09 August 2005

The Danny Legacy Option for the Lower Churchill

As noted in the Bond Papers on Friday, the Premier held a news conference on Monday to update the province on the process to develop the Lower Churchill.

The government news release listed three comprehensive proposals to build the Gull Island and Muskrat Falls generating stations plus associated transmission facilities. These will now move to the second phase of the process, namely a feasibility study.

The three proposals are:

1. The Hydro Quebec/Ontario Energy Financing Company/SNC Lavalin proposal. One of the few proposals made public, this joint venture contained an option in which the joint venture would lease the Gull Island and Muskrat Falls sites for 50 years and a second in which Ontario and Hydro-Quebec would negotiate an agreement under which Ontario would purchase energy and Newfoundland and Labrador would finance construction.

This was widely held as being the likely strong proposal. The partners have extensive experience in the energy business, more than enough experience in the construction of large hydro-electric projects and the ability to raise all the capital needed to build the project.

This project also included construction of improved transmission capacity between Ontario and Quebec.

The guaranteed, long-term purchase of power by both Ontario and Quebec would make it easy for the province to raise any capital to build the project under the second option.

Construction would begin in late 2006 with first power transmitted by 2011.

2. TransCanada Corporation. Nothing is known publicly of this proposal. The company operates several hydroelectric and other generating systems in the central part of the continent. The largest is a little more than 18% of the Lower Churchill's combined generating capacity.

Call this one a long shot.

3. Tshiaskueshish Group. This is a consortium comprising Macquarie North America, Ltd., Innu Development Limited Partnership, Peter Kiewit Sons Co. and Innu Kiewit Constructors.

Again, nothing is known about this proposal. The companies have considerable experience in large construction projects. Beyond that, there is nothing available publicly.

Given the the Innu component of this proposal and the stated need in the original call for proposals for aboriginal involvement, this might be a proposal that had a leg-up as a result. The Innu Kiewit website is a little out of date since it notes that Voisey's Bay construction has been delayed.

Then there is the stealth option, one that Premier Danny Williams included on his own.

That's the one which would see the provincial government and Newfoundland and Labrador Hydro build the whole Lower Churchill project by themselves. For want of a better name call it the PWG Caribou Company proposal.

There are several reasons the Premier is likely to give when this option is selected.

1. The PWG Caribou Company meets all the proposal call requirements:

- It cuts out the middle man thereby maximizing the cash return to the provincial government and Hydro.
- It allows the government to deal with the Innu land claim directly, as it would have to do anyway.
- It gives the provincial government total control over the local benefits.

2. The province can afford it. The proposal call listed the estimated cost of the project as being CDN$3.3 billion. With the $2.0 billion from the federal government, the province can almost pay off the whole thing by itself. Borrowing would be limited and with the right power purchase agreement, the remaining capital can be raised at reasonable costs. The various financing options allow the provincial government to find novel ways of finding money for the project.

3. We would develop our resources for ourselves. The Pink, White and Green Caribou Company is the ultimate expression of the "local power" wave the Premier created with his offshore revenue deal. The strongest argument he will offer for doing it ourselves is that we will have total control over everything and that every aspect of the project possible will be done locally.

Just remember that the whole thing hinges on the power purchase agreement or having steady markets in which to sell the power.

As for the rest of it, expect the province will do exactly as the Premier said today: Give first priority to the PWG Caribou option.

I'd expect he has already decided what to do with the offshore cash. He keeps telling us but no one wants to accept it. The rest of the process is all for show, or at least serves only to give the Premier the chance to pick over the very best ideas from a whole bunch of other proposals so he can then do the whole thing himself.

It's Danny Legacy Option.

I can hear the speech now:

"It is our water. It is our falls. It will be developed for our benefit. By our engineers and our architects and run by our Hydro company and our government with our oil revenue."

There's an old black-and-white film from the Upper Churchill the Premier can use to help get the speaking notes together.

It's the one we will see announced very shortly, with construction well underway by the time the Premier seeks re-election.