08 May 2006

Masters of our domain: the Danny Legacy Option wins Lower Churchill contract

Regular readers of Bond Papers will recall that in August 2005, we predicted that Newfoundland and Labrador Premier Danny Williams would chose the go-it-alone option on the Lower Churchill.

Today Williams confirmed the choice, in a vaguely worded news release. The release talks about the provincial government partnering with Newfoundland and Labrador Hydro; this is just a convenient bit of verbal fluff. Hydro is functionally a department of government. It doesn't partner with the provincial government: government tells it what to do.

The release is vague since it gave absolutely no indication of the business case supporting the decision. All we heard is that : "Today marks a turning point in our history as we acknowledge that we as a province are capable of leading and having full control of this process."
"We know that we are capable of executing this project in a way that will ensure we maximize the returns while mitigating the risks," the premier continued. "We have the experience, knowledge and capacity to take on a project of this magnitude and we are recognized as world leaders in hydroelectric operations and development. This is about doing it by ourselves, for ourselves. We are on a path to be masters of our own destiny and the successful development of this project will be a significant
step forward in reaching that ultimate objective for this province."
The release is also vague since it doesn't indicated where markets for the power will be. Under one option presented by Ontario and Quebec, Newfoundland and Labrador Hydro would develop the project on its own with Ontario and Quebec buying the power. (see below as well as the original Ontario/Quebec joint release from last year.) The timelines in the Ontario/Quebec proposal match those in the Williams new release today.

The biggest advantage of the go-it-alone option for the provincial government is that it gives the Premier total control of every aspect. As the Bond Papers noted last October (reprinted last week),
A genuine contradiction would exist if the [Progressive Conservative policy manual, the] Blue Book embraced the philosophies underpinning the Wells and Peckford approaches. It does not. Rather, Williams appears to be focused on control as an end in and of itself. For example, take this phrase dealing with prospective hydro development: "I'’d like to see us own the lion'’s share of the Lower Churchill...". The provincial government already owns the "lion's share" and can claim rents from electricity as a matter of owning it.

What Williams is talking about here is owning and controlling the company which generates the electricity.
Recent estimates put the project cost significantly above the CDN$3.5 billion originally suggested. In January 2006, CBC Radio used the figure CDN$ 9.0 billion or, put another way, approximately the same size as the current provincial debt. Since Hydro is a Crown corporation its debt is carried on the provincial government's books. The lower cost estimate is more than double Hydro's existing debt load (CDN$1.4 billion) while the higher estimate is over six times the current Hydro debt.

There is no indication in today's release of any possible role for Altius Minerals, a company that had proposed a financing option for the Lower Churchill construction and which is currently studying the feasibility of building a new oil refinery in the province. Premier Williams announced that private sector venture in February 2006. Altius proposal would see that company take a share of the project revenues.

According to a story in the Halifax Chronicle Herald, Danny Williams efforts to fund the Lower Churchill's non-Quebec route for transmitting power to markets other than Quebec was rejected by New York funders as being too costly and impractical.

In making today's announcement, Premier Williams appears to have discarded other proposals without indicating why. One, from Ontario, Quebec and SNC Lavelin offered two options. In one version the companies would fund construction and lease the generating facilities from Newfoundland and Labrador Hydro for a period of 50 years.

In the second option, Ontario and Quebec would sign a power purchase agreement with Newfoundland and Labrador Hydro for all the Lower Churchill's output for an unspecified period.

One of the major challenges in developing the Lower Churchill is finding a stable, long-term market for the power. The Ontario/Quebec second option would fit with the go-it-alone approach, or as we called it previously, the Pink White and Green Caribou Corporation. Long-term markets in Quebec and Ontario would help secure funding for building the Lower Churchill. Then only transmission infrastructure needed would be the additional lines needed to get the power from the Lower Churchill to Point A or some other location where the distribution system in Labrador meets the Quebec hydro grid.

Point A is the term in the Upper Churchill contract for the intersection of the Labrador and Quebec power lines. To avoid any references to the Labrador-Quebec border, the term "Point A" was inserted.