Quebec owes Newfoundland nothing for the Churchill Falls power contract

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Daniel Larouche is an economist and communications consultant. He is the co-author of Hydro-Québec: After 100 Years of Electricity.

Quebec and Newfoundland and Labrador are renegotiating the Churchill Falls power contract, most likely at an increased price. But that doesn’t mean that the present contract was, or is, unfair. It simply reflects the technological and financial constraints that prevailed at the time.

Given the present energy prices, the terms do seem to favour Quebec. But these terms reflect the risk the province took when it agreed to buy the electricity all those years ago.

In 1953, the government of Newfoundland ceded virtually all the rights to Labrador’s natural resources to BRINCO, a British company formed for this purpose, in return for royalties on future profits. Churchill Falls was deemed the diamond in the rough among these resources.

BRINCO sought customers for this huge power potential. Aside from Hydro-Québec, it also approached Alcan, Alcoa, British Aluminium, the UK Atomic Energy Authority, Ontario Hydro, and several utilities in the Northeastern U.S. All in vain: Churchill Falls was too big, too far, too expensive to develop.

Hydro-Québec came to be involved with Churchill Falls purely by chance: When Quebec nationalized electricity in 1963, Hydro-Québec acquired a company that owned minority shares in the BRINCO subsidiary CFLCo, which was formed to build and operate the Churchill Falls generations station.

Opinion: Newfoundland finally has a strong hand to play as it seeks a new deal on Churchill Falls contract with Quebec

Yet Hydro-Québec still showed little enthusiasm for the CFLCo project. Churchill Falls’s output exceeded its projected needs and no electric utility in Eastern Canada or Northeastern U.S. wanted to share it with Hydro-Québec. The project became attractive only in 1965, after Hydro-Québec developed 735-kilovolt transmission. The transmission of huge amounts of energy over long distances became economical. After much dithering, Hydro-Québec agreed to purchase almost the entire Churchill Falls electrical output.

Hydro-Québec did this at great risk. Churchill Falls was a $1-billion-plus project for the utility. That’s a big number now, but an even bigger number then. Put that in perspective: In 1963, Hydro-Québec had paid $604-million to acquire all the investor-owned utilities in the province. And because CFLCo was poorly capitalized, Hydro-Québec invested another $15-million in its equity, raising its participation to 34.2 per cent. Nobody else would.

Still, more than 85 per cent of the project had to be funded through debt, the terms of which did not favour Hydro-Québec. Essentially, the lenders required Hydro-Québec to bear the risks inherent in ownership, yet not fully own the plant.

A foolish deal. Unless Hydro-Québec enjoyed the main benefit of owning a hydroelectric station: cost stability, after construction, for the life of the plant. That’s why the contract was extended to 2041. That’s why the price decreased from 0.3 cents to 0.2 cents a kilowatt-hour over the life of the contract.

These reflect historical costs, as they do for any Hydro-Québec-owned power station (stations built before Churchill Falls generate power at a cost equal to or less than Churchill Falls). To this day, CFLCo provides royalties to Newfoundland and a competitive return to its shareholders – Newfoundland & Labrador Hydro has owned 65.8 per cent of CFLCo since 1974.

Quebec has no debt to Newfoundland, financial or moral.

Both must now negotiate from a clean sheet.