09 May 2006

Going it alone...with partners

While media reports are reflecting Danny Williams own "go-it-alone" words from today's announcement on the Lower Churchill hydro project, a closer look at the announcement today reveals a very different picture.

Williams didn't announce that discussions were beginning on project financing or that the project would begin within two to three years. Rather Williams announced today that there would be further study and analysis to determine the project's feasibility. Any decision on construction would be taken in 2009 with Hydro taking the "required time to complete due diligence on the feasibility of this project" in the meantime.

Williams key message is a simple one, repeated several times today in the House if Assembly:

- "The purpose of the announcement today was to indicate that the Government of Newfoundland and Labrador, and the people of Newfoundland and Labrador, are going to do this project themselves."

- "...but the big message here is that we are masters of our own destiny, that Newfoundlanders and Labradorians are in control of this project for the benefit of Newfoundlanders and Labradorians."

- "By taking the lead we are in full control of the project, unlike the circumstance with the last government; that project, basically, was going to be controlled by Quebec..."

The essence of Williams' comments - that the province will find markets, arrange financing and set the project in motion - essentially reflect the same position that Newfoundland and Labrador has always been in as the owner of the resource from which the electricity is produced. While the Upper Churchill was the product of negotiations between a private sector company - BRINCO - and Hydro Quebec, all subsequent negotiations for development of the Lower Churchill proceeded on the basis of development undertaken by the Lower Churchill Development Corporation, a subsidiary of Newfoundland and Labrador Hydro.

Control has always rested with the Government of Newfoundland and Labrador on whether or not to proceed with any development of the Lower Churchill.

The Premier's announcement today is a sign the province is likely looking closely at the second of two development options proposed by the Ontario provincial government and Hydro Quebec in March 2005:
The second option would see Ontario and Hydro-Quebec negotiate a power
purchase agreement for the output of the project. Ontario's share would be one-
third of the total output (945 megawatts). Newfoundland-Labrador Hydro [sic] would fund and construct the assets.
With a provincial debt of approximately $10 billion, Newfoundland and Labrador lacks the fiscal capacity to borrow the estimated CDN$6.0 to CDN$9.0 billion needed to develop Gull Island and Muskrat Falls on the Churchill River without federal backing and other partners to share the financial risks.

Williams noted that the project will require federal loan guarantees and likely will involve financial backing from corporate partners other than just Newfoundland and Labrador Hydro. In the House of Assembly today, Williams said:
Having said that, we are well away from the actual financing arrangements. As you do know, the federal government has indicated that they would be providing a guarantee in this particular matter. We are leaving our options open on this. We may look at inviting some equity partners. [Emphasis added]
Any company sharing financial risks would also expect a share of profits from the project, as in a proposal from local company Altius Minerals to establish an income trust with Altius taking revenues based on gross sales revenue.

While Williams said he felt confident the federal government would provide loan guarantees, the Harper administration has made no commitments publicly. Stephen Harper has only committed his party to support the project in principle and engage in discussions.
"We support this proposal in principle and believe it is important for Newfoundland and Labrador to have greater control of its energy mix. A Conservative government would welcome discussions on this initiative and would hope that the potential exists for it to proceed in the spirit of past successes as the Hibernia Project. [Emphasis added]"
Williams and natural resources minister Ed Byrne co-hosted a news conference linked by satellite link-up from two different parts of the province. In many respects, Williams' announcement today contained very little new information that would warrant the cost and production associated with it.

It is difficult to escape the conclusion that the announcement was intended to give the provincial government some positive news in the midst of a series of bad news announcements in the fishery, forestry and offshore oil and gas development.

Today's announcement will play well politically but the Lower Churchill is a long way from developed. It is also a long way from being shown to be in the best interest of the province, as a matter of public policy, to develop the Lower Churchill in the way the Premier proposed.