31 March 2005

The Churchill Options

As much as Premier Danny Williams might like to open development of the Lower Churchill to the world and have it developed using creative thinking, the whole project really boils down to a handful of issues and options.

1. Increased demand, but think Canadian before American. There is a growing demand for "clean" electrical energy, both in Canada and in the US. Quebec is actually a net importer of electricity. Ontario has a pressing need for new sources of power to replace some current nuclear capability or planned nuclear plant capacity. Both provinces need power from sources that don't contribute to greenhouse gas emissions.

The same can be said of the US marketplace, particularly New York state.

The most likely markets for Labrador power are in Canada.

2. There are basically only two ways out of Labrador. As much as Premier Williams may like to talk of Labrador electrical power as being a "world-class" resource, no one is likely to figure out how to send Labrador power to the People's Republic of China. Since we are looking at North American markets, we can either ship to or through Quebec or go across the Straits of Belle Isle to Newfoundland and then on to the mainland again via Port aux Basques.

The most economical way out of Labrador is through Quebec. The other route has significant engineering and other technical challenges that remain as they were in the 1960s when they were first proposed: very expensive.

3. There are basically two options for building the Lower Churchill plants.

a. Newfoundland and Labrador Hydro builds them, raising all the capital itself or with loan guarantees from the province and/or the federal government; or,

b. Someone else builds them: either public sector (Hydro Quebec) or private sector.

4. Who pays? With a debt level reaching closer to $14.0 billion, Newfoundland and Labrador has a limited capacity to assume any further debt directly or indirectly considering that the provincial government plans to keep running massive deficits for the next five years or more.

The latest provincial government estimate is that the project will cost in the neighbourhood of CDN$3.3 billion. Consider that to be a low estimate since it doesn't include a range of costs that would have to be factored into the final tally.

It is tempting to talk of using the new offshore money and the provincial government may look seriously at that option. Using a combination of cash and borrowing, the provincial government may be able to raise the necessary capital directly or through Newfoundland and Labrador Hydro. The economics of this approach have to be considered carefully, given that the oil cash is one-time money and revenues from the sale of power will have to reimburse the costs of construction (pay off the debt) before it could be used for other things.

Consider as well that Hydro would likely only turn over some of its net earnings to government as a dividend so the potential for generating large amounts of cash for the provincial treasury may not be as high as people might think.

Revenues must be competitive, as well. If the project required construction of new transmission lines over longer distances (the fabled power corridor), then Hydro would have to deal with much greater costs. In the Upper Churchill case, one of the continuing problems in developing the project was getting the power to market at a competitive rate and recover initial investments. We can't just charge what we want for the power - the industry is competitive.

In any event, the $2.0 billion from oil was supposed to pay down the provincial debt. As it now appears, the debt will continue to spiral. The "We build it" option would likely produce little more than an increased debt load in exchange for a modest increase in long-term revenue. We would spend a lot to make a little.

In the other option, the capital costs are borne by the private sector, as with the original Churchill project. Then the private sector legitimately reaps the lion's share of the revenues as a reward.

The decision matrix on this one is pretty easy to draw. I'll be curious to see how many concrete proposals actually arrive in the mail at the Natural Resources Building by five o'clock tomorrow. My guess is the number of proposals won't be nearly as high as the number of companies who inquired.

5. Two Columbos

One more thing: Linda Calvert did a short piece on Canada Now Wednesday evening on Churchill Falls. She made a comment that the Upper Churchill capacity can't be increased because the company (Churchill Falls Labrador Corporation) is contractually obligated to deliver a set minimum amount of power to Quebec. Any increased generating capacity (more turbines) might jeopardize that obligation.


The way I heard it is that Tobin's big promise to add two more turbines at the Upper Churchill in 1998 foundered when surveyors discovered that the rivers they planned to divert actually flowed the wrong way. The expansion couldn't proceed because of a lack of added water to push the extra turbines.

And one more, one last thing: Premier Williams has said in the past he wanted to link a "redress" of the Upper Churchill contract to development of the Lower Churchill with Quebec as a prospective partner. Don't hold your breath too long waiting for that. Much like the shell game of the "recall power sales", there might be some accommodation. I suspect that if anything ever came of any "redress", it would be much like the offshore deal: a lot less than the hucksters and pitchmen would have you believe.

Hands up anybody reading this besides me who has actually ever seen the Upper Churchill contract?