Coming Crisis

As a follow up to the Web Talk article, “Joint Review Panel Named for Lower Churchill Development”, published on Friday January 9th (see preceding article), I thought it might be beneficial to take a look back at some of the key issues surrounding the Upper Churchill contract itself.

The following article appeared last year in the now defunct newspaper “The Independent” which was Newfoundland and Labrador’s only locally run newspaper before closing its doors, the rest of the papers in the Province being owned and operated by Transcontinental out of Quebec.

The Independent may no longer be in circulation but the following article, which ran in the March 21st, 2008 edition, summarizes some of the key issues surrounding the Quebec/Newfoundland & Labrador dynamic as it relates to the Upper Churchill contract. It also identifies the potential for future tensions between the two Provinces regarding that specific project as well as to the Lower Churchill development.

Coming Crisis
Research paper traces upper Churchill renewal clause; indicates Québec 'exploited the moment'

By STEPHANIE PORTER
Friday, March 21, 2008

Relations between Quebec and Newfoundland and Labrador may become a little testier over the next eight years, predicts Memorial University economics professor James Feehan.

In 2016, the first 44 years of the infamous upper Churchill power contract expires. But then the “renewal clause” kicks in, automatically continuing the sale agreement between Hydro-Québec and Churchill Falls Labrador Corp. (CFLCo) for 25 more years — but further cutting the price of the already cheap electricity.

“I can imagine by 2016, where the prices of other things have gone up, and we cut the price of what we’re getting from Churchill Falls power by 20 per cent, that’s got to cause another, maybe not a crisis, but certainly it’s going to touch off other political events,” Feehan tells The Independent.

“People are going to get more upset about it as time goes along … and 2016 is not so far away anymore.”

Feehan, along with Memorial archivist-historian Melvin Baker, researched and wrote The Origins of a Coming Crisis: Renewal of the Churchill Falls Contract, published in the most recent edition of the Dalhousie Law Journal. The 52-page paper explores the negotiation of the Churchill Falls contract, particularly tracing the evolution of the renewal clause.

The authors show Hydro-Québec was fully aware of the ramifications of the deal they, in the end, were able to push to be signed.“Clearly there was no sympathy from the Québec side in terms of the resource owner, Newfoundland,” says Feehan.

“It certainly raises a lot of ethical issues for Hydro-Québec in terms of business practice. One wonders if anyone would get away with doing anything like this these days.”

In terms of the renewal clause, what began as an item of use to both sides at the table — in a 1963 draft, there was a brief provision allowing for the right to renew the contract “upon terms and conditions then to be agreed” — evolved “at a very late stage” into concrete terms, with fixed prices and time span.

In the paper, Feehan and Baker describe the post-2016 costs: “During the renewal period, the price is pre-set at two mills per kilowatt hour … two mills is 0.2 cents."

"Even in the late 1960s, a price of two mills was extraordinarily low … to put this price in perspective, in 2004 the average wholesale price of electricity in Ontario was 52.2 mills per kilowatt hour and in 2003 Hydro-Québec received an average of approximately 84.9 mills for its electricity exports.”

In other words, the authors say, that price “is barely distinguishable from being free.”

With about 30 billion kilowatt hours of electricity to be sold annually, the gap between the value of the electricity and the revenue for the province “could amount to billions of dollars per year for 25 years."

“Surely,” the authors continue, “this is the seed for a serious conflict involving the contracting parties and their owners, namely the two provincial governments.”

The vast discrepancy between the worth and price of the electricity is clear — and well-known to most Newfoundlanders and Larbadorians. But what Feehan and Baker systematically show, perhaps for the first time and using primary materials previously unexamined, is that the renewal clause was accepted in a high-pressure situation at a time when CFLCo was scrambling for cash and a deal.

“They didn’t want to do it,” says Feehan. “But they were in a position where, quite literally, it was a do or die condition for CFLCo and you know what you do? You prefer not to die.”

When beginning his research, Feehan says he — like many — was tempted to point the finger of blame squarely at Joey Smallwood or the provincial government for signing what should have been an obviously bad deal.

“I didn’t have the sense that the renewal clause came about the way it did; I had the sense this was something that had been in the works since the beginning. But dramatic change happened at the last minute.”

More damning still is evidence he found that shows Hydro-Québec knew very well what it was doing.

“Then you find the documents about what Quebec was saying about what a great deal this was and the price was so low, even in terms of 1968, everybody knew about inflation, everybody knew this was such a low price. It’s not that they were naïve on either side of the negotiating table; they knew that this price for renewal was incredibly low, yet it was pushed to the point where CFLCo had to take it or leave it."

"If I had found different facts, I would blame who I thought; and you can always go back and examine everybody’s role … but the party that really exploited the moment was Hydro-Québec."

"They knew exactly what they were doing.”

Feehan says he knows government “is aware of” his research, but hasn’t been privy to any discussions about potential upcoming challenges — legal or otherwise — to the renewal clause. He does expect discussions to heat up.

“Like the title of the paper says, Coming Crisis. Somehow, some way, as people get refocused on this, as 2016 comes and the price is cut as energy prices continue to rise …”

In adding further weight to the long-held feeling Newfoundland and Labrador was strong-armed by Quebec, Feehan also realizes his work could affect future negotiations between the two provinces.

“This sort of history very much spoils the relationship with Quebec for potential developments,” he says.

“You need some sort of basic element of trust to deal with another party.”

Feehan is paying attention as the province works toward developing the lower Churchill.

“In some ways it’s a separate issue,” he says. “You would think whatever happened on Churchill Falls shouldn’t influence the decision to make a good deal or not with the lower Churchill. If you have a good deal with any party then you should put aside the experience of a bad deal with a party in the past. But this still lingers in the background and it still creates political difficulties for relations between the two provinces.”