Mention Churchill Falls and Hydro-Quebec in a single sentence and it won’t take more than a nano-second for politicians in Newfoundland and Labrador to go ballistic.
The 1969 deal — in which power from the Churchill Falls hydro project in Labrador was sold for a fraction of a penny per kilowatt hour to Hydro-Quebec for 65 years, while the Quebec utility continues to make billions of dollars from reselling the power — remains a deep scar on Newfoundland’s political psyche.
The contract with Hydro-Quebec is due to expire in 2041, not that long in utility-planning terms, at which time it’s presumed Newfoundland will be able to negotiate somewhat saner and more realistic terms for the sale of the power.
But the province has more immediate problems. As Moya Greene, the former Royal Mail CEO, pointed out in her recent task-force report on Newfoundland’s financial crisis, the province is already borrowing $1 billion a year to pay interest on its debt and is headed straight for a debt wall.
The causes of this financial crunch are multiple, but two reasons stand out: consistent over-spending by the province, and the Muskrat Falls boondoggle. Muskrat Falls, a crazy scheme launched as a political riposte to Quebec by the delusional Danny Williams and backstopped by the Harper government, is a dam so wildly over-budget that the province can’t possibly repay its $13.1-billion construction cost.
In proposing a series of measures to try to put the province on a fiscally sustainable track, Greene suggested deep spending cuts and selling everything from a ski hill near Corner Brook to oil and gas assets and the provincial liquor monopoly.
But she also included a vague yet explosive paragraph in the report that suggested the province should “package” a series of hydro assets in Labrador, including Muskrat Falls, a future dam at Gull Island, and the province’s stake in the existing Churchill Falls contract. The province should also “seek federal and private-sector partners to maximize economic value.”
Being politically astute, Greene didn’t mention Hydro-Quebec (it’s neither federal nor private), but it didn’t take long for that shoe to drop. A column in La Presse by Francis Vailles revealed that Hydro-Quebec might be interested in taking a chunk of Muskrat Falls off Newfoundland’s hands, as part of a grand deal to buy more of Churchill Falls and renegotiate the current deal before it expires.
Vailles noted that the best business deals often occur in the wake of a bankruptcy, a red flag to proud Newfoundlanders.
As the column points out, Hydro-Quebec depends on Churchill Falls for 13 per cent of its power needs, and needs the electricity in future if it’s going to sign long-term power deals with Massachusetts and New York State. And the cost of building new dams has become so expensive that this option is increasingly off the table.
It seemed clear that Vailles had pretty good sources, including an estimate of the blended cost of power from Muskrat Falls and the current Churchill Falls deal. In fact, the whole column looked as if it could be the suggested opening salvo by the Legault government for talks with a financially desperate Newfoundland.
The reaction in Newfoundland was understandable, with Vailles getting an onslaught of angry comments by Newfoundlanders saying they’d rather die than sell anything to Quebec. Faced with opposition questions, Newfoundland Premier Andrew Furey was forced this week to deny there are any negotiations underway with Quebec or Hydro-Quebec, and that he would do everything he could to protect that asset.
The priority, Furey says, is to find $500 million to $600 million a year to subsidize power rates to make sure they don’t jump to an unsustainable 24 cents per kilowatt hour when Muskrat Falls is finally commissioned.
Rate mitigation is at the crux of the discussions between Ottawa and St. John’s. The federal government is on the hook for close to $8 billion of debt, on which it provided loan guarantees and on which it will likely have to take a big write-down .
It would be great if Serge Dupont, the able former bureaucrat leading the Muskrat Falls restructuring talks for Ottawa, could broaden the discussion to include a comprehensive agreement for a renewed Churchill Falls deal and development of the Atlantic Loop power scheme. It may be a great idea, but perhaps it’s a step too far.
Too often in the past, grand schemes over these same issues have been proposed and then crashed. The issues are just too fraught. Let’s take things one step at a time. Take a write-down on Muskrat Falls and try to get it up and running first. And make sure Newfoundland gets its own fiscal house in order, which means the province making a lot more tough decisions about spending and taxes than in its recent wishy-washy provincial budget.
And if anybody buys Churchill Falls, why does it have to be just Hydro-Quebec? If an agreement is reached sometime in the next few years for an extension of the Churchill Falls deal post-2041, these hydro assets might suddenly look a lot more attractive. Big pension funds like Ontario Teachers, CPPIB, and Caisse de Dépôt, along with private-sector power firms like Fortis from Newfoundland and Nova Scotia’s Emera, may find Newfoundland’s stake in the project a very interesting proposition.
And having Newfoundland sell a chunk of Churchill Falls to a consortium of investors may remove the sting from a new deal with its old nemesis, Hydro-Quebec.
I have another suggestion to anyone in Quebec looking to make a deal. If you want to negotiate with Newfoundland, drop the talk of picking off a prize asset from a bankruptcy sale. Humiliation is no way to start a discussion with any partner.
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