The basic problem with the MOU is that the primary benefit of Newfoundland and Labrador’s resources goes to people outside Newfoundland and Labrador. That’s the fundamental flaw in this deal. It is the fundamental flaw of the Muskrat Falls deal, which we got the same way we got this MOU.
Sadly…there is no more a chance to change this deal with Quebec fundamentally now than there was to stop Muskrat Falls, unless you change out the politicians behind it.
That’s all you need to know.
Before Andrew Parsons clacked out his mythbusting commentary on Facebook (which we published last week), he might have asked his old friend and former Liberal political staffer John Samms about the dangers of busting myths. John is intimately involved in this project and trades in his political connections all the way to the Premier’s office so it’s a living connection.
In 2011 or thereabouts, young John was a graduate student in political science at Generic Canadian University, an avid supporter of Muskrat Falls, and keen to draw some attention to himself. He started a blog that he disappeared the time came to look for a job. At one point, he did exactly what Andrew Parsons did, namely refute critics of the project that he backed by busting what he called myths. John’s mythbusting columns have disappeared but there are traces in my rebuttals - here, here, and here - at Bond Papers: The Original Series.
John failed at mythbusting. John became a master of myth-making. He had to make up myths to bust and in the process just spread more falsehood in a field that the government had already strewn with myths, fairy tales, and lies from the start. Now we have the same problem again, but this time in addition to John and a similar cast from the last horrowshow, we have some newbies in the mythmongering business, including Andrew Parsons.In the process, John, the rest of the MOU Mob, and now Andrew confirmed the old saw that wannabe mythbusters just spread their own myths rather than deal in facts. Nothing changes, right down to a bunch of guv’mint people behind another massive give-away slash mistake struggling to describe their own project honestly and failing miserably in the process.
There are lots of good examples of things the MOU MOB say that aren’t true, even if you accept *their* interpretation of the MOU. Like “we get a billion dollars a year” or if we don;t get this deal there isn’t a better one out there.
The most obvious example of this pushme-pullyou, doublethink world they live is about the deal itself: The past is done, the 1969 contract is torn up versus this is just a framework for negotiation and implicitly the deal is not a done deal, as if it might be abandoned later on. Andrew Parsons and NALCOR boss Jennifer Williams have used this for months.
Just last week, we had Parsons writing that “[u]nder this new deal, we [are] getting upwards of $225 billion (nominal dollars).” Deal, as in a finished agreement with firm facts like the amounts of money yet at the same time a bit later Parsons said “the reality is we are still negotiating.” Still negotiating… so not a deal and those numbers could go up, or down, or not exist at all unless some unknown conditions aren’t met.
Theirs is not an argument based on facts. Theirs is a sales pitch in which the “facts” change depending on the need of the huckster at the moment. This is just wannabe mythbusters spreading more myths. Well, on this issue of whether this is a deal or not let us take as fact what chief negotiator Karl Smith told NTV after the January dog-and-pony show in the House of Assembly last winter.
There is still some negotiating as the team fleshes out the final agreements, Smith said, but it is details. The structure is there and done in the MOU, which Smith called a synopsis of the agreement. That means “the major items have been negotiated [and settled, implicitly].” So, by the logic of Smith’s facts, there is no more a chance to change this deal fundamentally now than there was to stop Muskrat Falls unless you change out the politicians behind it.
Keep things clear.
To stick with facts, understand what happened in 1969, and why this new deal is not fit, let’s start with a reminder of what we were talking about at the beginning of the year. The memorandum of understanding is not about Churchill Falls alone. It’s actually about four or arguably five different projects tied up into one.
They are:
Renewal of the 1969 Power contract with Hydro-Québec, and a relatively minor upgrade of the existing turbine installation,
Construction of two new turbines in a separate power plant at Churchill Falls,
Construction of Gull Island, controlled by Hydro-Quebec,
Construction of new transmission, lines, and
Changes to the relationship between Hydro-Québec and NALCOR, currently doing business as NL Hydro.
That’s important to remember because the sales pitch about the MOU uses only one deal and leaves the rest out. To keep things simple, let’s do the same thing. And to be even more specific, let’s deal with:
goals,
price for electricity, and
alternatives
This will take us from the bigger ideas we’ve talked about here like the idea of Churchill Falls and the relationship between the people of the province and their resources all the way to the very practical stuff of workable alternatives to this project. Along the way, and even though we will deal with just three topics we will come across and demolish arguments that the people backing this MOU use, like fearmongering.
GOALS
We have no idea what the people behind this deal set as goals for the talks. As with another fiasco, namely the offshore wind give-away, the Government of Newfoundland and Labrador had not objectives of their own in these talks with Quebec.
None.
We can say that because there is no evidence of goals or objectives anywhere in any statement, including in the defences of the MOU since it appeared. There’s no mention of what the goals were or even suggest what they were *and* how this deal hit the targets.
The closest we can get is Andrew Furey’s stunt of ripping sheets of paper up and that’s still pretty far. After all, as you will see, the core issue from the 1969 contract is repeated in this new deal. What’s worse - as Andrew Parsons showed in his mythbusting rant - even if they thought they fixed the 1969 problem they clearly didn’t understand what happened before.
If you don’t know what you’re trying to accomplish, then it is impossible to know if you achieve it. This is not rocket science. And you can tell that Furey and his associates had no idea what they wanted to get out of this deal because when it came time to tell the rest of us about it, they couldn’t systematically layout their set of objectives and how they accomplished them.
Contrast this with the Atlantic Accord in 1985. The government publicly stated its objectives, pursued them consistently, and in the end could easily point to what they’d achieved. “Regardless of the issue of legislative jurisdiction, the Government of Newfoundland and Labrador had five areas of public policy with which it was concerned. Legislative jurisdiction would have allowed the provincial government to address those. Cabot Martin, then an advisor to the provincial government, described the five policy considerations in a 1975 article in the Ottawa Law Review.
“They were:
public revenue generation,
industrial development,
social disruption,
provincial autonomy, and
effective administration.”
Find that in anything the MOU Mob has said at any time since 2021. That’s an important date since that’s when Quebec Premier Francois Legault got Andrew Furey’s agreement for everything that followed. The 2023 trip to Sin Jawns by Legault was a stunt, revealed as such by Andrew Furey himself when he claimed first there were no negotiations and then immediately appointed a negotiating team. Go ahead and look. You’ll find nothing.
On the Quebec side, you’ll find lots, by contrast, including Legault’s desire to continue Churchill Falls at a favourable price to Quebec, build Gull Island and, if need be, give the Newfies some of the post-2041 cash early so they can feel good or maybe even pretend they are reworking the 1969 deal.
Price for Electricity
The original 1969 delivered enough money to pay off. The original majority shareholder - BRINCO - was happy with that. The fixed, low price would get the power plant and lines built, pay back the debts, and deliver a steady annual profit. In 1975, the Government of Newfoundland and Labrador created Newfoundland and Labrador Hydro and, like the model, the new company would be a way of developing the province’s hydro-electric potential for the benefit of Newfoundlandsers and Labradorians.
Domestically, the new company would deliver cheap electricity to local homes and businesses. Outside, Newfoundland and Labrador, the goal was profit. In the decade after the original contract, electricity suddenly became a highly profitable export business. That’s the root of the claim that - as Andrew Parsons put it - “Since 1969, … Quebec has gotten $28 billion from Churchill Falls, and NL has received $2 billion.”
No one has ever been clear where that $2.0 billion came from but the $28 billion came from buying electricity for about two tenths of one cent per kilowatt hour and reselling it for as much as 20-odd cents this year. The average price Hydro-Quebec got over the last 10 years for export electricity into the United States as been around six cents. Put it another way: Hydro-Quebec buys for a fixed price and sells for a market price. That's what a real escalator clause would fix by linking the sale price with the market price.
In the MOU, both NL-Hydro and Hydro-Quebec buy a total amount of electricity over the 50 years of the deal and pay a total amount for it. Hydro Quebec will pay $33.8 billion based on the formula already worked out *if* NL Hydro takes all the electricity it gets under the deal. HQ might buy more electricity since, under the deal, NL Hydro cannot sell to anyone but Quebec. But the price for each unit of electricity in this deal is fixed by the simple math involving the total amount of electricity and the total amount to pay set out in the MOU.
Key thing: both will pay the same low, fixed price. The MOU also sets up a formula for shifting the future price in something that looks like it ties the price to market value but the elements give Quebec control. We know that from what an HQ official told the media last winter and, as Andrew Parsons notes, that “the price will be ‘reflective of wholesale electricity market value in Quebec, replacement costs in Quebec, and wholesale electricity market value in northeast export markets.’”
The formula they’ve agreed on gives Hydro-Quebec control of the most important parts of it and those are deliberately kept artificially low. That’s HQ’s policy ordered by the provincial government. Andrew Parsons only quoted part of Schedule F to the MOU, which sets out the principles of pricing for the Churchill Falls electricity.
The one thing that is clear is the total amount HQ will pay: “The total of the forecasted payments to be made to CF(L)Co by HQ is $33.8 billion (on a net present value….” They are “forecasted” payments because they are in the future under the deal, if it is finished. But there’d be no reason to put a total in there if it was just a guess. That number means something anbd it is a fixed amount. Period. All the other principles like talk of different blocks with different prices will still only add up under the MOU to that total of $33.8 billion, which will be paid to the Churchull Falls operating company by the way and not the Government of Newfoundland and Labrador. We’ll just skip over the double lie in the claim that the MOU delivers a billion a year to “us” or even the Government of Newfoundland and Labrador and settle on the only formula that matters: fixed amount of electricity and fixed total to be paid = fixed price per kilowatt hour, exactly as in 1969.
Alternatives
That’s a nice spot to shift the talk to alternatives to the original 1969 contract. Bern Coffey offered a simple one a couple of years ago: ask the market for offers on blocks of electricity after 2041. Anyone could bid, including the two shareholders in the Churchill Falls company. Another alternative is the MOU, that simply copies all the aspects of the original deal including:
fixed low price, with not enough money to pay for Muskrat Falls,
absurdly long duration,
Quebec stranglehold over export sales out of Labrador, and
the minority shareholder (Quebec) gets the lion’s share of the electricity.
We know that the people behind the MOU never looked at any alternatives, just as with Muskrat Falls. We know they never looked at alternatives because, for one thing, NALCOR sorry Hydro officials will tell you that. We also know because Andrew Furey accepted Francois Legault’s framework for a deal two years before Legault showed up in Sin Jawns. Furey appointed an advisory committee made up with too many people who knew nothing of the issues including personal friends and political pals and they only discussed what he asked for. And, he started negotiations without having discussed a strategy or goals with anyone.
There are alternatives. Churchill Falls represents 15% of Quebec’s domestic electricity supply. They cannot replace that in the next 15 years for less than 15 cents a kilowatt hour. They need this electricity more than we need their pittance payments under this MOU. If this deal dies, then Hydro-Quebec is only more jammed up more than they are now. Meanwhile, in 2041, *all* the current deals end and Hydro-Quebec is left as a minority shareholder in a company it no longer controls. All the advantages it had in 1969 are gone. There are none to replace them. So Jennifer Williams has always been wrong when she says, even as recently as last week, that this deal is so good we should break up the 1969 contract. This deal isn’t good, but it does make sense for us to tear up the 1969 contract for a better one.
But we don’t need to take the deal. Jennifer copied down from Hydro-Québec officials’ dictation because there is an alternative, at least one alternative, for Churchill Falls that:
ensures the people of Newfoundland and Labrador are the primary beneficiary of their resources, something the MOU Mob’s deal does not do,
meets the province’s future electricity needs,
respects Quebec’s role as a shareholder in Churchill Falls (Labrador) Corporation,
funds the upgrade to Churchill Falls,
leaves the development of Gull Island for a separate discussion, but
puts Newfoundland and Labrador in a better position to deal with it,
pays for Muskrat Falls, and
fulfills the 1975 plan for Newfoundland and Labrador Hydro as a significant economic engine for the province.
Here’s the alternative:
The upgraded CF plant would bring the installed capacity to 6,000 megawatts and give about 36 terawatt hours of electricity a year, assuming the plant runs at 70% capacity. Improve the performance and you get more electricity but these numbers are nice for the easy math to illustrate the point.
Two huge problems with the 1969 deal and the MOU are that:
the minority shareholder gets the majority of the electricity, without compensating the majority shareholder, and
the electricity is sold for a fixed price instead of at competitive export market prices, from Newfoundland and Labrador’s perspective.
So right off the bat, split the electricity output according to shares, which is consistent with other major resource projects areound the globe. That means that out of roughly 36 twh (it’s really 36.75), Quebec would get roughly one third (12 twh) and Newfoundland and Labrador would get the other two thirds or 24 twh.
As for price, let’s make it three cents a kilowatt hour, for a total of $1.08 billion a year paid by both and NL Hydro and Hydro-Québec to CFLCo. Increase it for inflation if you want. That would pay off the loans for the upgrade and give cash besides that could go into dividends for the shareholders or other developments and upgrades.
Both shareholders can do what they want with the electricity. Quebec can use it whatever way it wants. Newfoundland and Labrador could follow the Quebec approach and set aside one third of its share for domestic use (about 8 twh) with another 16 twh for export.
That means Churchill Falls would give Newfoundland and Labrador twice its current electricity supply domestically for domestic use. Jennifer Williams already said we needed more than twice the existing electricity supply so there it is. Jennifer got all excited about 1990 MW of generating capacity or 12 twh. This would give her twice that to play with, total.
Here’s where it gets interesting. That 24 twh on the market today is worth about six cents a kilowatt hour, on average or about twice what NL Hydro would pay for it under the MOU if this alternative. Sell it. Sell it to the highest bidder. Let Hydro Quebec buy it from NL Hydro for six cents a kilowatt hour. That’s way cheaper than HQ could replace its existing CF supply and it’s twice what CF(L)Co would get under the MOU.
That would bring in $960 million each year to NL Hydro. Hydro needs maybe $800 million to pay for Muskrat Falls each year. That leaves $190 million, which would actually belong to Newfoundland and Labrador. In the MOU, the payments go only to CF(L)Co and it would need to declare a dividend - with HQ’s approval - to get a penny. Plus it doesn’t even give $1.0 billion although the MOU Mob claim that. It’s just not true. And if you can pay for Muskrat Falls from Churchill Falls, then all the re-directed cash inside NALCOR sorry Hydro at the moment can do something. Rework my numbers if you want to figure out the net. It will still be better than the MOU because it meets all the objectives described at the start of this section.
A smart play would be to sign short-term electricity sales agreements, like say 20 to 30 years, no matter who buys it. That hedges against wild changes in the market over a long time. For a bonus, there’s another block of 8 twh for domestic use that we don’t actually need. Sell it for market prices in a 20 year block or heave it onto the spot market. Either way, 24 twh at six cents a kilowatt hour, on average would be almost $1.5 billion a year, gross, which this deal would never deliver even if you accept the Mob’s claim of a billion a year.
This deal would work for Quebec since it cannot block exports. The power lines are there and even if Quebec and Newfoundland and Labrador needed new power lines, then Quebec still would make money from the wheeling charges. And if they bought the electricity for themsevles, they’d still get the lion’s share of the supply at far lower cost than anything else they’ve got. After all it would be 12 twh at three cents and almost all of the other 24 twh at only six cents. Six is way less than 15. But in this alternative, Newfoundland and Labrador would get the cash return from its resources it deserves.
The basic problem with the MOU is that the primary benefit of Newfoundland and Labrador’s resources goes to people outside Newfoundland and Labrador.
That’s the fundamental flaw in this deal and it is the fundamental flaw of the Muskrat Falls deal which we got the same way we got this MOU.
The MOU is a disaster for Newfoundland and Labrador.
There were alternatives.
There are alternatives.
As with Muskrat Falls, no one who had the power was interested in them or, as it is so clear, with who benefits from *our* resources.
That’s all you need to know.
In my opinion, you’ve made several valid observations in this piece. You wrote, “The basic problem with the MOU is that the primary benefit of Newfoundland and Labrador’s resources goes to people outside Newfoundland and Labrador.” I cannot evaluate this statement for any of the four proposed infrastructure projects because I believe it is not possible to conduct valid professional economic analyses of the costs or benefits due to the lack of crucial data. As Mark Carney pointed out in his book, cost/benefit analysis should be performed in these public projects to determine who bears the costs and which groups in society receive the benefits. The focus is on the well-being of consumers, workers and producers rather than just the corporate enterprise. The absence of data to evaluate these projects should be of significant concern to the residents of NL. What we do know is the rated capacity of the projects, but not their expected production over the years and during any year. We have not been informed about the expected prices for the additional electricity that will be produced. We were informed about a significant debt (about $17 billion) to be incurred, but the projected costs of these projects may now be questioned due to the ongoing trade negotiations. For Hydro-Québec (HQ), these proposed projects are the motivation for the MOU. For HQ, there is an increasingly urgent need for power to meet domestic demands and fulfill export contracts. The bottom line is that while the proposed projects may have potential, the nature and extent of that potential remain unknown to the public and cannot be determined from the minimal data released.
As for the “carrot” in this MOU, that is, the higher output prices for existing power from Churchill Falls generation to settle a historic grievance, the evidence to date would seem to back your statement regarding the primary benefit from the existing Churchill Falls generation goes to Quebec and will continue to do so even with the change in existing prices. However, as Dave Vardy has suggested, transmission costs should be made available because, without them, the picture remains unclear. The primary beneficiary is expected to be Quebec, given that HQ has essentially monopolistic powers over the pricing of power from Churchill Falls. In addition, given that HQ has a substantial minority ownership in CF(L)Co. I would argue that the prices charged are “transfer”, that is, prices determined by the parent company, rather than independent market prices.
A concern I have about the ongoing discussions regarding the MOU is its very technical nature. The references to concepts like present values, discount rates, and inflation adjustments likely do not inform the general public; instead, they make the issues seem complicated and perhaps best left to someone else to figure out. However, the democratic process requires an informed public that clearly understands what is likely to contribute to their well-being and that of future generations.
I appreciate the effort that you and others are putting into understanding the MOU. I also applaud the efforts of my fellow economists, Dr Wade Locke and Dr. David Vardy, in their professional and independent analyses.
The $19billion (or $44.5billion, or $53BILLION) gorilla in the room is NL's net debt. Only the NL government has access to the real economic picture and what the future holds for provincial finances; none of the "Nine" nor any of the other MOU prognosticators have that data. Without the MOU's infusion of cash before 2041, CFLCo may actually come to belong to some hedge fund who scooped it up from a fire sale of NL assets predicated by the collapse of the economy largely due to the Muskrat follies.