Churchill Falls Explainer (Coles Notes version)

Churchill Falls (Labrador) Corporation [CFLCo] built and owns and operates the Churchill Falls power plant. NL Hydro [NLH] owns 65.8% of CFLCo’s common shares. Hydro Quebec [HQ] owns 34.2% of CFLCo’s common shares.

Churchill Falls can generate 5,400 megawatts of power and produce 35 terra-watt hours of electricity annually. To put Churchill Falls in context, 5,400 megawatts is roughly 15 to 20 percent of New York state’s peak loads; 35 terra-watt hours is roughly 20 to 25 percent of the electricity New York state uses annually.

In 2018, Canada’s highest court determined that HQ “honestly earned” the profits that HQ makes as a result of the 1969 Power Contract.

Now to 2041:

NLH and HQ are CFLCo’s only customers. NLH and HQ pay CFLCo the same price for CFLCo electricity, namely 0.2 cents per kilowatt hour. NLH buys roughly 5 terra-watt hours of CFLCo electricity annually; HQ buys roughly 30 terra-watt hours of CFLCo electricity annually. NLH and HQ in turn separately resell that electricity. When reselling, NLH and HQ each impose high markups, and each makes a significant profit on every kilowatt hour resold. NLH resells CFLCo electricity to customers in NL and outside Quebec. HQ resells CFLCo electricity to customers in Quebec and outside NL.

On 31 August 2041:

All CFLCo’s sales contracts with NLH and HQ end on 31 August 2041.

Beyond 2041:

Questions to be answered:

  1. Should NLH and HQ require CFLCo to maximize its profit?
  2. Who are CFLCo’s potential customers?
  3. To whom should CFLCo sell its electricity?
  4. How much electricity should CFLCo sell to each customer, for what price(s), and for how long?

In considering answers to the above questions, keep in mind that both NLH and HQ have a conflict of interest vis-à-vis CFLCo.

(i) Both NLH and HQ are potential customers of CFLCo. As customers, NLH and HQ would want to pay CFLCo as little as possible for its electricity.

(ii) Both NLH and HQ are shareholders of CFLCo. As shareholders, NLH and HQ would want CFLCo to maximize CFLCo’s profit by charging as much as possible for its electricity, because doing so would maximize the shareholder dividends CFLCo could pay to NLH and HQ.

Possible Answers:

  1. Should NLH and HQ require CFLCo to maximize its profit?

(a) Unless NLH and HQ both agree otherwise, CFLCo must seek to maximize its profit. Having CFLCo maximize its profit would clarify CFLCo’s corporate purpose.

(b) If CFLCo is not required to maximize its profit, then NLH and HQ could divvy up CFLCo electricity between them. NLH and HQ could then independently use and/or resell their individual share of CFLCo electricity as each sees fit. The price NLH and HQ pay for CFLCo electricity would need to be enough to cover CFLCo’s operation and maintenance expenses.

2. Who are CFLCo’s potential customers?

(a) If CFLCo is required to maximize its profit, then CFLCo’s potential customers cannot be fully known without CFLCo soliciting expressions of interest from potential customers. Such a solicitation would best be done by way of publicly advertising for expressions of interest by potential customers.

(b) If CFLCo is not required to maximize its profit, then NLH and HQ would likely continue as CFLCo’s sole customers. HQ would use its share of CFLCo electricity as HQ wishes. NLH would use its share of CFLCo electricity as NLH see fit. If NLH’s goal vis-à-vis its share of CFLCo electricity is profit-maximization, then NLH would need to determine who NLH’s potential customers are, and then resell CFLCo electricity so as to maximize NLH’s profit. If NLH’s goal vis-à-vis its share of CFLCo electricity is not profit maximization, then NLH would dispose of CFLCo electricity so as achieve its non-profit maximization goal(s). NLH could decide to use some of its share of CFLCo electricity for profit maximization and some for purposes other than profit maximization.

3. To whom should CFLCo sell its electricity?

(a) 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.

(b) If CFLCo is not required to maximize its profit, then NLH and HQ would likely continue as CFLCo’s sole customers. CFLCo electricity would be delivered based on how NLH and HQ agree to divvy up CFLCo electricity.

4. How much electricity should CFLCo sell to each customer, for what price(s), and for what period(s) of time?

(a) If CFLCo is required to maximize its profit, then CFLCo should decide how much electricity to sell to each customer, for what price(s), and for what time period(s) based on what would maximize CFLCo’s profit.

(b) If CFLCo is not required to maximize its profits, then NLH and HQ would agree on how to divvy up CFLCo electricity and pay CFLCo a price per kilowatt hour that is just enough to cover CFLCo’s operation and maintenance costs. Such an approach would be similar to the one used in the 1969 Power Contract, but varied so as to alter how much CFLCo electricity NLH and HQ would each get.

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.

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

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?