07 September 2016

Jerusalem, Eldorado, and Perdition #nlpoli

Part I:  The development of our country

The Heritage Newfoundland and Labrador website "aims to provide school students and the general public with a wide range of authoritative information on the province's history, culture, and geography. It is based at the Memorial University of Newfoundland. Faculty, graduate students, and professional writers contribute articles, while undergraduate students provide support as research assistants."

That statement of authority is one of the reasons why the introductory sentence to its section on the impact of Churchill Falls is so intriguing:
The Upper Churchill Falls hydroelectric project remains one of the most notorious ventures in Newfoundland and Labrador's resource-development history.   
There is no such thing as the "Upper Churchill Falls" project.  There is no upper Churchill Falls or, indeed, a lower one.  There is simply Churchill Falls.

The rest of the opening paragraph is equally striking.  The project "resulted in devastating and irreparable social losses, reaped poor economic benefits for the province's people, and dramatically altered the environment surrounding the falls. It also created a great deal of political animosity between Newfoundland and Labrador and Québec after the two provinces negotiated an agreement in the 1960s allowing Hydro-Quebec to receive most of the development's profits over a 65-year period."

The author is not talking about Churchill Falls. She is talking about the Upper Churchill Falls, a political concoction of the 1970s, the stories about which have grown progressively wilder in the telling in the decades since.  One such tale is about a power corridor from Labrador to the United States.

The Corridor That Never Was

Joe Smallwood did threaten to ask the federal government to force one through Quebec.  That is well known. It is like the so-called Anglo-Saxon route through Newfoundland and on to Nova Scotia to reach New England.  They were both bargaining positions taken by Smallwood publicly in an effort to pressure Hydro-Quebec into a deal in the early and mid-1960s.

A couple of decades later, though, Smallwood told a very different story.  According to Cabot Martin's 1996 telling of the tale, Smallwood had told Martin of a meeting between Smallwood and then-Prime Minister Lester Pearson in 1964.  They discussed the corridor.  Pearson asked Smallwood not make the request.  The situation in Quebec, then somewhat tense, would only get worse. Smallwood magnanimously agreed to Pearson's request, even at the ultimate cost to Newfoundland and Labrador.

There's no reason to doubt Martin's story in any aspect.  Smallwood likely told him precisely that version of events.  There's also no doubt that a great many people have been ready to accept that account wholly and completely.  For them,  the story confirms their own belief that Confederation has cost Newfoundland at every turn. It lines up perfectly with their anti-Confederate predisposition.

There's just one problem.  None of it actually happened. Economist James Feehan published a short research note on the issue in the summer 2011 edition of Acadiensis.  After reviewing contemporary documents,  Feehan concluded that there "is no corroborating evidence that at the time the Newfoundland government ever tried to convince the federal government to use Parliament’s declaratory power to create a power corridor through Quebec. Newfoundland made no formal request for a parliamentary declaration that would allow the federal government to take over the project, nor would such a request have obligated the federal government to act, and there is no evidence that Smallwood, as much as he resented Lesage’s position, ever seriously contemplated such action.

"In September 1966, Smallwood did threaten to make such a request to the federal government. However, that was a short-lived tactic. He used the threat of a request to pressure the Quebec government to agree to Hydro-Quebec’s request that it authorize the letter of intent. Finally, and very importantly, there is the story that Pearson asked Smallwood, for the good of Canada, not to request the federal government to seek a parliamentary declaration. Despite its powerful imagery and its on-going influence on Newfoundland political culture, that story is no more than a legend."

What's important about the corridor story is that Smallwood - a key player in the events that led to the Churchill Falls development - made up a version of events in which he was a direct participant rather than remember them accurately.  He imagined events that did not happen, but which gave him a defensible reason for why the Churchill Falls power contract looked like it did.  Smallwood invented the story because almost as quickly as the started generating electricity,  the world changed the popular image of Churchill Falls to that of a disaster.  Smallwood needed an explanation for what appeared to be a failure of his ideas and ambition..

The Golden Boys

Smallwood left the Confederation Building unwillingly in 1972.  He'd clung to power after a close election in 1971 but after relinquishing the office to the Conservatives under Frank Moores, Smallwood went down to a hard defeat in a new general election the same year that Churchill Falls went on line.  The faced the same economic problems that had dogged Smallwood and the Liberals.  In the face of energy insecurity and the economic stagnation and inflation of the time,  the new administration was under greater pressure for a quick solution.

Within two years, of taking office,  Quebec was buying Churchill Falls power for a ludicrously low price and,  as many believed, selling it into the United States at an enormous profit. They were profiting  from Newfoundland resources while Newfoundland suffered.

The Lower Churchill was more attractive than ever.  Unlike Smallwood, though,  Moores and his cabinet were not content to let a private company lead the project.  Impressed by Hydro-Quebec,  many in Newfoundland and Labrador wanted to go down the same road.  Moores led a party that was made up of some long-time Conservatives mingled with a bunch of former Liberals who'd parted company with Smallwood for various reasons.  One of the more influential of  the ex-Liberals was John Crosbie, whom Moores made energy minister.

As Jason Churchill has noted, Crosbie thought that Smallwood made an enormous mistake in 1965 by rejecting the idea floated by the Government of Quebec that Newfoundland nationalise BRINCO. Crosbie believed Quebec's contention that the profits of the venture could have been split equitably between two Crown corporations.  At the time, Smallwood had stood firm at the time in his resolve to pit his consortium of international financiers against Hydro-Quebec. Smallwood was concerned that with BRINCO out of the picture,  the Newfoundland mouse would have to climb into bed with an amorous Quebec elephant.  Smallwood saw nothing but predictable and unhappy results for the mouse.

Back in cabinet under a new premier,  Crosbie was able to persuade his colleagues of the need to nationalise BRINCO. Control of our own resources was the rationale Crosbie and his colleagues offered for the buy-out.  This was a red herring, though, as Newfoundland retained the same ultimate control of its resources whether they were developed by a private sector company or a public one. Proponents of the new corporation neglected to mention that it was possible for conflict between the Crown corporation and its government shareholder.  It was just such a conflict, after all, that Smallwood had been trying to exploit with his talk of a corridor through Quebec forced by Ottawa or with the Anglo-Saxon route.

There was more to the success of Hydro-Quebec that attracted the politicians and senior bureaucrats of the new administration in St. John's.  Quebec's new style of assertive nationalism showed a new way for the new generation keen to shed the legacy of two decades of Smallwood and his demagoguery.  young men like Crosbie, who had come of political age in Smallwood's government were keen to better their spiritual father.

Before the decade was out, the Progressive Conservatives would be using terms like masters of our own house to describe their agenda.  They consciously aped what they had seen happen in Quebec.  But there was more to it than just mimicry. Crosbie was one of a score of bright young men who entered both politics and the senior ranks of the provincial public service at the time.  This was a generation born before Confederation but they had all matured after 1949.  They were a mixture of the progeny of established families and others whose backgrounds were more modest.  All were talented and ambitious.  All were well-educated and highly intelligent and all had the brashness and aggressiveness of young men on the make.  All were keen to exploit the opportunities - especially in energy - as they emerged in the 1970s in Newfoundland and Labrador. If Smallwood had been out to build the new Jerusalem, the golden boys who followed him were on the hunt for Eldorado.

Internally Conflicting Priorities

The Newfoundland government's course on Labrador hydro-electric development after 1974 consisted of two tracks.  One was redress for the grievance of the 1969 power contract.  The other  - development of the Lower Churchill dams - carried over from BRINCO to the newly organized Newfoundland and Labrador Hydro.

Strategically, the Newfoundland government could never divorce the two objectives.  Any development of the Lower Churchill inevitably needed the co-operation of Hydro-Quebec since it controlled the water flows on the river. Quebec was also the most likely customer for any major development on the Lower Churchill if for no other reason than that it was the closest population and industrial centre. Even as engineers cracked the problem of  long-distance transmission of large volumes of electricity, the basic economics of  the Lower Churchill in the 1970s and 1980s made Quebec the most attractive customer for the power.

The problem the politicians faced time and again in Newfoundland was that any effort to find an agreement on one of the tracks inevitably affected the other.  On the question of redress,  the Newfoundlanders brooked no compromise.  They tried recalling 800 megawatts of power,  knowing full-well that Churchill Falls (Labrador) Corporation could not legally accede to the request and honour the 1969 power contract with Hydro-Quebec.

As that initiative stalled in the courts,  Brian Peckford's administration  tried to wreck the contract by stripping CFLCo of its water rights under the 1961 lease legislation. Controversy over the Upper Churchill Water Rights Reversion Act  - passed by the House of Assembly in December 1980 - led the provincial government to refer the Act to the courts two months later.  The government posed nine questions. The Court of Appeal on Duckworth Street found in the Newfoundland government's favour on five of the questions and declined to answer the other four as they were deemed speculative.

But on the appeal from the court in Newfoundland, the Supreme Court of Canada found that the "pith and substance" of the water rights law was to interfere with Hydro-Quebec, not CFLCo.  The law was constitutionally invalid. The courts eventually ruled against Newfoundland on the 800 megawatt recall as well.  Each loss in the courts fueled popular resentment over the perception of what had happened in 1969.  Each setback fed the belief that the deck was stacked against the victims of a bad Confederation deal, with Quebec as the villain behind it all.

After 1984,  Peckford and the Conservatives turned their attention to other issues but the political controversy over Labrador power changed very little. That didn't stop efforts to build the Lower Churchill project.  In 1989,  Quebec, Ontario, and Newfoundland and Labrador began talks aimed at developing the project with Ontario and Quebec as customers. The talks petered out for two reasons.   The global recession and the Newfoundland government's hard financial situation made the deal financially difficult.  Equally challenging, though, was Quebec's proposal to win a de facto acceptance of the 1969 contract from the provincial government and a revision to the renewal that would have extended the tax provisions or the original deal until 2041.  This was a proposition Newfoundland could not accept not only because of 1969 but also because of the perception of granting more financial breaks for Quebec while Newfoundlanders suffered under government cuts.


By the end of the 1990s,  a combination of events made it possible for Quebec and Newfoundland and Labrador to explore hydro developments in Labrador. The unlikely pair of Brian Tobin and Lucien Bouchard announced an agreement in 1998 not only to develop the Lower Churchill but also to expand Churchill Falls' capacity by adding two new turbines.  The Churchill Falls redevelopment collapsed when surveys of the region showed it was impractical to divert water from Quebec to increase the water in the Smallwood Reservoir.  Lower Churchill talks simply tailed off, although Newfoundland and Labrador maintained its project office.

The most significant development in 1998 went unrecognised at the time and continues to be unappreciated.  Hydro-Quebec and Newfoundland and Labrador Hydro found a way to put more cash from Quebec into CFLCo using power Newfoundland and Labrador could recall under the 1969 agreement. NL Hydro sold surplus power from its recall to Hydro-Quebec at an agreed price that was essentially the current market price.  Between the recall sale and the Guaranteed Winter Availability Contract,  the two companies forestalled the prospect that CFLCo would wind up in financial difficulty, thereby triggering unwelcome provisions of the original lease and the 1969 power contract. It was a remarkable moment of peaceful co-operation in a relationship that seemed always shy of open warfare.

Changes to American regulations in 1997 broke Hydro-Quebec's stranglehold over transmission of electricity through the province. Two politicians with direct knowledge of the 1998 agreements confirmed to SRBP some time ago that NL Hydro looked at the prospect of wheeling the power to the United States at the time. NL Hydro found no financial advantage in selling the power on the spot market.  The price for the electricity from Hydro-Quebec was competitive.  Wheeling the power only drove up Hydro's costs without delivering any appreciable positive result.

Nalcor would confirm that assessment in 2009 in the deal to sell the recall surplus to Emera in New York rather than Hydro-Quebec. As SRBP noted at the time, the price for electricity from Emera was the same as that paid by Hydro-Quebec, thus giving the provincial energy corporation no significant gain. In addition,  NLH had to pay commercial rates  - $19 million annually -  to Hydro-Quebec's transmission division for wheeling through its jurisdiction.

The agreements in the late 1990s signalled a change in the relationship between the two energy corporations.  This came partly as a result of the change in senior decision-makers but more particularly by a change in the economic circumstances in Newfoundland and Labrador.  The advent of oil offshore Newfoundland meant that the Lower Churchill was no longer a crucial development.  The provincial government could negotiate from a position of relative economic security and walk away if things didn't work out.

Additionally, the prospect of wheeling the power through Quebec - thanks solely to the Americans - meant that any strength Quebec had had to frustrate Newfoundland and Labrador was finally gone.  If Newfoundland and Labrador could finance the Lower Churchill, it would be able to enter the market for energy and compete with Hydro-Quebec.  Suddenly, it was to HQ's advantage to deal with the Newfoundlanders fairly and equitably.

The Old Demons Return

It was in that context that Roger Grimes' administration achieved what was arguably the best chance to develop the Lower Churchill profitably for Newfoundland and Labrador.  The draft agreement allowed for Hydro-Quebec to buy the lion's share of the output from Gull Island with Newfoundland and Labrador having immediate access to 800 megawatts of generating capacity.  Without a domestic use for the power,  NLH could have sold it on the spot market for cash.

A key part of the draft agreement was a price for electricity that better reflected market rates. It also set a floor price for the  electricity exported to Quebec at 3.5 cents per kilowatt hour.  That would have been enough to secure financing at favourable rates.  As events turned out, the province's growing oil revenue would have made it possible to pay for the entire project or at least secure the borrowing using oil royalties.  Had Grimes been able to finish the deal or if his successor had carried on,  the Lower Churchill might well be making money for the provincial government, with most of it coming from Quebec.

In the event,  Conservative leader Danny Williams ruthlessly exploited a split inside grimes' administration to strangle the Lower Churchill infant in its cradle. Williams' rhetoric marked a return to the political demons of the 1970s.  He warned of give-aways by a supposedly incompetent regime desperate to hang onto power.  Williams went into the 2003 general election vowing that he would never sign a deal with Hydro-Quebec without redress for Churchill Falls.

Williams' actions in office continued the near-hysterical rhetoric against perceived enemies inside and outside the province but his combative style led the province nowhere.  Williams announced a call for proposals on the Lower Churchill in 2005.  In August, he announced three major contenders, one of which involved Quebec, Ontario and SNC Lavalin.  Reminiscent of their earlier proposals, this one would have seen the two provinces guarantee the purchase of almost all the power at profitable rates for Newfoundland and Labrador.  Crucially,  the two provinces would also upgrade the connections between their two provinces.  That would have opened a new market for NL Hydro.  The two provinces planned to start construction in 2006 and finish in 2011.

In 2006, Williams rejected all three options in favour of an undeveloped plan to go-it-alone.  The provincial energy corporation - now called Nalcor - spent the next four years trying to find a customer for a project that it wasn't even sure it could finance. No one was interested.  As energy minister Kathy Dunderdale would acknowledge in 2009,  she,  Nalcor boss Ed Martin, and Williams spent five years trying to lure Hydro-Quebec into an equity stake on the Lower Churchill, without any mention of redress for 1969 and despite Williams pre-2003 pledge.

HQ wasn't interested, either.  When Williams rejected its proposal in 2006,  the Quebec energy corporation just switched to its own Plan B.  HQ started development of 4,000 MW of new hydro generation and another 4,000 MW of wind generation, most of the latter coming from partners with private sector developers.

Williams claimed afterwards that every failure of his efforts was part of a Laurentian conspiracy.  The truth is that HQ simply wasn't concerned enough about Williams' braggadocio to waste the time on frustrating him.  They had other, bigger fish to fry. One of the fish was a problem that also scuttled Williams' ambitions. Large discoveries of shale gas allowed the Americans to meet their domestic electricity needs with a seemingly endless supply of cheap and relatively clean fuel.  The wholesale price of electricity fell dramatically not long after Williams decided to go-it-alone.  Hydro-Quebec's revenues from exports fell 30%% in a year.

In that market,  no one was interested in Williams expensive electricity from a project that - for all intents and purposes - didn't even exist.  Nalcor officials claimed they had experience building large projects.  They pointed to Churchill Falls, as if those in the electricity business didn't know the whole story of Churchill Falls from the outset.

Williams' tactics also proved unhelpful to finding anyone interested in partnering on his dream project. He intervened in FERC hearings, claiming that Hydro-Quebec was not meeting its obligations as an exporter into the US market.  Williams injected himself into a potential deal to sell New Brunswick's energy corporation to HQ purely to bugger HQ's business. All of that followed on the heels of a series of appeals to the Quebec energy regulator in 2007 that were, to some extent, more about causing Hydro-Quebec pain than on achieving anything productive.  If that was not enough, Nalcor also started legal action over the original 1969 power contract.


For all his screaming and insults,  by early 2010, Williams had no customers for his Lower Churchill scheme.  Gull Island was too large to finance on its own.  His perosnal popularity at home was starting to weaken and in early 2010,  residents of the province found out that their Premier had health problems.  To get out of politics as a success, Williams needed to deliver something on the Lower Churchill.  The people at Nalcor were happy to oblige.

The obsession with the Lower Churchill infected the walls at Nalcor's headquarters, passed on from the days of BRINCO.  For decades, the Lower Churchill was BRINCO/Hydro/Nalcor's only solution to any problem.  The single-mindedness was really old.  One engineer involved in the Lower Churchill project in the early 1970s recounts a conversation with a senior executive of the newly formed Newfoundland Hydro in the mid-1970s.  What was the back-up plan, the engineer asked, when Gull fails, as he felt it would.  We don't have one, came the reply.  The engineer suggested the Newfoundland company needed a fall-back position to meet the island's electricity needs. He thought there were good prospects for smaller hydro projects on the island and that is what NL Hydro eventually pursued until they won government support for a freeze on such projects in the late 1990s as they studied new chances to build their dream edifice.

Nalcor's solution to Williams' political problem was to build Muskrat Falls. The smaller dam of the Lower Churchill project had always been the least-discussed part of the package. It was small in output,  was more heavily dependent on water-flow control on the whole river and,  given the quick-clay problem offered the possibility of  problems needing a high-cost solution. The more lucrative option was always Gull Island, but since Gull wasn't an option, Nalcor opted for the smaller project.  And to ensure they could announce a deal quickly,  Nalcor officials claimed the project was the same one they'd started in 2006.  Supposedly, they were just changing the building order of the dams.

The truth was that they were offering a new project to meet domestic needs. Nalcor had never studied alternatives to the province's own demands.  Their only solution to every problem in 2010 was the same as Hydro's in 1975:  the Lower Churchill.  Financially, they'd force local taxpayers to cover all the costs.  Politically, Williams and Nalcor would tell taxpayers the deal was about exporting power using the old route through Nova Scotia.  Breaking the Quebec stranglehold, Williams would tell everyone even though  someone else had done the job,  Williams had already made the claim before, and Nalcor had no confirmed export sales.

Nalcor's haste to change from Gull to Muskrat meant they had only one proposal - from 1980 - that had ever speculated about the prospect of doing the smaller dam first. When Nalcor slid Muskrat falls through its own decision gate system in late 2010,  many of the documents needed to make the case for the project were either missing-to-be-fixed-on-the-fly or dog-eared copies of documents dating to the 1970s.  As it turned out, the most crucial part of the project was water flow control and that was something Nalcor never had.

William' acid spray at Hydro-Quebec made it virtually impossible to achieve any agreement with the company.  In the end it didn't matter.  Williams tried unsuccessfully to sneak a legal change to water rights  through the House of Assembly in 2008 but Hydro-Quebec caught him in flagrante.  The much-vaunted water management agreement, imposed the public utilities board in 2009 subordinated the agreement to any prior contracts. A decision by the Quebec Superior Court in August 2016 confirmed that in the renewal phase of the 1969 contract,  Hydro-Quebec retains the power to control production at Churchill Falls.

In 2016,  Muskrat Falls is far behind schedule. The current cost is double what it was in 2010 and the final price may well be triple the original forecast. The provincial government is having a hard time financing the project.  Any further downgrades in its credit rating will liekly cut the province off from long-term borrowing and that is precisely what they would need to finish Muskrat Falls.

Even if it can find a willing partner in Ottawa,  the provincial government's generating plant at Muskrat Falls will likely not be able to produce anything close to its installed capacity on a reliable basis.   When Churchill Falls is generating at full capacity,  Muskrat Falls will do likewise.  But at times when Churchill Falls is producing at its lowest capacity,  Muskrat Falls will have a hard time producing enough electricity to meet its commitment to Emera in Nova Scotia for free electricity.

In 2016,  Churchill Falls is making a profit for its shareholders.  The money comes virtually entirely from exports to Quebec.  Muskrat Falls, by contrast, will likely never be profitable.  The only people guaranteed to pay for it are Newfoundlanders and Labradorians.  Even if Nalcor can sell some of the electricity on the spot market,  they can only do so because it is discounted on the order of at least two to one by residents of Newfoundland and Labrador.  More pessimistic estimates would put the discount on exports more on the order of 10 to one. 

"How refreshing it is," the Telegram editorialist wrote in 2007 about the provincial government's energy plan, "to hear a government making plans that consider a time that they might not be in office, as well as the time that they are... to have a government looking at the long-term needs of the province, as well as addressing the sort of short-term needs that get governments re-elected."

"In the case of Churchill Falls, the assumption was that electricity supply would keep power prices low. A huge and unexpected upsurge in demand, when increased oil prices suddenly meant home-heating with electricity was more economical than fuel oil, blew those assumptions right out of the water."  In 2010,  the Telegram would cheer for Williams and his deal for the Lower Churchill even though most of the deals flaws were painfully obvious at the time.

But in 1969,  the Telegram editorialist took a more cautious view.  "Great promises of revenues to the provincial treasury all without a shred of paper or any detail to demonstrate how it would work," SRBP summarized it, above a scan of the editorial. "A call for the legislature to be opened to debate the deal and see what the deal between BRINCO and Hydro Quebec looked like."  They had no such qualms in 2010,  as if 1969 and the decades after had never happened.

Willful blindness?



Almost certainly,  for the people who warned the loudest of the ghosts in the turbines at Churchill Falls ignored the rattle of spectral chains as their unbridled ambition built a real tomb in the mud farther downstream.