16 September 2013

Negotiating from Weakness #nlpoli

Markets in northeastern North America are already awash in cheap electricity, thanks in large part of the discovery of massive amounts of natural gas in the United States. They’ll be that way for decades to come.

Current forecasts New England’s regional electricity transmission organization hold that improvements in energy efficiency will allow New England states to expand their economy without increasing energy consumption proportionately.  That means that eight years from now, New England will be using as much electricity as it is today. 

There’s no shortage of supply, either.  As a result, current wholesale electricity prices in New England are about one tenth of what Newfoundlanders and Labradorians will pay for Muskrat Falls.

And it is with that context the people of Newfoundland and Labrador are only now learning that a team from the provincial government  has been in Quebec for the past two weeks as part of talks with the Quebec government about the 1969 Churchill Falls power contract, according to one news outlet, and development the Gull Island power plant according to another.

Undoubtedly, Kathy Dunderdale and the Conservatives will tell you that something called “Quebec” is at the table because the pressure the Conservatives have been keeping up over the 1969 contract. 

Nothing could be further from the truth, but that won’t stop them from saying it over and over again.

Quebec has the upper hand

The Government of Quebec is at the table because it has nothing to lose and everything to gain.  The 1969 power contract is legally unassailable. As a result, that is the floor from which all talks start.  Hydro-Quebec will wind up with nothing less than the 1969 contract, including its right  - in effect - to manage the water flows on the Churchill River to meet its needs.

The list of what they can get is striking.  For starters,  Hydro-Quebec can try and extend the tax-free provisions of the 1969 contract beyond their expiration in 2016.  They aren’t part of the renewal clause.  Hydro-Quebec has tried to gain them before.  They can get them now and likely would not have to pay much  - if anything – for them.

Hydro-Quebec could also be looking for a way to extend the 2041 contract beyond its current 65 year lifespan. Remember that finance minister Jerome Kennedy took a completely different view of that agreement in 2012 before the provincial government gave the green like for Muskrat Falls. Suddenly and inexplicably, Kennedy started to claim that Newfoundland and Labrador could not guarantee having any power available from Churchill Falls when the 1969 contract expires.  Maybe he knew something the rest of us didn’t.

Short of extending the 1969 contract itself, perhaps the biggest gain for Hydro-Quebec would be a repeat of the 1969 contract’s principles to the entire 3,000 megawatts on the Lower Churchill.  Before you scoff, recall that since 2003 the Conservatives have preferred to develop the river with Hydro-Quebec as part owner.  Danny Williams even got miffed in 2009 because HQ didn’t want to take an ownership stake, despite his willingness to put redress for 1969 to one side.

Unmistakeable Political and Financial Weakness

For its part, Newfoundland and Labrador is in as bad a financial position and in a worse political state than in 1969.  Like its predecessor BRINCO, Nalcor has already started to build the dam at Muskrat Falls without final agreements in place.  They alone are spending billions while Emera tries to negotiate more electricity at lower cost.

If Emera cannot squeeze that concession from Nalcor and the Nova Scotia regulator rejects the Maritime Link, Nalcor is in a big jam.  Under the agreement between Emera and Nalcor in December 2012, the two companies must start talks on a joint deal from scratch, with no prior commitments. In other words, Emera could walk away at little if any cost. Nalcor would be left holding the bag.  Nalcor officials don’t want to talk about that detail, just like they gave unfounded assurances about problems with the water management agreement.

Politically, the provincial government is also in a weak spot.  Note that Kathy Dunderdale told Fred Hutton that the provincial government will always look for legitimate ways to deal with the grievance over the 1969 contract.  But she knows that since 2003, the provincial government certain looks like it has tried a few underhanded ways to screw around with the contract.

Given that there are not one but two lawsuits in Quebec courts involving the 1969 contract,  Newfoundland and Labrador can hardly do anything but go along with the talks no matter where they lead.  Walking away isn’t very much of an option since it would look so bad in court.  Hydro-Quebec can always tell the judge that they have tried – yet again – to deal with these Newfoundlanders and unfortunately – yet again – they have shown they aren’t willing to talk.  I is hard to imagine a worse position for anyone to be in.

If by some miracle, the Conservatives manage to sign a development deal despite all the disadvantages the face, they may well have a hard time trying to sell it to the electorate.  The Conservatives today have less public support than the Liberals in 2002 when they had a sound plan to develop the entire Lower Churchill.  No one trusts them

People have good reason to distrust the Conservatives, at least on energy issues.  After all, they broke their solemn commitment and carried on five years of efforts to strike a deal with Quebec without disclosing their actions to the public. The Conservatives have a problem disclosing all sorts of things, as they have shown repeatedly with Muskrat Falls. 

Disclosure Needed

The Conservatives could start on a better foot than they are on by issuing a detailed statement about the talks.  As you can see from the media reports,  it isn’t clear what the talks are actually about.  Is it 1969?  Is it Gull Island?  Is it both?  They should disclose the principles guiding the talks, disclose who is involved on the provincial side, and clearly state the provincial objectives. 

The people of Newfoundland and Labrador have a right to know what the provincial government is doing.  The climate secrecy the current administration prefers only adds a fundamental moral weakness to the their political and financial ones.