After nearly 50 years, the time has come for Newfoundland and Labrador to forget the humiliation of the lopsided Churchill Falls hydroelectric contract.
If only it could.
The Supreme Court of Canada on Friday ended the province’s long and costly legal quest to reopen the controversial 65-year contract, under which Hydro-Québec continues to buy Labrador hydroelectric power at 1960s prices and resells it at huge profits.
The dismissal marks three strikes for the province. Twice before, it had challenged elements of the Churchill Falls contract in court, losing each time.
The obvious lesson in the latest failed lawsuit is that Newfoundlanders should move on. This should be the end of the story.
Unfortunately, the Supreme Court ruling hasn’t erased deep financial and psychological scars. Newfoundland unknowingly blundered once by agreeing to the 1969 contract. And it doubled down a generation later by blindly forging ahead on its own with the high-risk Muskrat Falls megaproject on the Lower Churchill River, which is slated to begin producing hydroelectric power in 2020.
For former Newfoundland premier Danny Williams, developing Muskrat Falls was never just about generating hydro power. It was about sticking it to Quebec, and righting the perceived wrongs of the Churchill Falls contract. Never again, he vowed, would Newfoundlanders let themselves be exploited by Quebec. So instead of selling the power from Muskrat Falls to the most obvious customer – Quebec – the province opted to go it alone, with all the inherent risks. It will repatriate the power to Newfoundland and finance a circuitous underwater transmission line to Nova Scotia.
The unfortunate consequence of this energy hubris is that instead of being cheated by its neighbour, Newfoundlanders are fleecing themselves. Delays and cost overruns on the $12.7-billion megaproject will cause residential hydro rates to more than double across Newfoundland by 2022 and could eventually bankrupt the tiny province. A provincial inquiry, charged with uncovering what went wrong and whom to blame, is slated to release its final report late next year.
In its lawsuit, Churchill Falls (Labrador) Corp. (CFLCo), a provincial Crown corporation, sought to have the contract reopened because the deal had made the company a “prisoner of the 1960s paradigm” – before energy became a valuable and tradeable commodity. For its part, Hydro-Québec said CFLCo was wrongly seeking to take benefits that belong to the Quebec utility.
No one disputes that the Churchill Falls contract turned out badly for Newfoundland. The contract, automatically extended in 2016, allows Quebec to buy the power at pre-1970s oil shock prices until 2041. Hydro-Québec gets the power at roughly $2 per megawatt-hour, and resells it at 20 to 40 times that price. Back in 1989, the Quebec utility estimated that it would buy power for a total of $5.8-billion over the life of the contract, generating $250-billion in windfall profits.
Then again, the financial returns on any major energy project built in the 1960s, such as dams and nuclear reactors, look pretty good today, because they have long ago been paid for.
Without Quebec, Churchill Falls would never have been built. Newfoundland had no use for the power at the time. Hydro-Québec put up nearly half the initial capital for the project, and CFLCo the rest. The company then leveraged its contract with Hydro-Québec to borrow the rest.
As the Supreme Court pointed out in its decision, the contract was specifically structured “to have Hydro-Québec assume a risk that CFLCo did not want to assume.” The low fixed price and the long term were Hydro-Québec’s compensation for taking on that risk, the court concluded.
The court did point out that the province stands to get back full rights to Churchill Falls and its cheap power in 2041, reaping the windfall gains in the decades beyond.
That won’t help Newfoundland in the short-term. The province is caught in an economic, fiscal and demographic trap. The federal Parliamentary Budget Officer has warned that the small and slow-growing province must either slash spending or dramatically raise taxes to avoid a debt trap, and bankruptcy.
Newfoundland’s problems could one day become a problem for the whole country, if Ottawa is called on to bail out the province. The federal government’s financial obligations are not just hypothetical. Ottawa has guaranteed billions of dollars worth of Muskrat Falls' debt.
This story is not over.