David Vardy is an economist trained at Memorial, the University of Toronto and Princeton University who taught economics at Princeton, Queen’s University and at Memorial University. He worked as an economist in the federal departments of fisheries and finance, both in Ottawa and in St. John’s. He served in a number of senior executive positions including President of the Institute of Fisheries and Marine Technology, Deputy Minister of Fisheries and Aquaculture, Chair of the Public Utilities Board and Clerk of the Executive Council/Secretary to the Cabinet of the province of Newfoundland and Labrador. He was a member of the team which negotiated the 1985 Atlantic Accord. More recently he served as a member of the Premier’s Economic Recovery Team (PERT), chaired by Dame Moya Greene, and as a member of the Churchill River Management Expert Panel. He is a Paul Harris Fellow and a recipient of the True Rotarian award from Rotary International. He holds an honorary doctorate from Memorial University.
This is a short summary and analysis of the MOU. Our major concerns are with the renewal agreement for the sale of power from the existing plant for 51 years. The new developments are of concern as well.
The MOU requires a full independent review to ensure that mechanisms are created to allow our Province to realize market prices for its hydroelectric resources. Only if we invite other proposals on a competitive basis will we achieve market value.
The Existing Plant
- The biggest issue is the failure to realize the value of the power capacity and renewable energy of the Churchill Falls plant. The “MOU target” value over 51 years is $33.8 billion. On an average annual basis, and in today’s dollars, the value is $663 million, and our share is $436 million. Adjusting for lost revenues under existing agreements this becomes $423 million. The annual market value of the power is in the range $3.5 to $4.5 billion.
The MOU assigns a value of 2.5 cents/kWh to the power in today’s dollars, but our share is only 1.6 cents/kWh, or 10% of the market value, which is virtually the same share we have received from the Upper Churchill, since first power in 1971. This 10% share falls far short of our equity share in CFLCo, namely, 65.8%, and far short of what we should be obtaining as the owner of the resource, including the water rights on the Churchill River.
Combined with this failure is the lack of an escalation formula to reflect rising market prices for energy. There is no confidence that the $33.8 billion will adjust to respond to a dramatic change in prices. Our experience since 1969 is that energy price inflation has indeed been dramatic, much higher than the general rate of inflation, a factor of 11 versus 8. The low base revenue base is unacceptable, unreasonable and unfair and so is the lack of a price-to-market formula.
2. The next issue is the continued monopoly control by Quebec. The MOU does earmark power for sale within our Province but, if it cannot be used locally, we must offer it to Hydro Quebec. The MOU does not supply us with transmission rights to wheel power to third party customers other than those in Quebec. It does not allow us to access more lucrative markets but instead locks us into an exclusive arrangement for another 51 years.
Access to Hydro Quebec’s transmission corridor should be a condition precedent to any negotiations, along with our right to seek bids from other customers. We are locking ourselves into a further 50-year exclusive relationship with Quebec which prevents us from building diversity on the demand side, while perpetuating Quebec’s dominance. Without competitive bidding from a multiplicity of customers we can never obtain market value for our power.
3. The MOU is silent on the issue of water rentals and royalties, but Hydro projections suggest that royalty rates will not be changed from their current level. Our province captures a very low royalty rate from its hydroelectric resources, compared with Quebec and other provinces. Dr. Doug May has pointed out that the Quebec rate is 36 times higher than ours, per energy unit. It is in our interest to access revenues by relying more on royalties, compared with dividends, because royalties and water rental revenues, are not shared.
4. The MOU contains no termination clause. If circumstances change, there should be an escape clause but we are locked into a long-term arrangement which mirrors the 1969 65-year contract and the terms are virtually the same.
5. Finally, the MOU offers no water management agreement, but only “best efforts”. Hydro tells us that the new agreements will not give Hydro Quebec the control over the plant and its water supply which they had under the 1969 agreement and the Shareholders’ Agreement, but that is “best efforts” as well.
New Developments
Four major projects are provided in the MOU. Their combined value is $35 billion and the financial exposure of the province will be $23 billion, including equity and debt investment. Hydro Quebec will own 40% of the new company established to build the Gull Island project. This 40% ownership will continue beyond the term of the proposed power purchase agreement (PPA). In the event of financial failure, the province could not only lose its equity in the Gull Island project but also lose any semblance of control if Hydro Quebec or another financing entity is called upon to rescue the project.
If the Gull Island project is indeed sanctioned it will supply power to off takers based on costs incurred and subject to a 2% inflation factor (a rate well below historic levels). As an equity participant and as owner of the resource the province will have no entitlement to market prices. Again, the Gull Island project is being built to serve the interests of Quebec and not those of Newfoundland and Labrador.
Independent Review
Our government has refused an independent review. The oversight committee now in place has been discredited. Michael Wilson resigned from the committee on May 12 “because, in my view, the independence of the Panel became impaired, and I no longer believed the Panel’s reports would meet the public’s expectations and need for an independent analysis supported by a full and frank commentary.”
Our government has refused to refer the MOU to the PUB for review, nor has it committed to restore the jurisdiction of the PUB to review the Definitive Agreements or power purchase agreements. Instead, the Premier, during an election debate, said that the agreements would be considered by the House of Assembly, repeating the failed process which took place in January. This offers no transparency and no role for independent expert witnesses.
Summary
The Churchill Falls MOU is of vital importance to the future of the province and its fate has been left to be resolved by a general election to take place on October 14. The revenues targeted in the MOU do not justify the hype or the expectations that have been raised. Targeted revenues fall far short of market prices, and the MOU perpetuates Hydro Quebec’s control of our power resources.
Quebec continues to dispute the boundary between our provinces which was established by the Privy Council in 1927. They are de facto saying that the Churchill River lies within the jurisdiction of the province of Quebec, so they are the resource owner. This explains why they are behaving, as the owner of the resource and the principal beneficiary. That is why they insist on a cost recovery pricing scheme which deprives our Province of access to market prices.
The MOU has a big downside to our Province and little upside. We have a lot to lose and little to gain. Our government has an obligation to obtain the highest possible economic and social benefits from its resources. How can we get the best deal by doing a repetition of the failed 1969 contract? The answer is that the MOU is indeed a rollover of 1969, which should be soundly rejected.
If we go forward with the definitive agreements scheduled for completion by April 30, 2026, we will be depriving future generations of their best prospect to place their province on a sound social, economic and fiscal foundation. We are being told that we must sign up now, without taking the time for a full public review, because the Legault government may not last much longer. We are being gulled to accept that our world class assets will become stranded. These fear tactics should be rejected.
We must have the foresight and the confidence as a Canadian province to enjoy and exercise the same control over our resources as is exercised by Quebec and other provinces.
I call upon the people of our Province to demand a full independent review of the MOU. It is not too late.