From 2006, an article by Craig Westcott that appeared originally in the now defunct Independent.
Premier Kathy Dunderdale went to Ottawa today with her hand out looking for some federal financial aid to get the Danny Williams retirement project off the ground.
The key is still in the financials.
Let’s see what, if anything, she gets.
And then let’s see what that will cost us.
Growing interest: Solving interest rate riddle critical to Lower Churchill project
At a Memorial University lecture hall one evening last week, Gilbert Bennett stood and gave a 45 minute talk on the challenges and opportunities of the Lower Churchill River hydroelectric project.
Then his real work began. For the next 45 minutes, people in the crowded lecture hall peppered the vice president of Newfoundland and Labrador Hydro with questions.
They asked him about everything from the chances of getting redress on the infamous Upper Churchill deal to what kinds of benefits the Innu Nation members can expect from the project.
Then came one of the toughest questions to answer, but one that is critical to the viability of the $6-billion to $9-billion project that Hydro is hoping to have on stream by 2015.
“The surprise for me tonight,” said one man, “was that this project, to get off the ground, is going to take as much as 10 years. Interest rates are starting to rise. Isn’t there a risk in taking this project so far out?”
Bennett allowed there is. “I’m with you in that interest rates are going to be essential,” he admitted.
And that was putting it mildly.
<Growing interest>
As Bennett himself pointed out, there are a number of key factors that have to be resolved before the Lower Churchill hydro project can get sanctioned for construction. A land claim and impact benefits agreements must be negotiated with the Innu Nation. The federal and provincial governments have to agree on the form the environmental impact statement will take and who will head the review. And the province must decide who will develop the power plants at Gull Island and Muskrat Falls, who will get the power from them, how they will get it and how the whole thing will be financed.
“As you can see, we have a lot of work to do,” Bennett told the gathering.
But among all the challenges and risks, perhaps none is more important than the matter of interest rates. If the Upper Churchill was a boondoggle because of BRINCO's inability to negotiate a re-opener clause to cover inflation, the killer for any Lower Churchill project could be interest rates. And that’s because just like the man in the lecture room observed, this project is going to take a long time to develop.
“If you had the right contract, it doesn’t matter,” says Cyril Abery. “You’d have to build into the contract that the price you’re agreeing to (sell the power for) is based on certain interest rates and you’d have to have a clause that if interest rates went up, the price gets adjusted. Otherwise you could get screwed. There has to be re-openers in there. If they do that, there‘s no problem. But if they don‘t do that, yes, it is a problem, especially since today interest rates are low and they‘re probably going to go up.”
When it comes to interest rates and the Lower Churchill project, Abery knows what he’s talking about. From 1985 to 1991, he was the president and CEO of Newfoundland Hydro. He helped negotiate a Lower Churchill deal with Hydro Quebec in 1991 that Premier Clyde Wells ultimately rejected.
“He was nuts in my opinion,” says Abery. “It’s a long story, but the long and short of it is I thought he was nuts. I’m not so sure we haven’t got another one now.”
Abery wasn’t at Bennett’s lecture, but he well understands how interest rates could cripple the development.
So does another former Hydro president and CEO, Bill Wells. He headed the provincial Crown Corporation from 1995 until about a year and a half ago. Like Abery, he too tried hard to reach a development deal on the Lower Churchill.
The problem is that while interest rates may be low now, nobody knows what they will be in 15 years time, if the project is even completed by then. Nobody even knows what they will be next year. And once the project is sanctioned, the developer will be borrowing money every year until it gets built.
“You’re borrowing, borrowing, borrowing, spending, spending, spending (until 2015),” explains Wells. “Somebody’s got to lend you that and that interest cost during the period of construction, that just adds on to the principle because you’re not paying anything back. So at the end of the day you’ve got this lump sum of money that you owe and when you close out your financial agreement going forward for 30 years or 40 years financing, what you’re going to pay in interest is determined at that time, it’s not determined now. So interest rates in 2016, who knows? They may be up, they may be down. And one of the things is, who takes the risk on interest? That used to come up in previous negotiations. It‘s a critical factor.”
Wells says the province, or Hydro, could try at the outset of the construction project to get a lender to agree to a range of future interest rates, as some measure of protection, but that would cost a lot of money.
“Interest is a big factor and then it depends on how you’re financing it,” Wells says.
<Quebec again>
One of the ways the province is looking at raising money to build the project is on the strength of a power purchase agreement with a future customer of the power. That’s how BRINCO financed the Upper Churchill deal in the 1960s. Back then, the only customer BRINCO could get to sign a guarantee that it would buy the electricity was Hydro Quebec. With Ontario and some United States utilities facing the prospect of energy shortages, it may be easier to find other buyers this time around. There will be enough electricity from Lower Churchill to power 1.5 million homes.
But the power will still have to go through Quebec.
“You can’t get the power out of Labrador without going through Quebec,” says Abery.
Williams has raised the prospect of building a transmission line through the Maritimes.
Abery is sceptical.
“We always put that out there to make it sound like we had options,” Abery says. “But everybody in the business knows that’s foolishness. It sounds good in the newspaper. Joe Smallwood started that back in the 1960s calling it the Anglo-Saxon route. It was crazy then and it’s crazy now.”
Abery says any talk of a Maritimes route doesn’t fool Hydro Quebec.
“They just smile,” he says. “I mean you’re in the middle of Labrador. The only border we’ve got is with Quebec. So you’ve either got to sell it to Quebec, or go through Quebec. And there’s no reason you wouldn’t sell it to Quebec. Their money is just as good as anybody else’s money as long as you got enough of it.”
Abery says Newfoundland could sell the power to another customer, in Ontario say, and simply pay Hydro Quebec to wheel it across its transmission lines. The fee for doing it wouldn’t be unreasonable, he notes.
“But the farther you sell it, the more transmission lines you’ve got to build and the costlier it is,” he points out. “The simpler thing is to just sell it to Quebec and let them deal with it. But if you’re getting enough money out of Ontario, then sell it to them. If you’re getting enough money out of Manitoba, I suppose you’d sell it to them. But it would be expensive power. The further you go, the more expensive it is. Transmission lines are not cheap. And you lose energy on the transmission line. That’s why you can only go so far with the transmission line, otherwise there’s no energy at the end of it.”
Wells, meanwhile, sees one way around a purchase power contract with Hydro Quebec or any other customer as the main way of financing the project. But it’s one that didn’t get anywhere in the past.
“If the federal government said ‘We’ll back the project,’ well nobody is going to argue the federal government is going to go broke over (it),” says Wells.
Bennett says obtaining federal backing is an area the utility is going to explore very carefully. He notes Premier Williams raised the idea with all three parties during the last federal election. Stephen Harper, then the Conservative Party Leader, now the Prime Minister, said his party supported the idea of a project “in principle.”
Whether that includes a financial commitment remains to be seen.
- srbp -