The Churchill River MOU-A Quebec Perspective

Andrew Grant, FCPA is former Vice-President Finance & Chief Financial Officer of Newfoundland and Labrador Hydro Group. Andrew retired in 1997.

There has been much commentary since December 12^th, 2024, about the MOU from the perspective of Newfoundland and Labrador.  It’s time now that we estimate how Quebec would fare if the “bundling approach” does indeed survive scrutiny by the Review Committee.  Bundling refers to the combining of four projects, namely a proposal on new rates and terms for CF(L)Co energy, an upgrade of the CF(L)Co generating units, an addition of two new generating units at Churchill Falls and a Gull Island project.

It’s been 99 years since the Labrador border demarcation decision was issued by the Judicial Council of the Privy Council in London. Quebec has never accepted that decision, its approach to acquiring Labrador’s vast resources reflects that stance.  Examples include its position on our province’s development of iron ore mines, insisting that processing be done in Sept Isles.  Also, they took advantage of CF(L)Co’s precarious financial position.  All this is compounded by the refusal of our national government to take a leadership role in the creation of a national energy grid.  The MOU reflects the province’s desire for jobs, and its need to monetize Churchill Falls before the power contract expires in 2041, to alleviate our fiscal problem.  The Quebec advantage is clearly illustrated in the 1969 power contract and appears to be at the centre of the MOU.

The financial/economic impact of the present power contract so far can be summarized as follows.  Hydro Quebec’s energy purchases over 50 years from CF(L)Co at the approximate rates in the contract would have cost it (net of its common dividends) about $2.7 billion dollars.  That energy when resold in Quebec and the export market at reasonably assumed resale prices would range between $50 and $100 billion, or more. 

So much for looking back.  Now let us have a look forward to the next 51 years.

Should HQ decide not to proceed with either of the expansion projects at Churchill Falls and the Gull Island project, the MOU Article 2.4 (c) bars CF(L)Co and NLH from even discussing these projects with any party other than HQ for several decades.  This is startling as it would hand over full control of these sites to HQ.  Surely, as owners, we should not allow this to occur.

The “Financial Benefit to Newfoundland & Labrador Treasury” (the table), included with the supplementary MOU information, is a summary of cash flows in nominal billions of dollars.  The table presents both the benefits from the status quo Churchill Falls (without upgrades or expansion) and the benefits from new developments. 

A focus on CF only, shows a treasury benefit of $179 billion, 25 percent of which comes from NL Hydro.  The contribution from HQ would be $134 billion and from NLH $45 billion.  NLH’s $45 billion is in essence, a return to the treasury (in CF rental, royalty and dividends) of a portion of the total purchase price it would pay to CF for energy purchases, and therefore, not a “benefit”.  The real treasury contribution from NLH would come from resale in Labrador of its power purchased from CF.  Such sales are based on a significant premise that a market would materialize over time.  Any market development would be somewhat constrained by government’s declaration recorded in Hansard on January 6^th, 2025, “rest assured that there will be no change in rates for residential customers in Labrador arising from this agreement”. Would present and future industrial customers demand the same assurance?

In the absence of a fully developed Labrador market HQ could purchase uncommitted energy “at rates to be determined in the Definitive Agreements”.  It is therefore difficult to quantify any treasury benefit from NLH resale of energy currently.

The benefit to Quebec is immediate because the energy to be purchased from the existing CF plant, only, in the early years (2026 to2041, in particular) is priced at low nominal rates.  The opposite is true for the years 2042 to 2075 when the rates will be higher.  Obviously, by delaying higher rates for several decades, the value (purchasing power) is greatly diminished.  Meanwhile, HQ, would resell the energy for which it paid a net unit price of 1.8 cents, to markets in US and Ontario, as well as domestically, at many multiples of its net purchase price, possibly for $100 billion or more.

The prospect of a Gull Island development, should Quebec authorize it to proceed, would be very beneficial to Quebec.

• One notable result would be its avoidance of borrowing the tens of billions of dollars needed for the development as this province would be committed to do the borrowing.
• The energy from this development would be available to HQ and NLH.
• The project would have 40 percent HQ ownership in perpetuity.
• Compensation to NL for its limited access to energy purchases would be a meagre return based on “cost-of-service rates” and not real market rates, as if the project were in Quebec. 

No power development could take place on the Churchill River unless Quebec agrees.  Therefore, it would be exercising the same control that it has over potential power sites in Quebec. Along with denying this province a fair share of the wealth of the Churchill River, they would be barring future development on our terms until the mid-2040s.

There is an alternate case that would enable Newfoundland and Labrador and Quebec to realize a true sharing of the value of this resource based on fairness and equity.  It should be pursued.

Andrew Grant, FCPA