09 April 2019

The 2005 and 2019 Federal-Provincial Agreements #nlpoli

The Atlantic Accord functions in Newfoundland and Labrador politics in two ways.  There is the agreement between the Government of Canada and the provincial government that established the joint management framework for the Newfoundland and Labrador offshore. At the same time, there is the political prop and the associated mythology that has, in largest measure, replaced the actual agreement in both the popular and political/bureaucratic understanding of it.
Neither the 2005 nor 2019 federal-provincial agreements commonly referred to as the Atlantic Accord or revised Atlantic Accord had anything to do with development and management of the oil and gas resources offshore Newfoundland and Labrador. Neither changed the 1985 agreement directly or indirectly.

The widely-held belief is completely different. The popular misconception comes from the fact that in both cases, the premiers faced with financial difficulties linked their demands for money from Ottawa to the Atlantic Accord. In both cases, the issues were about something else.  In 2005, the discussion was actually about Equalization. It 2019, the final agreement was about financial assistance for the provincial government about its own financial difficulties and to deal with the troubled Muskrat Falls project.   

Phony War

The war with Ottawa in 2004 was a phony war if ever there was one.  Danny Williams and his Progressive Conservative team came to office in October 2003 facing a provincial government that had some short-term financial problems.  The long-term prospects were considerably better thanks to the Atlantic Accord and the three oil fields offshore that were either already in production or due to come on line. Even the assessment by PriceWaterhouseCooper, whom Williams had engaged to assess the provincial government’s financial state forecast a steady increase in provincial government revenue.

One of the first meetings Williams schedule was with Prime Minister Paul Martin in December 2003. Williams and Martin discussed the province’s financial problems. Williams asked for help.   Williams followed up the meeting with a letter dated January 4, 2005, the same day he made a province-wide address announcing layoffs, wage freezes, and spending cuts.  Williams also announced that his deputy minister, Ross Reid, would conduct a review of government spending programs to ensure any spending was necessary and efficient. 

Spending cuts were only part of the answer to the provincial government’s problem.  Williams needed cash, which he believed would come from Ottawa. Martin’s January 27 reply to Williams’ letter was positive. The Prime Minister welcomed Williams’ commitment to work both constructively and co-operatively with the federal government. He expressed confidence that the provincial government could meet its financial problems by a combination of “controlling expenditures and expanding the economy.”

Martin also said that the federal government was “open to discussing the issues related to offshore resources. However, it is imperative that these discussions be based on the principle of fair treatment across the country.”  Williams had a commitment of help from Ottawa.  The only thing left to do was find the amount.
The Blame Canada Commission

The basis of Williams’ claim for federal cash was a 2003 paper for the province’s Royal Commission on Renewing and Strengthening Our Place in Canada.  A former provincial government official, David Norris did more than recycle the old concern that the Equalization system would leave Newfoundland and Labrador financially in the same place with oil revenues as it had been with federal hand-outs. 

Norris called the Equalization offsets of the Atlantic Accord from a temporary, diminishing payment to “revenue protection provisions.”  Norris argued that while the provincial government would receive all the revenues it was supposed to receive under the 1985 agreement, it would only receive “the benefit” of a small portion of them as a result of declines in Equalization.  Norris made up a definition of “principal beneficiary” that was only about money and that involved a sharing of federal and provincial revenues from the offshore in a way never contemplated in the original agreement.

In Norris’ view, the province was entitled to a share of federal revenue from Newfoundland and Labrador in addition to provincial revenues even though this violated the basic principles of the Accord.  After all, the Accord treated the offshore resources as if they were on land, with revenue shared between the two orders of government on the same basis.  Newfoundland and Labrador would be treated like Alberta, as far as oil goes, or like any province – including Newfoundland and Labrador – with respect to other minerals.

Norris’ solution was a renegotiation of what he termed the Accord’s “revenue offset formulas”:

The arrangements within the revised Accord should not expire based on arbitrary dates. Rather the formula should be structured such that the Province continues to receive a proportionately higher share of provincial oil revenues as long as it remains below the Canadian average on key economic and fiscal measures.
There are two things worth noting about Norris’ approach, aside from the fact it is obviously impossible to receive a higher share of “provincial oil revenues” than 100% no matter how long the time period involved.  First, Norris’ language is not about the 1985 agreement but about federal offers that predate the Mulroney-Peckford Accord. 

Second, what Norris was trying to do – in effect – was to hide provincial oil revenues from Equalization.  The treatment of non-renewable resource revenues was a contentious issue but in 2003 and afterward, there was considerable interest in the notion.  As it turned out,  the federal government accepted the recommendation of an expert panel in 2007 and revised the Equalization program to exclude natural resource revenues from the calculation for Equalization payments. Newfoundland and Labrador makes too much money to qualify.

We know what we are fighting for, well, sort of

Once in office, Williams and his ministers took up the Norris argument with vigor. Not satisfied to talk about how the province lost the benefit of revenue, Williams and his ministers claimed that, in some versions, the province lost the revue itself. Like Norris, Williams seemed lost in the period before 1985 and as a result it was hard to know precisely what the provincial government sought from the talks with Ottawa.

An April 2004 news release from Williams stated that the government’s goal was to “allow Newfoundland and Labrador to receive 100 per cent of the provincial revenues from offshore oil and gas.” It already did, of course.  In one presentation, finance minister Loyola Sullivan expressed shock that - as the program has always worked - the provincial government received less Equalization as its own revenues grew.  At various times, Danny Williams claimed the provincial government wanted 100% of offshore revenues (which it already received) and that it wanted the federal government to treat offshore resources as if they were on land, something that was already achieved in the 1985 agreement.

Misinformation was widespread in Newfoundland and Labador about the Accord provisions,  Equalization, and provincial goals. The Telegram for example, reported in early June 2004 that “the province receives 100 per cent of its share of oil cash, but then sends 70 per cent of the money back to Ottawa through equalization. That means that just 30 per cent of provincial offshore moneys stay in Newfoundland and Labrador.” In truth, the provincial government never sent any amount of the money “back to Ottawa” through Equalization or in any other way.  No provincial government pays for Equalization but that fact didn’t stop people from believing it.

In late February, Williams presented federal cabinet minister John Efford with the provincial proposal.  They would re-negotiate the Atlantic Accord, as Norris suggested, even though doing so would risk bringing the agreement under free trade agreements. The province wanted a new Equalization type-transfer that would – in effect – double provincial oil revenue.  Under Williams’ proposal the province would continue to receive 100% of oil revenues as it had since 1997. In addition, Williams expected the federal government would provide a transfer equal to the province’s oil revenues. The new transfer would last as long as the provincial government collected oil revenues.

The federal government could not accept the provincial approach to the Accord and Equalization, so Martin tried variations on a familiar theme when dealing with provinces in financial trouble. After all, that is what the discussion was really about.  Martin offered an amount of money for a set period of time, tied to an existing program or agreement. 

This was the approach the federal government had taken with Saskatchewan in 1990.  The federal government created an exemption to Equalization for 30% of value for provinces that had an unique income source.  The so-called generic solution applied to Saskatchewan potash.

Martin had extended the same option to Newfoundland and Labrador in the 1990s for its light sweet crude.  After 1997, the federal government allowed the province to choose between the Accord offsets or the generic solution, whichever gave more cash.  Later, the federal government allowed the province to chose between the two approaches at the end of the fiscal year instead of at the beginning.  This ensured the provincial government always maximized its cash haul without bending the existing system of federal transfers so far out of shape that it broke.

Starting in June 2004, Williams and his ministers waged a very public and very popular campaign against Ottawa that had the effect only of boosting its own popularity with voters who were misinformed about the issues and provincial demands.  The federal position never changed:  it offered an amount of money for a fixed period, tied to an existing program, in this case the offsets provisions of the Accord.

The agreement signed in January 2005 accepted what the federal government had offered all along:  in an agreement that did not change the Atlantic Accord,  the Government of Newfoundland and Labrador received money to cover the difference between what the province received in Equalization plus offsets and what it would have received without oil revenue at all. The deal would last until the Atlantic Accord offsets ran out in 2011 or until the province no longer qualified for Equalization, whichever came first.

There was a possibility of an extension beyond 2011 for another eight years.  The January agreement set two conditions for renewal, both of which had to be met. One condition was that Newfoundland and Labrador had to qualify for Equalization in either of the last two years of the agreement. There was no chance of that happening since forecasts in 2005 had put the province off Equalization by 2010 even using assumed oil prices of less than $30 a barrel.

In the second clause of the final agreement, signed on February 14, 2005, Williams and his ministers acknowledged that “Newfoundland and Labrador already receives… 100 per cent of offshore resource revenues as if these resources were on land.”

Williams called the deal for a $2.6 billion cheque the Atlantic Accord although it made no changes at all to the original agreement and was about Equalization payments, not offshore oil revenues. It remains on the provincial government website under that name, though: 
https://www.gov.nl.ca/atlanticaccord/agreement.htm. The Atlantic Accord is on the government’s website for the government services department under the name aa-mou. The way the government treats the two documents reflects the way the government views the two agreements.

The 2005 Review Clause

The 2005 Offshore Arrangement included a clause that committed both governments to review the original Atlantic Accord and the 2005 arrangement in the presumed final year of a renewed 2005 deal.  The review clause stated that no “later than March 31, 2019, the parties agree to review the current arrangement.”

“The review will address:
a)     the extent to which the Atlantic Accord objectives have been achieved, including the key objectives of the Atlantic Accord that Newfoundland and Labrador be the principal beneficiary of its offshore,
b)     whether Newfoundland and Labrador have realized lasting fiscal and economic gains from its offshore petroleum resources revenues,
c)     the Equalization arrangements then in effect,
d)     the fiscal disparities that then exist between Newfoundland and Labrador and other provinces,
e)     Newfoundland and Labrador’s undeveloped offshore petroleum discoveries,
and will have regard to the 1987 Canada-Newfoundland Atlantic Accord Implementation Act, any legislation that implements the terms of this arrangement, and any other relevant considerations.”
The 2018 Review

Premier Dwight Ball wrote to Prime Minister Justin Trudeau on February 13, 2018 to initiate the review of the Atlantic Accord under the 2005 arrangement. The review was the latest in a series of fruitless discussions with the federal government in which Ball had tried to secure federal cash to bridge the province through its difficulties until oil prices came back to historic highs.

The letter reproduced the clause from the 2005 arrangement.  Ball noted that the province was incorrectly referred to as a “have” province given its current financial status.  He also referred to “lingering uncertainty” about the proposed federal environmental review process.  Other than that, the thin letter offered no clue as to what issues the provincial government wished to discuss or what approach it would take in the review.  The provincial government maintained strict silence about the discussions.  A series of access to information requests to various departments returned very few documents none of which revealed anything about the provincial position.

One of the fascinating aspects of the public discussion of the Atlantic Accord since 2003 is the extent to which myths have replaced fact.  This is not merely a public phenomenon, as evident in 2019 as it was in 2004-05.  It exists within government as well.  One of the few documents related to the review that has been made public is a briefing note on the Accord prepared in the Natural Resources department in January 2018. It contains false information about the Atlantic Accord and the 2005 arrangement. Among other points, the briefing note recites as if it were factual the claim that the province received only 12% of offshore revenues while the remainder went to the federal government “and the other provinces.” 

The briefing note incorrectly states that the Accord was amended in 2005.  It was not.  The note claims the 2005 arrangement delivered only 75% of the amount the provincial government should have received until 2011. The comment is moot since the province ceased to qualify for Equalization in 2008. As it is, the provincial government was able to claim the rest of the money advanced in 2005 due to high oil prices in the qualifying years. The briefing note gives the value of the 2005 arrangement as $2.0 billion when the actual amount received under the agreement was $2.6 billion.

The Atlantic Accord Review Agreement Hibernia Dividend-Backed Annuity Agreement

The review concluded with an agreement the provincial government calls the Atlantic Accord Review Agreement.  The document – actually called the Hibernia Dividend-Backed Annuity Agreement – contains three major sections, although they are not labelled as such.

The first section describes the annual payments made by the federal government and the provincial government to one another under the agreement. The federal government will provide the province payments totalling $3.3 billion over 38 years according to a schedule attached to the agreement. Another schedule describes $800 million in payments from Newfoundland and Labrador to the federal government. There is no explanation of why the provincial government is paying the federal government anything.

The second section – the only references to the Accord – notes that the review is complete and commits the parties to continue to work together on offshore development.  It also commits the two governments to conclude discussions on administrative issues related to joint management and announces the agreement to allow oil exploration in one offshore area but not another.
The third section lists a series of general provisions related to the federal-provincial payments that are the main purpose of the agreement.

The provincial announcement of the agreement – titled Landmark Atlantic Accord Agreement Achieved -  included reference to electricity rate mitigation as part of the agreement.  This caused some public confusion and drew criticism from former premier Brian Peckford. 

Changes in Official Views

One of the characteristics of the post-2003 approaches to the Atlantic Accord is that it is about something other than the original agreement.  This change, which began during the 2004 dispute about Equalization, is reflected in the slides used by provincial officials to give reporters a “technical briefing” on the new agreement.

One slide provides a new definition of principal beneficiary.  In the original agreement, it consisted of joint management, provincial revenues, and local benefits.  In 2019, principle beneficiary means  that the resource is “Treated as on land”,  that there is “joint management”,  and that the province receives an “appropriate share” of offshore-related revenues.

The next slide lists the outcomes of the review discussions as being:
  • Guaranteed revenue
  • Joint management
  • mitigation
Since the slide deck does not include the speaking notes that explained these points, many questions remain unanswered.  The most obvious one is the connection between the definition of principal beneficiary and the three outcomes.  Joint management is the same on both slides.  An “appropriate share” of revenue – itself undefined – is linked to a guaranteed income in the arrangement related to Hibernia shares.  Some have questioned the decision to accept a fixed amount each year as opposed to allowing oil prices to rise and fall over a long period of time.  There is no obvious connection at all between discussions about the Atlantic Accord and mitigating rates for electricity in Newfoundland and Labrador.

What is unmistakeable, though, is the difference in government policy concerns in the post-2003 world versus the issues in 1985 and immediately after. In 1985 and for the 20 years afterward,  the government was concerned with management control,  revenues, and the creation of a strong local industry.

Provincial concern since 2003 has focused more on government revenues than anything else. Interest in setting provincial revenues (1985) appears to have transformed to a concern about “appropriate” or guaranteed amounts.  The idea in 2004 of getting some share of federal revenue in addition to provincial revenue may be nothing but a more aggressive statement of what is "appropriate".  In the end, the appropriate amount in 2005 was about 10% of what the original demand was worth over the period from 2006 to 2015.  In 2019,  "appropriate" was the same dollar amount spread out over 38 years instead of eight.

Local benefits and the creation of a globally competitive service industry  - the 1985 policy goal - has been supplanted by the creation of a small government-owned oil company that holds tiny shares in the local offshore used to fund the Lower Churchill project.  Its other main function has been promotion of the local offshore to foreign investors and providing policy support to the provincial government on both offshore policy and on offshore development negotiations.  The difference in Nalcor Oil and Gas between 2005 and 2019 is cosmetic, at best.

Perhaps most strikingly, while the 1985 agreement was – at its heart - about ending Newfoundland and Labrador's political and financial dependence on the federal government,  both the 2005 and 2019 agreements were about avoiding the day when the provincial government didn’t get a significant portion of its income from Ottawa.  Whether they succeeded or not is a question for another time.