More Bafflegab on the Upper Churchill

In another recent
‘information dump’ the Minister of Natural Resources released a Paper entitled:
“Upper Churchill: Can we wait until 2041?”   

Many critics
of the Muskrat Falls development have advanced the view that the Government
should not expose the small population of NL to high cost power and to the
financial risk associated with the mega project; the idea is that our incremental
power needs can be met from a variety of smaller, less risky sources, until the
Upper Churchill Contract expires.

For at least
a year, the Provincial Government has been attempting to dispel the idea that
developing a portfolio small projects, under the “isolated island” option was a
viable.  Your Uncle Gnarley scribe wrote
an article on the subject entitled: Upper Churchill Contract: Inherent Uncertainty or Bafflegab.  When the Minister released the new documents,
The Telegram on November 10, 2012, quoted him paraphrasing an opinion contained
in the Paper.  Said the Minister:

“I know at
one point I laboured under the illusion that as we waited for 2041 we would get
free power, we would have unlimited power, but when you look at the corporate
structure of CFLco it’s not that simple.

“It’s not
going to be Hydro-Quebec simply agreeing that all power will be given to
Newfoundland and Labrador.  Churchill
Falls (Labrador) Corp. will still exist – its ownership split between
Newfoundland Hydro (with 66 per cent stake) and Hydro Quebec (34 percent).  Whatever happens with Churchill Falls, the
interest of Hydro Quebec simply can’t be ignored.

“There is no
doubt that Newfoundland and Labrador will benefit in 2041 power, but it’s very
difficult to envision what exactly will take place”.

It is
difficult to contemplate that these are the comments of the Minister of Natural
Resources, a lawyer and former a Minister of Justice.   

Let’s cut to
the chase.

Any person
who runs a company, in which there are minority shareholders, knows that the
only requirement, in law, is that their rights must not be subjugated to the
interests of the majority shareholder(s). 
The majority shareholder, in this case, is Newfoundland and Labrador
Hydro.  It is the owner of 66 percent of CFLco

The Minister
suggests that the existence of a minority shareholder constrains CFLco’s
ability to make decisions.  The Minister
is wrong. It is true that, in 2041, CFLco will not be able to sell power to
Newfoundland Hydro (NH) or to any other customer for a price that is less
than the ‘market price’ (such an action would prejudice the minority
 But, it will be able
to sell to NH, at the market rate.

Why would
Kennedy be afraid of that conventional corporate practice? Is he confused about
the rules?  Is he fearful that the truth
may interfere with his mission to get Muskrat Falls approved? 

We should
hope that power costs, in 2041, will be higher than they are now.  Why? Because, as owners of 66% of CFLco, NL
will be the major beneficiary.

and Labradorians would do well to remember that the Moore’s Administration, in
1974, used $160 million of taxpayers’ money to purchase BRINCO, the developer
of the Upper Churchill.  To date, little payback
has been received on that investment.  

You may ask,
if electrical rates in 2041 are high, won’t my power bill be impacted?  NO, is the short answer!  But, an explanation is required.

Upper Churchill
power, in 2041, will have a ZERO cost base, except for the cost of on-going
maintenance of the hydro plant and the cost of transmission to the island.

Provincial Government owns 100% of Nalcor and Newfoundland Hydro Corp. is its
100% owned subsidiary.  Once CFLco sells
electricity in 2041 to either Nalcor or its subsidiary (likely the latter
because NH is already engaged in electricity sales), the government can adjust the cost of the power before it is sold to Newfoundland
Power (the distributor); in so doing, it will not impact the minority
shareholder of CFLco. 

Alternatively, the Government can
reduce the “market price” by some other mechanism including by direct
subsidy to the ratepayers.
for the Government, it’s a very simple process.
Just keep in mind that, on a net
basis, Government revenues are unaffected since it will receive 66% of the net
income of CFLco.  There is no magic
involved for Government; just a few more accounting entries for NH.        

That is what Mr. Kennedy, in his
disingenuous way, is hiding from you.

Let’s move

The Minister’s
Upper Churchill Paper also contains this quotation:

“Instead HQ’s
minority shareholder position….and the legal rights that it confers, will have
to be considered.  This will have various
consequences, one of which is that CFLco may not be subject to being operated
at the instruction of NLH.  Instead,
there will be legal, financial and corporate obligations upon CFLco, including
those of Directors of CFLco that may be appointed by NLH, as a result HQ
continuing economic interests.  These
obligations may or may not align with the Province’s public interest or policy
goals at any given time.”  (Underlining

This view
might be believable, except that it is the NL Government who appoints a
majority of Directors on the CFLco Board right now, and who will appoint possibly
more than a majority in 2041.  What Mr.
Kennedy is essentially saying to you is this: 
be concerned that one or more Directors will not represent the interests
of the Government that appointed them.  This
is not credible.

One final
point.  The Paper fails to note that at
the end of 2041, the Province will also have the legal right to expropriate the
34% CFLco shares owned by Hydro Quebec. 
The Upper Churchill Contract, having expired, ceases to be an
interprovincial matter. Provinces, as the jurisdiction in which property rights
are vested, enjoy the constitutional right to undertake such expropriation
under Section 92A of the Constitution Act of Canada.  Possibly, NL won’t want to take that
step.  Most importantly, such an option
is available should unforeseen legal issues need to be resolved. 

In case you
wondered, power from the Upper Churchill, upon expiry of the contract with HQ
will be plentiful, available and cheap.

Kennedy’s ‘information dump’ has done little to advance the case that it is
being responsible and transparent.  But,
then, the Government’s case for the Muskrat Falls Project has always been dodgy.  I suggest, if this is the best Kennedy and
his lawyers can do, pray that they have better engineers.

Des Sullivan
Des Sullivan
St. John's, Newfoundland and Labrador, Canada Uncle Gnarley is hosted by Des Sullivan, of St. John's. He is a businessman engaged over three decades in real estate management and development companies and in retail. He is currently a Director of Dorset Investments Limited and Donovan Holdings Limited. During his early career he served as Executive Assistant to Premier's Frank D. Moores (1975-1979) and Brian Peckford (1979-1985). He also served as a Part-Time Board Member on the Canada-Newfoundland Labrador Offshore Petroleum Board (C-NLOPB). Uncle Gnarley appears on the masthead representing serious and unambiguous positions on NL politics and public policy. Uncle Gnarley is a fiscal conservative possessing distinctly liberal values and a non-partisan persusasion. Those values and opinions underlie this writer's views on NL's politics, economy and society. Uncle Gnarley publishes Monday mornings and more often when events warrant.


Bill left public life shortly after the signing of the Atlantic Accord and became a member of the Court of Appeal until his retirement in 2003. During his time on the court he was involved in a number of successful appeals which overturned wrongful convictions, for which he was recognized by Innocence Canada. Bill had a special place in his heart for the underdog.

Churchill Falls Explainer (Coles Notes version)

If CFLCo is required to maximize its profit, then CFLCo should sell its electricity to the highest bidder(s) on the most advantageous terms available.


This is the most important set of negotiations we have engaged in since the Atlantic Accord and Hibernia. Despite being a small jurisdiction we proved to be smart and nimble enough to negotiate good deals on both. They have stood the test of time and have resulted in billions of dollars in royalties and created an industry which represents over a quarter of our economy. Will we prove to be smart and nimble enough to do the same with the Upper Churchill?


  1. While I wish what you said were true, it is not. The 1999 Shareholder's Agreement gives Hydro Quebec a special veto, including first right on CFLCOs shares. The 1961 Churchill lease agreement gives Hydro Quebec, together with CFLCO, a 99 year lease on the Upper Churchill waters, and an automatic 99 year renewal should they choose to exercise it..sound familiar? Bottom line is what Kennedy says is true, its just their answer is very flawed.

  2. Mr. Cabana, are you saying that HQ could opt to purchase the shares of CF(L)CO outright in 2041 or would that depend on whether CF(L)CO decided to sell them?

    Also, what did you mean by,"…what Kennedy says is true, it's just that their answer is very flawed."

    No wonder HQ is just lurking in the background, watching us speculate on water rights!

    • Hydro Quebec has first right to purchase any shares issued or sold by CFLCO. Kennedy knows the agreements referred to above have completely sunk NL as an exporter of power. They are trying to force their way through the deals signed as opposed to intelligently flanking HQ. That is where their approach is wrong and has failed time after time in the past. Yes, they are sitting in the weeds, and its only a matter of time.

  3. The water rights, monopoly, granted to CFLCO in the 1961 lease are good for 99 years, plus an automatic renewal if they choose. When the 2041 contract expires any new agreement for the sale of that power must be approved by Hydro Quebec in accordance with their veto granted by the 1999 Shareholder's Agreement. In other words, in 2041 Hydro Quebec, through its veto on CFLCO, can refuse any deal on power sales until it gets the one it wants. The 1999 Shareholders Agreement finished NL off as a potential future exporter.

    • Does this rationale assume that all transmission from the Upper Churchill must go through Quebec after 2041?

      If so, a Maritime link large enough to handle the 5000 MW from that site may become a viable or only option. Surely, we would be better off taking a smaller profit than allowing Quebec to dictate terms yet again. But that also means that the proposed 500 MW link for Muskrat Falls is a colossal waste of money and a lost opportunity.

      While I hope Quebec will be reasonable after 2041, there is no guarantee that they will and there may be no other option. If need be, it could come down to using the power ourselves and trying to attract heavy power users with low cost power.