Thursday, 1 September 2016

The Renewal

The Renewal

By: Ryan Young

I have been dreading having to write this particular post for quite a while now.  As of 12:01am on September 1, 2016, the original Churchill Falls power contract with Hydro Quebec officially expired. Unfortunately for us, however, the expiration of the original contract triggers an automatic renewal clause that will see us selling power to Hydro-Quebec for an another 25 years at an additional 20% discount. This means that from today until the contract expires in 2041, we will see even less revenue from Churchill Falls coming back to the province.

The whole Churchill Falls story would take hundreds of pages to tell, but we all know how it ends. Hydro-Quebec earns more than a billion dollars each year from the sale of Churchill Falls power, while NL earns only a few million. Many wonder how such a lopsided deal could ever have been signed in the first place. I will try to summarize some of that long, dark story, to help us better understand how we came to this place so many years later.

It’s no secret that Newfoundland’s first premier, Joseph R. Smallwood, was hell bent on developing the province into an industrial hotbed. His “Develop or Die” mentality was behind some of the most elaborate (and often shady) business schemes in our history. Joey’s memory is often tainted now with the revelations of the size of the giveaways of Newfoundland resources to lure outside investments into the province. The greatest giveaway of all was Churchill Falls. But how did it happen? Let’s take a look…

Soon after Newfoundland’s Confederation into Canada in 1949, Smallwood began working on developing the mighty Hamilton Falls (later renamed Churchill Falls) for hydroelectric power generation. The site had the potential to be one of the largest power producing dams in the world, with the prospect of providing cheap, renewable power to the fast growing industries in Quebec, Ontario, and the United States. Smallwood organized a consortium of investors to finance the project and formed the British Newfoundland Development Company (BRINCO). With all of the investment in place, Smallwood was anxious to get the ball rolling on the project but he was having issues negotiating with Quebec for the right to transmit power across their province in order to bring it to market.

Quebec was only interested in using its power to attract large steel and manufacturing industries and would never participate in any scheme that would transfer its energy to power-poor provinces to give them an advantage. A bitter battle of words ensued, and the project was left at a stalemate. Prime Minister of Canada Lester B. Pearson and his Liberal government failed to defend Newfoundland's right to engage in inter-provincial trade through Quebec in the same manner that oil and gas moved seamlessly from western provinces to the east. This right was supposed to be protected under section 92.10(a) of the Constitution act of 1867. Some believe that Smallwood’s failure to demand that Ottawa uphold the constitutional right to export power across inter-provincial borders, was his greatest failing as premier.

It must be noted, however, that at the time there was a great divide growing between Quebec and the rest of the country. The FLQ was rising in power and the separatist movement in Quebec was the biggest it had ever been. With the very real threat of sabotage and terrorism if Newfoundland were allowed to put its transmission lines across Quebec, Pearson was left in a very hard spot. In one famous, but unverified story, Smallwood paid a secret visit to Pearson to ask him to invoke the constitutional protections. As the story goes, Pearson said to Joey: “I know what you are going to ask, and if you ask it I shall have to say yes, but I ask you premier to please not ask it.” Smallwood got up and left without a word, his relationship with Pearson forever shattered. We may never know if this story is true, but if it is, it underscores the severity of the situation of the time. It also underscores the decades of contention that has existed between the two provinces.

After well over a decade of negotiations a letter of intent was finally signed and construction began on the project in 1966. In 1969 a deal was finally signed with Hydro-Quebec and the project was officially a go. Smallwood touted the agreement as a great victory for Newfoundland and Labrador and promised that great prosperity would come from the mighty falls on the Churchill River. He was certainly right about the prosperity part, but just not about who would benefit.

Under the lopsided contract, Hydro-Quebec would buy electricity from CFLCO, the BRINCO subsidiary created to build and manage the project, for 0.25 cents per kilowatt hour until 2016 and then at 0.20 until 2041 under the automatic renewal clause. Within a decade of Churchill falls starting to generate power, Quebec was earning $600 Million a year compared to just $23 Million for Newfoundland and Labrador.  By 2010 Quebec’s share had grown to $1.7 Billion, while NL took in a mere $63 Million.

So why did we sign such a lopsided deal? There are many reasons to consider; large foreign investment, the ongoing construction of the dam, the ability to get something instead of nothing, the low price of oil, pride. But was there another reason that might have tipped Joey’s hand to get the deal done?

When Frank Moores ended Smallwood’s long reign as premier, he ordered a Royal Commission to look into some of the dealings of the previous government. It was discovered that Smallwood and two of his business partners had taken a $1.6 Million loan from the Bank of Montreal to purchase shares in BRINCO. This ultimately left the premier in an extreme conflict of interest that many believe led him to put his own financial needs ahead of those of the province. In the end the deal was signed, the shareholders all made money, and Hydro-Quebec gets to laugh all the way to the bank until 2041.

Scores of court challenges have been tried and lost since the deal was signed. The legality is clear, we gave up our rights to Churchill Falls and we wont get them back until 2041. Some have suggested that we simply flick the switch and force Hydro-Quebec back to the bargaining table. This is an option that sounds very nice to our patriotic ears, but would it work or would it just cost us even more money in the end? More intelligent people than myself have tackled this problem over the years, and still the contract stands. No matter how much we wish it to change, it will continue to stand for another 25 years.

The renewal clause is a sad reminder of our long history of failure. To even discuss it brings out the dirt in each and every one of us. It is important to recognize those emotions, but instead of dwelling on our past mistakes and being angry over by-gone backdoor deals, we need to harness that sentiment into something positive to ensure that we don’t keep being led down the same road. To many observers it looks like the Muskrat Falls project may end up being an even worse deal than the original Churchill Falls contract, but only time will tell on that one. Our long history of failed projects and giveaways needs to end sometime, and I can only hope that days like today remind Newfoundlanders and Labradoreans why we need to stand up to the corruption and the greed that has kept this province underachieving for centuries. We need to renew ourselves to believe that we can do better and that we will do better the next time around. As the wise sage and former U.S. President George W. Bush would say, “you can’t get fooled again.”

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