The Gulls of Churchill Falls

A "remarkable price" to be paid by NL. Again (This is the one you'll want to share)

Here’s what Newfoundland and Labrador and Quebec announced last week:

• Hydro-Quebec secured another 50 years of the electricity it gets today from Churchill Falls along with 90% of the new generation from Gull Island and a second Churchill Falls plant (if they are built) for a blended price of six cents a kilowatt hour (2024 dollars).

• The New ‘69 Deal preserves *all* of Quebec’s powers from 1969 including the right to run the CF plant as if it were within Hydro-Quebec’s system in order to meet CF’s needs.

• As in 1969, Hydro-Quebec will assume all risk for cost over-runs.

• HQ will finance the expansion projects, including paying for the equity shares by CF(L)Co and NL Hydro.

• This significantly reduces NL Hydro’s control of the expansion projects and of managing the projects overall. HQ is merely required to “consult” NL Hydro.

• The new price for electricity from CF for both HQ and NL Hydro will be an average of 2.2 cents a kilowatt hour, valued in 2024 dollars. It does not escalate. Given HQ’s effective discount, that will be 1.43 cents a kilowatt hour today, in effect. NL Hydro’s effective discount reduces its cost to 0.8 cents per kilowatt hour.

• HQ’s domestic wholesale price for electricity today is 3.0 cents a kilowatt hour and has been for the past 20 years.

• Over the past 25 years, HQ’s been getting between 4.0 and 6.0 cents a kilowatt hour for export electricity into the United States. In 2023, it got 10.3 cents.

• The total HQ will pay Churchill Falls (Labrador) Corporation for that electricity from CF is $33.8 billion as valued in 2024. If HQ dropped a cheque off at CF (L) Co today for $33.8 billion, they’d never pay another cent until after 2075. If they go the other way and pay year by year, the last payment they make will be for however much electricity they get in 2075 but valued at 2.2 cents a kilowatt hour in 2024 and have to be under the total.

• Neither Premier Andrew Furey nor NALCOR/Hydro boss Jennifer Williams have explained why they accepted such a low price in light of the commitment not to repeat the 1969 deal.

• Although NL Hydro gets exactly the same deal on price, NL Hydro has not revealed its financial commitments under this deal such as the amounts it will pay for CF electricity.

• The chart at the end of the column shows the estimated yearly payments by HQ to CF (L)Co for CF electricity in hundreds of millions of 2024 dollars. Future prices must deliver the 2024 valuation of the electricity regardless of its value at the time. This is similar to the 1969 contract.

• There are two expansion projects: Churchill Falls 2 (new power plant and two 550 MW turbines) and Gull Island (2250 MW installed). As in a similar 1998 deal, neither of these is guaranteed to go ahead.

• If everything goes ahead, HQ gets 80% of the power in CF and Gull with NL Hydro having only 20%. HQ will get 90% of Gull Island’s output for 50 years. The price for both Gull and Churchill electricity will be six cents a kilowatt hour.

• This blended price implies that the anticipated price for Gull Island electricity will be around 11 cents a kilowatt hour and therefore reinforces the conclusion that the actual price for CF electricity will be an average of 2.2 cents a kilowatt hour.

• If the expansion projects do not go ahead, HQ keeps its 50 year access to and control of CF at a super cheap price in 2024 dollars but NL Hydro only gets modest mounts of additional electricity in compensation.

• The 1,990 megawatts of electricity potentially available to NL Hydro (it’s 20% of the total available) if everything goes ahead will not cover projected new generation needed in Newfoundland and Labrador based on NL Hydro’s current forecasts.

• As with the 1969 deal, if NL Hydro does not recapture its full share, HQ can take the electricity at the contracted prices. The bulk of this electricity would come from Churchill Falls.

• To get any of that NL Hydro electricity to Newfoundland, NL Hydro would have to build at least two more Labrador-Island Link type lines, at its own cost.

• There is no part of the MOU that says the Government of Newfoundland and Labrador will get *any* money in 2025 or 2026 or in *any* year, for that matter. Period. Whatever money GNL gets in any year will be after CF(L) Co and NL Hydro are done with it. The money will go to operate the existing plant, pay any new bills for new developments, cover dividends to shareholders, and in NL Hydro’s case pay for Muskrat Falls *before* a penny comes to the provincial government.

• CF(L)Co or NL Hydro will get a combination of two payments covering 2025 and 2026 *if* the final agreements are signed on time and *if* HQ makes a particular decision on CF extension financing. One is intended as the first installment for the cheap new price for CF electricity. The other is part of a 10-year payment by HQ for the shares in Gull Island. Thus for the first decade of the new deal, NL Hydro and CF(L)Co would likely receive no added revenue.

• The return on equity for the expansion projects is between eight and nine percent. Given that HQ is funding the NL equity portions, it is not clear if HQ will claim this or give it to NL Hydro and CF(L)Co.

• If Gull Island goes ahead, Hydro-Quebec will own 40% of the Gull Island project, up from the 34% it owns in Churchill Falls.

• Hydro-Quebec will own all the intellectual property related to Gull Island and Churchill Falls 2 (two new turbines and a new powerhouse) whether or not the projects go ahead.

• Under the exclusivity clause and once the Definitive Agreements are signed, in the event the expansions do not go ahead neither NL Hydro nor CF(L)Co can talk to anyone about either project for 15 years beyond 2029.

• Given that this includes preliminary discussions, that means HQ has a privileged position on those projects out to 2044 and would effectively delay develop on either without HQ involved until sometime into the 2050s and beyond.

• The CF renewal agreement is independent of any agreements to develop new generation.

• If they are built, the expansion project deals will be for 50 years from the date of commissioning. That would put their end dates at some time in the 2080s.

• There is not enough money coming from the Churchill Falls renewal to pay for Muskrat Falls.

What does Newfoundland and Labrador get that makes this such an amazing deal?

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When Andrew Furey and Jennifer Williams went into talks with Quebec about renewing the 1969 contract a few years early, they had the advantage of decades of experience and tons of expert advice about what had happened before, why things had come out like they did in the past, and how to move ahead without repeating the mistakes of the past. After all, there have been attempts to build Gull Island and expand Churchill Falls before now. There are some people outside government and NALCOR who understand what happened in 1969 and how the deals actually work. That’s why it is strange the New ‘69 Deal recreates so many of the negative features of the original Churchill Falls agreement.

On price alone, they had some pretty obvious top and bottom levels to the what the Newfoundland and Labrador team could have looked for, legitimately, based on current and future situations. The bottom or floor for their talks would naturally be 3.0 cents a kilowatt hour which is Hydro-Quebec’s current domestic wholesale price for electricity. Not what consumers pay. What Hydro-Quebec sells electricity to the provincial distributor for. The upper limit of possible prices would be 16 cents a kilowatt hour which is the cheapest alternate source to Churchill Falls that Hydro-Quebec has.

They settled on 2.2 cents for Churchill Falls, which is a stand-alone agreement. A total value of $33.8 billion for all the electricity and privileges under the current contracts, valued in 2024 dollars and locked in at that price recreates 1969 and is shockingly low. It seems to have been accepted since it allowed Hydro-Quebec to build Gull Island at a price it would accept than pursue Newfoundland and Labrador’s separate interests in the different aspects of the deal and find mutually beneficial middle ground. Like Muskrat Falls, it seemed having any deal was the goal, regardless of the cost to Newfoundland and Labrador.

Hydro-Quebec owns 34% of Churchill Falls. It’s a shareholder. The plant is paid for long ago. Operating costs are low. So whatever HQ pays to Churchill Falls (Labrador) Corporation, it stands to get most of it back a dividend each year. That’s effectively a discount of 34% so that 2.2 cents really nets out at something less than 1.5 cents.

Half of the floor price.

So when you call this a bargain basement price, it really is. And it’s locked in regardless of what happens to the expansion projects.

That’s why it seems Newfoundland and Labrador got nothing in return for giving very much.

Nothing.

Both the Churchill Falls expansion project and Gull Island are not guaranteed to happen. So if Andrew and Jennifer took a super cheap price on Churchill Falls - again - in exchange for something on another part of the whole deal, they got played for suckers. That’s because they put the control of those other projects in Hydro-Quebec’s hands to decide everything, including whether or not they go ahead and left the CF deal as a stand-alone survivor at an absurdly low price.

If you want to understand how heavily skewed in Quebec’s favour this deal really is, listen to The Signal, CBC’s mid-day radio program that this Thursday featured two of the people who negotiated the New ‘69 Deal. There was Jennifer Williams, chief executive of NALCOR, now calling itself NL Hydro again, plus others involved in the negotiations.

“Why a 50 year deal?” someone asked, given that typical contracts these days are running 25 years for the supply of electricity from established plants. Good question. Not so good an answer. Well, Quebec wouldn’t have wanted that, came the reply. No explanation of why not 30 or even 40. Not a word about why there’s no pause after 25 years to review and make sure things were okay from Newfoundland and Labrador’s perspective. Quebec wanted 50 and so they got 50.

Someone else asked about the value of the electricity given that we do not know what the value will be in the future. Another great question and one that goes back to the point made here last Monday. That’s why we built in high values later on, one of the guests explained.

Nice if it were true, but it isn’t. The deal *he* signed off on before the provincial government accepted it, fixes the value of the entire block of electricity from Churchill Falls that Hydro-Quebec gets for another half century at $33.8 billion in 2024 dollars. It will never go higher unless the plain English words in the MOU don’t mean what they mean. The average price per kilowatt hour is about 2.2 cents.

In an interview with Radio Canada this week, Michael Sabia, the chief executive of Hydro-Quebec and until recently the deputy minister of finance for the Government of Canada, called the price for electricity he got from Jennifer Williams and Andrew Furey “remarkable.” It *is* a remarkable price. Remarkably low, that is, and Sabia knows neither he nor his successors could have pulled off such a sweet deal if he’d waited until 2041. He said as much in the interview. He also said that “if we have the chance to pay six cents, we will do it.”

Quebec had a particular advantage in this deal thanks to Sabia. Given that Sabia was deputy minister of finance in Ottawa from December 2020 until early 2023, he also knows far more about the financial mess of Newfoundland and Labrador and of NALCOR/Hydro’s financial problems than anyone else at the table likely including the lead negotiators for NL Hydro and the provincial government. Aside from whatever was working on the Newfoundland and Labrador side against the province’s own interests, Sabia may have given it an edge.

Sabia puts the price for Churchill Falls electricity at four cents a kilowatt hour, on average over the term of the deal, with an initial price of only two cents for the 17 years remaining from the old deal. Call it four cents, if that is reasonably what it works out to be. It doesn’t actually. The number comes from the made-up idea the price rises. Frankly, given the fact the two groups that signed the deal cannot explain in the same plain English or French means that they are both likely hiding something significant from the people on both sides. The confusing claims about price compared to the simple text of the agreement in principle seem and inadvertent disclosure of a deliberate public deception.

All the same, accept Sabia’s four as an average for Churchill Falls. Accept it for a moment. It makes no more sense than 2.2 cents. Overall, including the new transmission, the price would be six cents a kilowatt hour in Sabia’s version. That price for Churchill Falls alone is still only one cent a kilowatt hour over Sabia’s current wholesale price and it is guaranteed for another 50 years.

And if you look at Sabia’s interview, it’s clear there is supposedly a very slow rise in the price Hydro-Quebec will. There’s no explanation for this in any way. Why is it so? Quebec has done very well by the original contract and looks a bit less generous and much more conniving by insisting on paying more but only a little more in exchange for nothing, really at the front end while only getting to a better price of four cents or something else later on. The versions of the CF pricing offered by neither party is true of course, at least not as the MOU describes it. This is meaningful.

You can see the benefit of this project to Quebec if you look at the arrangements for Gull Island. As with Churchill Falls, Hydro-Quebec is taking all the financial risk on its own back and, in fact, the equity stakes for Newfoundland and Labrador are coming entirely from Quebec. That puts Newfoundland and Labrador under Quebec’s control for these projects. As at Churchill Falls, the one who pays the piper calls the tune

At Gull Island, Quebec will get 40% interest in the new company. It will also take - according to Michael Sabia - 90% of the plant’s output once it is done. The upside for all is that unlike NALCOR/NL Hydro, Hydro-Quebec has a demonstrated experience of delivering megaprojects pretty much on spec. La Romaine, it’s most recent project, was only 14% over budget. NALCOR/NL Hydro could only dream of such ability. Gull Island will cost about $20 billion, Churchill Falls 2 about $2.5 billion, again with Hydro-Quebec taking the lead and the risk. The upgrade at Churchill Falls will cost about $1.5 billion and is relatively straightforward. NL Hydro is responsible for that.

Compare this with the proposal from 1998, some key elements of which survived into the 2003 draft deal. Indigenous people would have had a 10% stake. HQ would provide a guaranteed floor price, taking 100% of production, but the actual price “will be set by an average of market prices above the floor.” This was still a viable option this time but clearly Newfoundland and Labrador was either not aware of or interested in a pricing for either CF that anchored pricing in future values as determined by the market at the time. Such an approach would clearly be in Newfoundland and Labrador’s interest while at the same time offer Hydro-Quebec the potential for a more generous (from Newfoundland and Labrador’s perspective), fixed-price scheme on Gull. An alternate version of Gull in 1998 saw Newfoundland and Labrador take a 75% stake and 50% of the electricity.

In his interview, Sabia was very clear about the importance of this deal to deliver long-term cheap electricity to Quebec. That was a strategic objective for Quebec. The same cannot be said for Newfoundland and Labrador. What was its objective beyond getting a deal with political value? Asked about electricity prices on Thursday, Williams assured Labradorians they will continue to enjoy the heavily discounted electricity they’ve had since 1975 thanks to Churchill Falls. After all, as regular readers know, NL Hydro gets its electricity from Churchill Falls at the same heavily discounted price as Hydro-Quebec and sells it for a tidy profit.

But for customers on the island, crushed by Muskrat Falls and its looming shadow over future electricity prices, Williams offered no help at all. She cannot. *Their* electricity rates will continue to climb for many reasons, only some legitimate, simply because Williams and her fellows at NALCOR have never developed a coherent electricity plan for the province. That was to be the job of the public utilities board but, after 1999, a cabal of successive political leaders and bureaucrats and officials at the energy corporation gutted the Board’s powers. In an ultimate display of arrogance and hypocrisy the Furey Liberals are promising to let the PUB play with this project at some point even though they have no power to change any of it. By the time they get to it, the contracts will be carved in stone anyway.

Newfoundland and Labrador will get a few jobs during construction, if the expansion projects go ahead. There will be some extra cash every year but far less than there could have been and should have been *if* the goal on the Newfoundland and Labrador side had been more than getting a deal at any price. The result is that as with Muskrat Falls, someone else will reap the benefits of Newfoundland and Labrador’s resources while Newfoundlanders and Labradorians pay ever more.

That someone else is very familiar. But you cannot fault anyone in Quebec and Hydro-Quebec for seeing an opportunity and taking advantage of it. The fault here rests as it did with Muskrat Falls 15 years ago, entirely with the people from Newfoundland and Labrador who accepted far less than Churchill Falls and Gull Island than they are worth and who - as all the briefing materials and public statements have shown so far - are following the old NALCOR playbook. The truth is that despite all that we have learned, the people who put this deal together produced a worse mess than the 1969 fiction they promised not to repeat.

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