Photo: JOE GIBBONS/The Telegram
Outgoing Newfoundland and Labrador Premier Danny Williams, left, speaks during a news conference announcing the $6.2-billion Lower Churchill deal. Others are Nova Scotia Premier Darrell Dexter, Chris Huskilson, chairman and CEO of Emera Inc, and Newfoundland and Labrador Natural Resources Minister Kathy Dunderdale. Photo: Joe Gibbons/Postmedia News
"If the feds buy into the Quebec argument, it will go down very badly, not just in Newfoundland but in all Atlantic Canada," said Donald Savoie, a leading economy expert at the Université de Moncton.
"This is a very divisive issue."
Quebec has opposed federal subsidies for the construction of transmission lines, including an underwater cable, for the joint $6.2-billion Newfoundland-Nova Scotia Lower Churchill hydro project, on the grounds federal help could distort the price and market for electricity.
Newfoundland and Nova Scotia have asked Ottawa for some $400 million in federal infrastructure funding to help with the cost of building the sub-sea cable from Newfoundland to Cape Breton.
Quebec Premier Jean Charest warned Ottawa any financial involvement in the construction of the transportation line would violate international trade agreements.
Meanwhile, Quebec's natural resources minister has said the province is looking at all its options to make sure Ottawa doesn't throw a penny into the project - and she didn't rule out legal avenues.
"We are putting all the necessary energy into this to tell the federal government: 'You simply won't finance the transmission line between Newfoundland and Nova Scotia.' We, too, are able to put our foot down," Nathalie Normandeau told reporters.
Jean-Thomas Bernard, a Laval University economist specializing in energy analysis, said Quebec could have grounds to sue the federal government if the financing leads Newfoundland - as laid out in the agreement with Nova Scotia - to sell power from Lower Churchill to the U.S. northeastern market.
"That would have an impact on the electricity markets," Bernard said.
Ottawa is trying to distance itself from the dispute. A spokesman for Finance Minister Jim Flaherty said the application for infrastructure money is being reviewed by PPP Canada, a Crown corporation that operates "in an objective, arm's-length manner."
The spokesman added the decision will be made on a "merit basis."
The Newfoundland government and Nalcor, its provincially owned power utility, declined to comment on the potential battle.
This is just the latest episode in a long-running energy battle between Quebec and Newfoundland. It all goes back to the controversial 1969 agreement that has allowed Quebec to reap windfalls by transmitting through its territory cheap power from the Upper Churchill hydro project, and selling it for large profits in North American markets.
Newfoundlanders still harbour a deep resentment against Quebec for this deal and the provincial government has tried for years to overturn that agreement. However the courts, including the Supreme Court, have sided with Quebec and declared the agreement between the two provinces valid.
To add to the division, both provinces also have a historic quarrel over Labrador's frontier.
When Williams, who left the premier's office last month, announced the deal with Nova Scotia with great fanfare on Nov. 18, he said this would put an end to Quebec's long dominance over the fate of Labrador power.
Like many observers, Savoie and Bernard feel the N.L.-N.S. agreement is still a long way from reality, notably because of the financial and technical challenges of building an underwater cable.
They both noted it would be in Quebec and Newfoundland's best economic interest to seek a deal to transmit power from the Lower Churchill project through Quebec's existing transmission grid to markets in Ontario and the United States.
"Quebec's best response would be to cut a deal with Newfoundland," Bernard said.
However, Savoie believes it might be too late for the two sides to reach an agreement.
"I think the relationship between both provinces is sealed," said Savoie.
He said it might be up to Ottawa to solve this long-running battle by forcing Quebec and Newfoundland to negotiate.
"I don't think Ottawa can sit idly by. I think in the interest of economic fairness, they should get involved and solve this dilemma in some way," he added.
However, ex-Parti Québécois minister and former Hydro-Québec executive Rita Dionne-Marsolais said it would be politically very difficult for both provinces to reach a deal considering how Newfoundland has used the Upper Churchill deal to attack Quebec.
"The popular pressure in Newfoundland is high and people feel they were swindled by Quebec. This prevents the two provinces from making a smart decision," she said. "I think no one is winning that
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