END OF THE UPPER CHURCHILL POWER CONTRACT: IMPROVING OUR BARGAINING POWER

Mark your calendars for August 31, 2041, the date the Upper Churchill Contract comes to an end.

Of course we will know long before then what will happen. No doubt Premier Furey wants a deal before he leaves office but we should recall that Premier Williams announced the Muskrat Falls project just before he retired. That didn’t work out so well! We should be wary of Premiers looking to cement their legacies before leaving office.

The Churchill River Management Expert Panel has just delivered its report to Government. For good reasons we won’t see that report as the release might prejudice negotiations. I’ve been involved in a number of sensitive negotiations over the years, such as the Atlantic Accord and Hibernia and know they have to be conducted in secret.

That being said, before entering into negotiations, the Government needs to publicly announce what its overall objectives are. This was done by the Peckford administration as a prelude to the start of negotiations for the Atlantic Accord.

In this case I would have thought they are: first, to have the right to use the power for our own domestic uses and to use attractive electricity rates to encourage economic development, particularly in Labrador, second, to get the maximum price for our energy exports, and third, to develop Gull Island and sell the electricity to whomever gives us the best price. Those objectives will be difficult to attain under the current circumstances.

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.

Ron Penney

Will we prove to be smart and nimble enough to do the same with the Upper Churchill?

The conventional wisdom is that we will be in an excellence bargaining position in 2041. The demand for electricity is increasing as we embrace electric cars and switch to electricity and Hydro Quebec will need the power. The cost of replicating the Upper Churchill within Quebec will be very high and gaining environmental and indigenous consent will be far more daunting. It is now recognized that dams have significant environmental downsides.

Gull Island is said to be the most attractive new site for a major new hydro project in North America and it has the advantage of an approved environmental assessment and indigenous agreement. (However that support may no longer be there as the Innu are very unhappy with the impact the rate mitigation plan for Muskrat Falls may have on their anticipated income from the project.)

Our bargaining position may not be as strong as we think.

What lies behind the Upper Churchill contract and the Muskrat Falls boondoggle is a fundamental problem with the regulation of the interprovincial transmission of electricity in Canada.

The transmission of oil and gas is federally regulated but not the transmission of electricity. Why is that? Section 92 (10) (c) of the Constitution Act allows  the Parliament of Canada to declare interprovincial electrical transmission lines to be for the “general advantage of Canada”, which would have the effect of placing them under federal jurisdiction. No constitutional amendment is required.

The reason is the disproportionate power of Quebec within Confederation. Until the problem with the interprovincial transmission of electricity is resolved we have no real bargaining power. So our overriding negotiating strategy should be to cause that to change and to develop alliances to ensure it happens.

We ought to have strong partners in achieving this objective as the demand for clean energy increases, particularly in Ontario and the Maritime Provinces, and specifically in Nova Scotia, where over half of its electricity is produced by coal. They should be able to deal directly with us rather than through an intermediary. The American States deal directly with Hydro Quebec. They don’t have to sell the power to a state which is between Quebec and the State of New York and let them resell it at a profit. (I recognize that there have been other significant roadblocks to transmission lines in the United States, but that isn’t one of them.)

We need to be placed in the same position as Alberta and Saskatchewan are with the transmission of their oil and gas. Alberta and Saskatchewan companies don’t have to sell their oil and gas to British Columbia or Manitoba at bargain basement prices so those provinces can resell it at immense profits.We must have the ability to deal directly with potential markets, just as Quebec has the right to deal with the State of New York.

The unstated but fundamental reason for the Muskrat Falls debacle was to demonstrate that we could bypass Quebec. We’ve certainly demonstrated that it may be physically possible, the jury is still out on that, but it is certainly uneconomic. We now know for sure that it isn’t financially feasible to transmit power from the Upper Churchill through the island and the same is true with Gull Island. So Muskrat Falls hasn’t enhanced our bargaining position, in fact it has worsened it.

Without the intervention of the Federal Parliament we are forever the hostage of Quebec.

If there is only one customer for a good, that customer has all the bargaining power. When we renegotiate the price for Upper Churchill power we need to have more than one potential customer. It may well be the case that Quebec may ultimately be our best customer, but we’ll only know that for sure if there are alternative customers.

We all need to be engaged in this big public policy issue, the biggest since the Atlantic Accord  and to inform ourselves about the history of the Upper Churchill.

The first lesson is to disabuse ourselves of the conventional wisdom that Smallwood signed the power contract on behalf of the Government.

The Upper Churchill was privately developed by a subsidiary of Brinco, CFLCO. It arranged the financing, built the project and signed the power contract, not Joey Smallwood nor the Government of Newfoundland. CFLCO is a private company. It’s not like Newfoundland and Labrador Hydro, which is wholly owned by us.

The only reason why we care now is that we forced the sale of most of the shares to the government in the early 1970’s, with the exception of those held by Hydro Quebec, because the government of the day didn’t approve of CFLCO’s proposal to develop the Lower Churchill.

If that hadn’t  happened we would have cared less about the Upper Churchill contract. Once we became the majority shareholder we did care and the inequity between what we receive for the power and what Quebec receives has become such a sore point, particularly as the price went down for the last 25 years of the contract!

The second thing we need to do is to achieve full control over CFLCO. It is intolerable that once the contract comes to end, including the special shareholders agreement, that Quebec Hydro retains a minority interest in CFLCO.

It was recognized during the negotiations of the Upper Churchill contracts that there was an inherent conflict of interest in Hydro Quebec having shares in CFLCO and at the same time being on the other side of the negotiating table.

Our bargaining position is already severely compromised because of the refusal of the federal government to assume regulatory control over the interprovincial transmission of electricity. As a minority shareholder in CFLCO  Quebec Hydro would be privy to our negotiating strategy. Our freedom of action will be inhibited because minority shareholders have special protection. CFLCO  needs to be wholly owned by the people of province so it can do what’s in our best interests not Hydro Quebec’s. We might decide to use the power domesticity in Labrador and on the island to promote mining or other industrial purposes but we can only do that if we fully control CFLCO. Unfortunately the Muskrat Falls project eliminates the largest potential domestic use. As I and others said at the time it was announced we needed to have waited until 2041.

I recall that when we introduced the Water Rights Reversion Act in the early 1980’s in an effort to overturn the contract, CFLCO opposed the legislation, because the directors felt that their obligations to the company required that. The same has happened with the Water Management Agreement where the Quebec Hydro directors of CFLCO vetoed the companies support. Such an agreement is essential to the most efficient use of Muskrat Falls, and Gull Island, should it be developed.

Moreover, any increased profits which are realized after 2041 will have to be shared with Hydro Quebec, should they retain their minority interest.

With respect to the development of Gull Island, that project should only be developed when the government of Canada exercises its right to regulate the interprovincial transmission of electricity and we can negotiate the best price in a competitive marketplace. Again, Quebec Hydro, may be our most attractive customer, but we’ll never only know for sure if there is no  competition.

Regrettably, the early indications from the provincial government are that it sees Quebec as our only customer. I’m not optimistic about the end result of the upcoming negotiation if that is the case. I’m not arguing that we shouldn’t deal with Quebec, only that we should negotiate with them when the power imbalance between Quebec and us is resolved by the government of Canada and Hydro Quebec relinquishes its minority interest in CFLCO.

One thing we know for sure is that Hydro Quebec is a very hard and able bargainer and takes full advantage of its power. I experienced that first hand in a set of negotiations I participated in the 1980’s, which lasted exactly one meeting! We need to be placed in an equal bargaining position by the government of Canada.

There are billions of dollars at stake here, which may allow us to maintain our public services as the oil and gas industry winds down. And those billions of dollars go on in perpetuity, unlike oil and gas royalties. If the federal government is really committed to a “just transition” they should step up and level the playing field for us and not continue to kowtow to Quebec.

NALCOR (Masquerading as ‘Hydro’)LIVES IN AN UPSIDE DOWN WORLD

If a Big Mac costs McDonalds $10 to produce and it is sold for $1.50, McDonalds will go out of business. They would not declare a profit!

REMEMBERING BILL MARSHALL

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.