Hydro-Quebec. He lost money at it, routinely. It was a stark comparison to the decade of deals with Quebec.
Again, though, these deals were consistent with the attitude taken by Quebec from the mid-1970s onward. The Government of Quebec through Hydro-Quebec was willing to look at side deals to deal with complaints about the 1969 contract and to make sure that CF(L)Co remained financially stable. There was an interest on both sides of the Quebec-Labrador border in developing the Lower Churchill. Quebec was interested in more electricity at a low cost. Newfoundland and Labrador had ideas in the 1970s and 1980s that are worth examining separately in greater detail. For this column, let’s note that the idea Quebec’s interest has been in frustrating development of the Lower Churchill is simply not true. Attempts to develop the Lower Churchill died for different reasons at different times but it was not from a lack of interest.
What’s especially important to note is the effort between 1998 and 2003 that ended in an outline for a viable agreement. This survived into the 2005 proposal from Hydro-Quebec, Ontario Hydro, and SNL Lavalin jointly that the provincial government rejected out of hand, without explanation, in favour of the so-called Go-it-Alone option. Except for a brief period in the 1990s, the gap from 2006 to the present is the longest period if not the only period when both Hydro-Quebec and Newfoundland and Labrador’s Crown corporation – now best called NALCOR-Hydro – have not been talking at some level about potential future developments of the Lower Churchill.
All of that is why the upcoming talks are so significant. There’s been an unusually long period where the partners in Churchill Falls (Labrador) Corporation have not been talking about a Lower Churchill project that both are interested in. There’s been consistency in the discussions and periods of agreement since the mid-1970s that ended with a potentially viable deal in 2003 and a renewed offer in 2006. The political climate that created the rift in 2006 and sustained it through mercurial, expensive and, incredibly wasteful actions by Newfoundland and Labrador appears to have run its course. Both provincial government’s are interested in talking again.
Quebec’s interest is in securing both Churchill Falls after 2041 and Gull Island in the meantime, both at the lowest feasible cost. Churchill Falls is an integral part of Quebec’s domestic supply. Losing access to it would be a serious setback for Quebec’s hydro-electric and economic policy. Gull Island represents the best option for its own domestic supply. It is larger than and cheaper than any alternative.
There’s been much talk about the Quebec government’s plan to increase overall generation by 50% by 2050. There is some concern about the number of new dams needed as well as the number of windfarms needed to produce 100 terawatt hours of electricity on top of what Quebec already has. Francois Legault has been talk up new mines and the green transition but the assumptions on which it rests need some serious investigation. The province will need more generating capacity even without Legault’s dreams. Consider the green options as much a convenient political rationale as the claim that all the dams and turbines are really just a back-up in case the Churchill Falls talks fail.
After all, Plan B in 2023 is exactly the same Plan B another Premier had in 2006 when Williams rebuffed all the responses to the government’s call for proposals and opted for another, ultimately disastrous path. The difference is that Hydro Quebec has already built its best dam project of the time on the La romaine River and its options for more are more and more limited.
Newfoundland and Labrador interests are not so obvious or clear. There is no significant growth forecast for the population itself, except the incidental changes in demand from the gradual increase in green vehicles. Any growth there will come from availability of cars and trucks at an affordable price. That’s not within the provincial government’s powers any more than it really is within Quebec’s powers.
New industrial development anywhere in Newfoundland and Labrador would have to deliver its own electricity, as the Risleygate and similar projects already assume. There *are* demand and transmission issues in Labrador but these can be met without developing Gull Island now that Muskrat Falls is effectively stranded in Labrador without any reliable way of getting its electricity to the island. The others – like mines and bitcoin operations are either long away from development or not firm enough to bother with. In some respects, they are as insubstantial as the same kinds of operations both Hydro-Quebec and the Quebec government are using to justify its expanded generation plans.
The province’s energy policy is determined by the inertia of early policies. This is bolstered on the electricity side by the dominance of NALCOR-Hydro in any provincial thinking. Danny Williams transferred power to the Crown corporation and weakened the government’s ability to resist whatever the corporation proposes. The result is that NALCOR-Hydro’s corporate interests determine the provincial government’s actions more than it is the other way around.
This a point made at the old SRBP blog in 2012. After the sham filibuster he led on the Muskrat Fall’s project, Dwight Ball tweeted that he could always support the principles behind Muskrat Falls. Since Dwight didn’t really do it, your humble e-scribbler spelled out the six of them. They all centred on the idea that the ratepayers/taxpayers cover all costs and assume all risks for the publicly owned-corporation. Rather than profit from the corporation they supposedly owned through the provincial government, the people of Newfoundland and Labrador became its guarantor, its perpetual money-bank, without any real ability to control the corporation.
As another post that December explained, this was the result of consistent actions by the provincial government led by Danny Williams from 2006 onwards to advance the corporate interest of NALCOR-Hydro. At the time, Williams and just about everyone else conflated the corporate interest with the public interest.
There’s no small irony that in a year-end photograph, someone stuck a copy of Doug House’s book on economic development policy in the 1990s behind Andrew Furey’s head. The Economic recovery Commission that Doug House chaired was an alternative policy centre created by Clyde Wells to counterbalance the bureaucracy. House describes the internal political struggles by what he calls the Old Guard against the ERC but what House ignores is that essentially that conflict was a deliberate choice by Wells to give him and cabinet genuinely different perspectives when making major policy decisions. You can find examples of the same approach from the United Kingdom from the early 1970s onward and very obviously in the way Ronald Reagan created two competing nodes of arms control thinking in the 1980s in State and Defense.
In itself, the provincial government doesn’t have any energy policy thinking within the bureaucracy that will balance the influence of NALCOR-Hydro and its supporters and proxies like Brendan Paddick. There is no political thinking on energy policy at all. You can see this in the way Furey and the cabinet created the Genius Committee on what might happen in 2041. To give you a sense of the lack of thinking inside government about this, consider that the official news release says the cabinet appointed the team because Richard LeBlanc told them to. Not the obvious need for the provincial government to have a clear policy on what to do with one of the most significant decisions it will make in the first half of this century.
The scenario we are looking at is one in which Quebec has the initiative. Quebec will frame the discussion and the Newfoundland and Labrador side will be responding. Quebec will come to the table not only with a rich understanding of what has gone on before, but also a n understanding of how to play on the considerable and obvious weaknesses on the Newfoundland and Labrador side. Their organizational strengths are considerable in comparison to Newfoundland and Labrador.
That means they are likely to pitch an offer in a way designed to achieve their goals. There are at least two separate issues this time out: one is the continuation of the Churchill Falls contract (from Quebec’s perspective). The other is Gull Island.
Quebec might pitch Gull first in the hopes they could slide through a renewal of the Churchill Falls contract as incidental after a seemingly tougher round on Gull Island. They could also replay the 1998 deal with some adjustments. After all, expansion of the Churchill Falls power plant requires more water and there may not be more water. The two provinces basically crossed those ideas off after 1998 once they actually started serious investigation of the possibilities. If they can make a plausible pitch for an enlarged Churchill Falls, that could be a convenient distraction that builds up expectations at the front end that settles down to discussion on Gull and then adds Churchill Falls at the back end as an “oh by the way” thing.
A focus on Gull Island would excite the folks at NALCOR-Hydro. Andrew Furey and his key advisor – Brendan Paddick, BFF – are already sold on it. Quebec will play up the green stuff and the new opportunities. Again, that’s stuff where the Newfoundland and Labrador Premier is already sold. There’ll be an ego-boost in getting this long-standing goal done, which was basically what drove Danny Williams to push a ludicrous project forward no matter what. Capping his tenure with Gull Island would have the same lure for Andrew Furey as it had for Danny Williams.
That’s playing the psychological game of negotiations. If the Quebec negotiators are smart, they can pitch the offer with some obviously unacceptable features. Like some sort of blending of NALCOR-Hydro and Hydro-Quebec into a single company or of taking over CF(L)Co. It could be something as simple as demanding a 50/50 split on the interest in the company formed to build Gull Island. That will allow the Newfoundland and Labrador folks to fight about something Quebec isn’t actually serious about and feel good when they come around to a deal that meets Hydro-Quebec’s goal of lots of power for a long time as cheaply as possible.
That underlying sense of continuity in whatever comes from Quebec will make it easier for the Newfoundland and Labrador side to agree eventually. They don’t have an alternate idea. If they did, we’d have heard about it already. That’s because – as Hydro-Quebec well knows – the window on finishing a deal on what could be complex talks could easily run beyond the window for Newfoundland and Labrador to do something else. By the time they figure out what is going on, the Newfoundlander and Labrador side may be too far down the path to change.
The window, by the way, for an alternative is somewhere between 2025 and 2029. That’s how long it might take to settle a legal battle between the two shareholders in CF(L)Co if things went sour. Remember 2041 is an absolute cut-off. Every contract that supplies electricity from Churchill Falls to both shareholders and major portions of the Shareholders Agreement all stop cold on 31 August 2041.
If you haven’t seen it yet, one of the crucial features of whatever the two governments and their energy companies talk about in the next few years, price will be a big part of it. For Hydro-Quebec, the important number are three, six and a half, and 11.
The Heritage Pool – Quebec’s domestic supply – currently costs about three cents a kilowatt hour to produce on average. There’s not going to be much interest in any number that is significantly higher than that, especially on a contract that will last at least 30 and more likely 45 to 50 years.
Hydro-Quebec exports electricity these days for an average of 6.5 cents a kilowatt hour (Canadian). That’s a pretty tidy sum.
11 cents a kilowatt hour is roughly the cost of a new dam in Quebec.
That’s a coincidence but you are looking at a workable picture of potential low-, medium-, and high- prices for electricity from Churchill Falls where the low is half the medium and the medium is half the high. At those prices, you are looking at $900 million to $3.3 billion in annual revenue if we assume annual production at Churchill Falls of 30 terawatt hours a year. It can actually produce more than that and would produce more if they actually could expand the output from the plant as expected in 1998.
Well, we can toss out that 11 cent figure. No one is interested in that. Our range of likely prices they will be talking about is likely going to be somewhere between three and six cents a kilowatt hour, give or take. A long-term power purchase agreement is not going to settle on a higher price, so that pushed the number below six cents. Hydro-Quebec will want to pitch a blended price for electricity, using Churchill Falls and the low cost of production from a paid-off plant, to make Gull Island more attractive than it would be as a stand-alone project.
Any of those numbers is better than 1969 but that’s why it is silly to use the 1969 contract as a benchmark for anything. A deal has to be looked at not in comparison to an irrelevant past but to a likely future. That’s where Newfoundland and Labrador could use some expensive external consultants but all those psychological factors mentioned earlier will push the province toward a deal that likely sets the price closer to three cents a kilowatt hour than the six.
[continues below]
More 1998 reading
Premiers announce formal negotiations on Churchill River Developments
NL Hydro to negotiate Churchill River Developments
Framework for Churchill River Discussions
Text of Premier’s Address to Province
Map of Existing and Proposed Developments
In 2012, as part of the Muskrat Falls pitch, the provincial government produced a document titled Upper Churchill: What will happen in 2041? Neither “ CFLCo, nor the Upper Churchill facility, nor the power generated by it will ‘revert’ or ‘return’ to the province on 31 August 29041 the paper cautions. “Instead, the Upper Churchill will continue to be owned and controlled by CFLCo, a corporation owed 65.8% by NLH and 34.2% by HQ, until such time as the 1961 Water Lease expires.”
There “will be legal, financial and corporate obligations upon CFLCo, including those directors of CFLCo that may be appointed by NLH, as a result of HQ continuing economic interests. These obligations may or may not align with the province’s public interest or policy goals at any given time. There is every reason to expect that some Upper Churchill power will be delivered within the province. However, almost 30 years from today, it is impossible to predict what CFLCo’s sale arrangements and power price will be for Upper Churchill when the Power Contract expires.”
While that’s generally true, there are a few nose-pullers among the assumptions. That’s because the paper’s aim was to discount Churchill Falls as an alternative to Muskrat Falls, not present a fair and accurate assessment of 2041. That’s why there’s the insinuation that the provincial government might have to accept decisions in 2041 that would be dictated by Quebec. It’s a true statement across a wide range of possibilities but, as we saw with Muskrat falls, the public interest and the corporate interests of the government’s Crown corporation don’t align sometimes. But on something like Churchill Falls, it’s actually *more* likely than not that NALCOR-Hydro and therefore the provincial government will align with Hydro-Quebec rather than stand with the public.
That’s because there’s an inherent conflict of interest in these talks that mirrors the one in the 1969 talks. At that time, only one of the parties to the negotiations – Hydro-Quebec – sat on both sides of the table. BRINCO was a private company and the majority shareholder. It objected to the conflict of interest but ultimately that didn’t matter. In 2023, *both* governments have an interest in continuing some version of the 1969 contract that under-values the electricity.
“There is little doubt the people of the province will realize significant benefits from the Upper Churchill arrangements post-2041,” the author of that terribly written 2012 paper put it. “ Whether those benefits will be as ultimate beneficial majority shareholders of CFLCo, or as the customers of relatively inexpensive power, or a combination of both, will be determined by future generations.”
That’s why you should expect some deal that short-changes Newfoundland and Labrador in practical terms. There’s a powerful political interest in using cheap electricity to subsidize the economy in Labrador. There’s a common outlook shared by both Francois Legault and Andrew Furey, as regular readers know from other columns.
And that’s why the notion proposed in the La Presse op-ed is so radical. It actually calls on both government’s to operate CF(L)Co so as to counteract that conflict of interest in deciding what to do with electricity from the Churchill Falls plant after 2041. Open calls for expressions on interest in the electricity, as suggested by Bern Coffey, is one way to do that. The two governments would have to set up CF(L)Co to do that. Not an easy task but it is possible. Coffey’s approach would force both provincially-owned hydro-corporations to compete with other commercial and public sector buyers for the electricity. It’s one sure way of maximizing the revenue to both shareholders. It’s also an approach that neither could legitimately turn down if they genuinely respected their legal obligations to each other operate the company in the best interest of both parties. It actually would align the public interest with the corporate interests on both sides of the border.
What you are more likely to see, though, is some variation on the approach both provinces are already committed to, one way or another. As with Legault’s commitment to “energy sobriety,” there will be a phrase that allows the government to give a benefit to a company that doesn’t meet the policy objective but that brings other benefits of some kind. That’s how both sides of these talks will justify under-valuing Churchill Falls electricity in the final deal. They will claim that ordinary citizens deserve cheap power, even though there are other ways to deal with electricity prices and the market will deliver plenty of reasonably priced electricity anyway if the governments follow the right policies.
Talk of helping ordinary people is more a distraction from the real beneficiaries of under-valuing electricity after 2041. Those beneficiaries are the companies that get breaks now and that will get them in the future, whether under Legault’s Energy Sobriety scheme or whatever Andrew Furey cooks up along the same lines. It’s what happens today. Inertia rules.
Wednesday: The Labrador Hydro Briefing Note
Monday (Feb 13): Team Broke NL
Wednesday (Feb 15): Car and Truck Sales Trends