Here's to the crazy ones, the misfits, the rebels, the troublemakers, the
round pegs in the square holes... the ones who see things differently -- they're
not fond of rules... You can quote them, disagree with them, glorify or vilify
them, but the only thing you can't do is ignore them because they change
things... they push the human race forward, and while some may see them as the
crazy ones, we see genius, because the ones who are crazy enough to think that
they can change the world, are the ones who do.

Steve Jobs
US computer engineer & industrialist (1955 - 2011)

Sunday, November 28, 2010

Taking Back the Upper Churchill Falls Now

Hydro Quebec is our number one competitor now for hydro electric generation. They know it and so do we. With the announcement of the Lower Churchill development, and more importantly the sub-sea cable links, Newfoundland and Labrador are officially walking in Hydro Quebec's perceived turf. Hydro Quebec are the type of people who don't like to share their turf. Be that as it may, we are there. The question is: Do you allow the other crowd to survive fiscally or do you go for the jugular.

It seems that there are those in the province that are resigned to allowing the Power Contract of 1969 to expire naturally in 2041. I disagree. The economics of that issue can not be ignored for another thirty years. Some are suggesting that a large tax will be placed on the power delivered after the renewal term comes into force in 2016.  They argue the lost revenues can be made up while utilizing Hydro Quebec's transmission system. On the surface that sounds like a reasonable idea. However, it is not utilizing the economic dependancy that Hydro Quebec has developed on the Upper Churchill. In other words, it allows Hydro Quebec to continue on relatively strong until 2041 which is not in our long term interest as a competitor.

The proof is in the numbers. Hydro Quebec purchases power from the Upper Churchill for $0.0025425 cents per KWH until 2016. When the agreement automatically renews in 2016 the price will be $0.0020000 cents per KWH. Hard to believe, but yes, we will be receiving 20% less for the power until 2041. The cost of the profits lost by that reduction over the life of the contract, at today's rates and without inflation, will be between $71 billion and $95 billion. A staggering figure of lost revenue.

The real question is how important to Hydro Quebec is the Upper Churchill. Again it's in the numbers. You will hear many people, especially in Quebec, say Hydro Quebec has a surplus of power and is bringing on new power generation all the time. That while it's nice to have the 5428 MW of power from the Upper Churchill it's not the end of the world if they lose it. Those people base their assumptions on the quantity without looking at the profitability.

Hydro Quebec's average cost to produce power from it's many plants and dams is approximately $0.06 cents per KWH. That does not include transmisssion and distribution costs. They receive our power for $0.0025425 cents per KWH. Translation: It takes 25 James Bay Dams to equal 1 Upper Churchill Falls - profitability wise. Further translation: Hydro Quebec can not lose the Upper Churchill or all the profitability of their corporation will be lost. They will be forced to try and raise domestic Quebec rates to make up the difference, which in turn would be taxed back by the federal government in equalization transfers.

A larger problem would be debt sustainability. Most Hydro Quebec projects are built on 35 to 50 year projections of revenue and costs. All their financing, primarily through bonds, are based on those projections. The corporation's credit ratings are similarily affixed. In other words, the loss of profitability effects all the corporation's operations - nationally and internationally.

Conversely, NALCOR could strike at the heart of their chief competitor early in the game. Gain the upper hand on the long term battle, and be in position to compete on a much better fiscal footing. Strategically, it is as important to stop your competitor as it is to try and advance yourself. Hydro Quebec certainly understands this principle.

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