Why the Churchill Falls Agreement Must be Re-Negotiated

Head Table Guests

Margaret Scrivener, Former member of the Provincial Parliament for the riding of St. David, member of the firm Martin & Meredith Limited Real Estate and an Honorary Director, The Empire Club of Canada; Nick Mancini, President and CEO, Dun & Bradstreet Canada; Janice Tomlinson, President, Chubb Insurance Company of Canada; David Angus, Senior Partner, The Capital Hill Group; Gordon M. Nixon, Vice-President and Director, Head, Global Investment Banking, RBC Dominion Securities Inc.; George G. Capern, Vice-President, Government and Industry Affairs, Boeing Canada; Ann Curran, President, Curran & Associates, Principal, Lewis Companies and a Director, The Empire Club of Canada; David E. Seibel, Country Managing Partner, Canada, Anderson Consulting Canada; The Rev. Ian Noseworthy, Rector, St. Jude Church Wexford; Paul Antle, President and CEO, SCC Environmental Group Inc. and Vice-President, Resourcecan Environmental; Gerry Lukassen, Senior Vice-President, Commercial Banking, CIBC; and Dr. Michael D. Sopko, Chairman and CEO, Inco Limited.

Introduction by Julie Hannaford

Friday, June 16, 1972, was the day chosen by the architects of the Churchill Falls Project for the official inauguration ceremonies, which were to take place at the Labrador site. Eight hundred guests from the upper reaches of government, industry, and international business and finance were scheduled to gather to celebrate the most significant development of the hydroelectric project undertaken jointly by government and private enterprise.

The day was important, however, not because it marked the achievement of what had begun as a dream in the mind of Premier Joey Smallwood in August, 1952, or because it served as a tribute to those entrepreneurs and financiers who took the initial risk and invested in the project through a consortium which became known as Brinco, and not because of the impassioned and impressive rhetoric of those persons who took the podium to inaugurate the project. Rather the day and the proceedings and the ceremonies were marked by the one constant that constantly changes--namely, Canadian weather.

Fourteen chartered airliners and 41 executive jets, carrying the 800 dignitaries, confronted in mid-June temperatures hovering just above freezing, rain that turned the site of the ceremonies and landing strips into quagmires, and fog and low clouds that frustrated the best of navigational personnel and equipment. We are told that of the 220 landings and take-offs registered during this airlift, fully two thirds of them had to be made by way of instruments and few of the landings were made without several unsuccessful passes over Churchill Falls.

All in all, aside from being distinctly Canadian, the weather on the day of the opening ceremonies proved the best metaphor for the history that has shaped and defined the Churchill Falls Project.

If the matter of arriving at the opening ceremonies in mid-June 1972 was marked by the intense negotiation by aircraft personnel of heavy weather, the development of the Churchill Falls project could not have been defined by a better graphic illustration. The story of Churchill Falls, which began with the visit of the then Premier Joey Smallwood to Sir Winston Churchill on August 14, 1952, is marked by all the heavy weather of negotiation on shifting ground, combined with changed expectations, shifting political geographies, and developing international agendas.

The story of the development of the Churchill Falls Project, if it tells us anything, tells us that the only thing we can count on is change. And that development, or progress, only occurs if the architects of development recognise that in an uncertain environment, the greatest progress is made when the participants are willing to shift ground rules, expectations, and imperatives at the same time that the environment (political, financial, and technological) dictates a change in outlook.

When Brinco Limited undertook its investment in Churchill Falls, the expectation of those who were part of the Brinco consortium was that the investment was a good deal because it had been granted a mineral concession. The water power in the Labrador Plateau was a secondary matter and at the time the geographical and environmental odds against its development were insurmountable. Then technology changed and what appeared initially insurmountable became possible. Had the founders of Brinco kept their eyes exclusively on minerals, the hydroelectric project would have been relegated to a secondary although good idea.

Jeffrey Simpson has said of Canadians that we are a people accustomed to making arrangements rather than making history, and if this is true, the story of Churchill Falls is also a metaphor for the making of arrangements. The challenge of Churchill Falls did not lie in geography or technology exclusively. Instead, the challenge and the story of Churchill Falls is a story of prolonged, difficult, at times acrimonious, negotiation.

Our guest today brings us not just a report card on Churchill Falls from 1972. Premier Brian Tobin brings us the reason why we must once again negotiate. If it is true that Canadians do not make history, but rather make arrangements, then Premier Tobin's address today places us at the threshold of an opportunity to make arrangements, or failing same, to make tragic history. Premier Tobin was sworn in as the sixth Premier. of Newfoundland and Labrador on January 26, 1996, having first been elected to the House of Commons in 1980. Premier Tobin won re-election in 1984, 1988, 1993, and was appointed Minister of Fisheries and Oceans on November 4, 1993.

Mr. Tobin served as Vice-Chair in the House of Commons Committee on Regional Development and as a Member of the Commons Committees on Transport, Fisheries and Forestry, Labour, and Employment and Immigration.

Premier Tobin addresses us in the midst of the heavy weather surrounding the Churchill Falls Project. For Newfoundland, and for Canada, the vision of Churchill Falls born half a century ago threatens to become a nightmare of epic proportions. Whether we shall make a new arrangement or simply make history is the question and the challenge. In addressing both the question and the challenge as energetically as he addressed the fisheries crisis, we are fortunate to have our guest with us today.

Ladies and gentlemen, please join me in welcoming our guest, The Honourable Brian Tobin, Premier of Newfoundland and Labrador, to The Empire Club of Canada today.

Brian Tobin

I am here today to explain, as I did in Montreal, why the Churchill Falls agreement must be re-negotiated. This is an issue that should concern all Canadians.

From the outset, there are three things we should all realise about the Churchill Falls agreement: It was arrived at in an unfair way; Hydro-Quebec has reaped unconscionable windfall profits; and the Churchill Falls project is not viable under the current agreement.

For all these reasons, the agreement must be re-negotiated. It is not a question of whether. It is a question of how and when.

Let me explain how it was that the Churchill Falls agreement was arrived at in an unfair way. Geography made that possible. To get Churchill Falls power to market, it had to cross Quebec. But, Quebec in the 1960s said "no" to the free movement of electrical power. Quebec said, you can sell the power to no one but us. You cannot "wheel" Churchill Falls power through the Hydro-Quebec power grid. And, you cannot build a power line to reach markets in the U.S. We had no choice but to accept Hydro-Quebec as the middleman.

Once this was clear, Hydro-Quebec could, and did, dictate the terms of the Churchill Falls agreement. A letter of intent was signed between Hydro-Quebec and the developer, Churchill Falls (Labrador) Corporation, CF(L)Co, in 1966. Based on the 1966 letter of intent and Hydro-Quebec's demand for first delivery of power in four years, CF(L)Co began construction at Churchill Falls in 1967. The Vice-President of CF(L)Co Eric Lambert said in 1967 that if the deal with Hydro-Quebec fell through, it would "bankrupt Churchill Falls and imperil Brinco" (CF(L)Co's parent company). Hydro-Quebec knew this and exploited it. By 1969, CF(L)Co had spent $150 million but had no power contract. Hydro-Quebec demanded--and got--agreement for a 40-year agreement, with a 25-year renewal. On top of this, the price for power went down by almost 50 per cent over the 65 years.

As former Quebec Minister Eric Kierans said to Peter Gzowski on September 24: "The agreement had gone from 30 to 65 years. I couldn't believe it. People don't take risks more than 20 or 30 years even on long-term things; that's how insane this thing was." I agree. The 65-year agreement is "insane." CF(L)Co was ready to sign anything to avoid financial ruin. Hydro-Quebec knew this and exploited it. The Churchill Falls agreement was arrived at in an unfair way.

In 1969 the Churchill Falls agreement was a good business deal for Hydro-Quebec. It gave various guarantees, for example that the project would be completed. It purchased $100 million in bonds. And, it invested $15 million in equity. For these, Hydro-Quebec bargained to receive a handsome profit if the price of power and the cost of operating the project had remained stable. But, they did not.

By 1973, the first oil crisis had caused the price of energy, including electricity, to skyrocket. New regulatory arrangements for petroleum were put in place by the Canadian government. For example, in 1974, the National Energy Board increased the export price of natural gas to competitive levels. This involved overriding prices in long-term contracts. This was not done for electricity. And, worldwide, contracts for petroleum and for many other energy sources were re-negotiated to fit radically changed circumstances. But, there was no such re-negotiation of the Churchill Falls agreement.

Let's see how much Hydro-Quebec pays for Churchill Falls power. In 1976 it paid three mills, or three tenths of a cent, per kilowatt hour. Today it pays 2.7 mills, or just over one quarter of a cent. By 2016, the price will drop to two mills, or one fifth of a cent. Let's compare that with how much Hydro-Quebec gets when it sells power. Today, domestic consumers pay almost 60 mills, or six cents per kilowatt hour. Industrial consumers pay 35 mills, or 3.5 cents. In Ontario, you pay even more. Domestic consumers pay 88 mills or almost nine cents per kilowatt hour; industrial consumers pay 50 mills or five cents per kilowatt hour.

Today, Hydro-Quebec pays only about one quarter of a cent for a kilowatt hour and then resells it for up to six cents. That's like buying oil at $1.65 a barrel and reselling it at the world price of over $30.00 (Canadian) a barrel. Put another way, this equates to one cent per litre of gasoline or four cents per gallon. After 2016, the price paid by Hydro-Quebec drops to the equivalent of $1.22 a barrel for oil or 0.7 cents per litre--that is, three cents a gallon for gasoline.

Let's compare that to an important export from Ontario, Chrysler Mini Vans made in Windsor. That's like exporting Mini Vans to the U.S. for $1200 each, compared to the current price of $21,000 each. After 2016, it will be like exporting Mini Vans for $860 each.

It is not only the low price paid by Hydro-Quebec for Churchill Falls power but it is also the massive quantity of power. Since 1976, Churchill Falls has exported the equivalent of one billion barrels of oil. That is equivalent to all the oil from both the Hibernia and Terra Nova projects off Canada's East Coast. Over the 65-year term of the agreement, the export of energy from Churchill Falls will equal 3.3 billion barrels of oil or more than three Hibernias and three Terra Novas combined.

Hydro-Quebec is buying Churchill Falls power at 1969 prices and re-selling it at 1996 prices. Under the agreement, this will go on for another 45 years. The windfall profits for Hydro-Quebec are immense and unconscionable.

Since full power came on stream from Churchill Falls in 1976, Hydro-Quebec has received benefits averaging about $600 million a year. Newfoundland and Labrador has received benefits that averaged $23 million a year. Recently, that has slipped to $16 million a year. From 1976 to 1996 Hydro-Quebec received 96 per cent of the benefits, while Newfoundland and Labrador got only four per cent. To put this in perspective, in 1995 while Hydro-Quebec received benefits of $1.4 million a day from Churchill Falls, Newfoundland and Labrador received just $45,000 a day.

This is a significant and fundamental injustice. It should be a matter of concern to all fair-minded Quebeckers and, indeed, all Canadians. The Churchill Falls agreement must be re-negotiated because it has yielded unconscionably large benefits for Quebec and unconscionably small benefits for Newfoundland and Labrador.

For the people of Newfoundland and Labrador, the resource owners, the situation will become far, far worse. Costs keep going up to operate and maintain the 40 kilometres of dykes, the massive power house with its 11 turbines, the huge transformers, and the 200-kilometre power line to the Quebec border. Costs have gone up because of inflation, something else not taken into account in the 1969 agreement.

Because of this, by 2001 CF(L)Co will run out of money. Cash shortfalls will follow in various years thereafter. If Hydro-Quebec makes cash contributions, then it gets CF(L)Co shares in return. If Hydro-Quebec makes enough cash contributions, it would gain a majority of CF(L)Co shares and take control of the Churchill Falls project.

In addition, the benefits to Newfoundland and Labrador will continue to shrink. That is because the major benefits to Newfoundland and Labrador are dividends from CF(L)Co. But, beginning in 2002, CF(L)Co will have to forego the payment of dividends in some years and pay reduced dividends in most others. But even this lamentable situation will worsen. In 2016, the price paid for Churchill Falls power will go down again, from one quarter of a cent per kilowatt hour to a fifth of a cent. Massive cash shortfalls will follow. For the remaining 25year term of the contract, these would total more than $340 million.

To keep CF(L)Co from financial collapse, Newfoundland and Labrador would be forced to close more hospital beds, close more schools, abandon more public services, so that we could subsidise the production of power from Churchill Falls. Meanwhile, Hydro-Quebec would be reaping even more billions of dollars in windfall gains.

We cannot accept a situation where the future holds a $340 million cash shortfall for CF(L)Co and a $56-billion gain for Hydro-Quebec.

The Churchill Falls agreement must be re-negotiated because it is simply not viable. Declining prices for power over 65 years, and increasing costs for operating the project for that period just don't add up. The project simply will not be able to pay its way. And so the agreement must be re-negotiated.

But Hydro-Quebec says "a contract is a contract" and that is that. Well, it isn't. Contracts are re-negotiated all the time when a fundamental change of circumstances calls for it. Ask the public sector unions in that province.

Twelve years ago, Hydro-Quebec recognised the need to re-negotiate the price paid for Churchill Falls power. In 1984 Hydro-Quebec and Newfoundland and Labrador Hydro signed a "Statement of Intent Regarding Churchill Falls Negotiations" to re-negotiate the Churchill Falls agreement.

As its starting point the "Statement of Intent" recognised the need, as is stated in Article 1, the preamble, for "a fair and equitable return to Newfoundland as the owner of the Churchill Falls resource."

The document went on to state: "Bearing in mind the need to reach a compromise approach to a more equitable return to Newfoundland as the owner of the hydraulic resources of the Upper Churchill, the parties agree to devise a formula whereby Newfoundland would receive a fair and equitable return for the electricity produced, taking into account the need to adapt the terms of existing arrangements to the new reality which has arisen since the original arrangements were entered into."

The rest of the document goes on to set out a framework for that re-negotiation. What happened to this statement of intent? It became buried and forgotten, as the negotiation was aborted. But the document shows clearly that Hydro-Quebec, with the knowledge of the Levesque government, recognised that this is an agreement that needs to be re-negotiated.

The statements by Hydro-Quebec ring as true today as they did 12 years ago. Today what we need, in the words of the General Secretary of Hydro-Quebec, is a "fair and equitable return" that takes into account "the new realities." Those words stand in stark contrast to recent statements made by Hydro-Quebec to justify the 1969 agreement.

Hydro-Quebec has said it made no "extraordinary profits on Churchill Falls"--and CF(L)Co receives a fair rate of return. In an October 15 position paper, Hydro-Quebec stated that CF(L)Co made on average $33 million a year since 1977, an 11-per-cent return on equity.

This ignores two critical factors. First, CF(L)Co will soon begin to suffer cash shortfalls that could eventually total $340 million. Second, while Hydro-Quebec invested $15 million in shares, bought $100 million in bonds and gave various guarantees, since 1977 it has received net benefits estimated at $12 billion and will receive as much as $56 billion more before the end of the contract.

What is Hydro-Quebec's return on its $15-million equity investment? In 1977, the benefits to Hydro-Quebec were $124 million. That is an 827-per-cent rate of return. In 1996, the benefits to Hydro-Quebec are $745 million; that is almost a 5000-per-cent rate of return. In 2016, when the price paid by Hydro-Quebec for Churchill Falls power will drop dramatically, its benefits will increase to about $1.13 billion and its rate of return will be about 7500 per cent. $y the end of the agreement in 2041, the benefits to Hydro-Quebec will exceed $1.7 billion and its rate of return will exceed 11,000 per cent.

This is not the profit that Hydro-Quebec bargained for. It is an immense and unconscionable windfall. And, it stands in marked contrast to the 11-per-cent rate of return, soon to disappear, that Hydro-Quebec says is fair for CF(L)Co.

On October 23, Quebec's Natural Resources Minister Guy Chevrette tabled legislation for reciprocal wheeling of electricity. This is a positive development, made in response to planned deregulation in the United States. It does nothing, however, to resolve the serious problems with the Churchill Falls agreement. Instead, it reminds us that Quebec categorically refused to wheel Churchill Falls power. This reinforces the need to re-negotiate the Churchill Falls agreement in light of changed circumstances.

Justice and equity have been too long denied to the people of Newfoundland and Labrador. Tens of thousands remain out of work because of the collapse of cod stocks. Unemployment officially is 19 per cent. We have the lowest expenditure per capita in Canada for health care and education and yet we must cut these services again and again as provincial revenues fall. Our population is going down as people leave the province.

Faced with this and the monumental injustice of the Churchill Falls agreement, what would you do if you were in my position? How far would you go to get a fair share of the benefits from Churchill Falls for the people of Newfoundland and Labrador, for the owners of the resource?

Re-negotiation of the Churchill Falls agreement, to rebalance the sharing of benefits in a fundamental way, not a minor way, is what is needed. Just keeping CF(L)Co's head above water will not do this. It would not solve the basic inequity that is at the heart of the agreement.

Working together in good faith Quebec and Newfoundland and Labrador can find a solution. We can find a solution that is fair to both our provinces.

The appreciation of the meeting was expressed by Ann Curran, President, Curran & Associates, Principal, Lewis Companies and a Director, The Empire Club of Canada.