The Privatization of CFLCo 2.0

These days, the number of arguments and issues relating to the first step of the Lower Churchill development (the Muskrat Falls dam) are so numerous that it's easy to become lost in the maze for the casual observer. There is the politically mangled agreement between Emera and Nalcor that is starting to resemble the same desperation of the ill-fated Hydro-Quebec renewal clause in the 1969 Power Contract. The issues hear are primarily political, but legally could effect the federal loan guarantee. There is the North Spur controversy which questions the physical integrity of the project, with the certain possibility of a massive concrete blanket worth billions being wrapped around the Spur. There are the environmental issues. There are the five lawsuits which place the loan guarantee expiry date of December 31, 2013 out of reach. There is all of this. But there is one factor that gives this article its title - the poison pill: the Reversion Act decision by the Supreme Court of Canada in 1984.

I touched on this issue in a previous article regarding the recent Hydro-Quebec court challenge of Nalcor's decision to take more power than it's entitled to under the Power Contract. That issue is currently before the Court. That article has had a huge readership internationally, and nationally, including: every major Canadian bank; the largest US investment firms; multiple governments (including Quebec); and multinational companies from Germany to the US. In other words, it's a big concern, and so it should be to anyone doing any serious due diligence of this project.

Nalcor admitted, in its pre-filed evidence before the Public Utilities Board (PUB) in 2009, that a water management agreement was necessary in order for the Lower Churchill project to be viable (both proposed dams: Muskrat Falls and Gull Island). That part is true, and frankly just common sense. Without it, the projected cost of power delivered to the Island from Labrador would go from 25 cents a kilowatt hour (kwh), already the most expensive power in the world, to a staggering 75 cents a kwh (at a minimum). This of course would immediately put the finances, and therefore ability to survive, of all but the wealthy in the province. So, the water management agreement is the life blood of the Lower Churchill project, without which it dies.

Premier Dunderdale has, in the last two months, stated several times that the position of the government, and Nalcor (or is that the other way around), is that when the Power Contract renews in 2016 our province does not owe Hydro-Quebec the same obligations as the first term of the contract.
Their legal position is that after 2016, Hydro-Quebec is subject to an "energy allowance", which means that it has only a block of power each month, and the rest is available for Nalcor to take at the same cost Hydro-Quebec would have gotten for it (by 2016 that will be an incredibly cheap $0.0020 per kwh). Nalcor estimates, according to Vice-President Gilbert Bennett, that extra energy would be about 1500 MW per year, which would generate about $600 million in profit for Nalcor once sold. That is where any and all the "revenue" is in the Muskrat Falls dam project. That's the plan anyway.

Here's the killer:
The Supreme Court of Canada, 1984, decision on the Reversion Act, as proposed by the province's government of the day:

"the company (CFLCo) signed a contract (the Power Contract) with Hydro-Quebec whereby it agreed to supply and Hydro-Quebec agreed to purchase virtually all of the hydro-electric power produced at Churchill Falls for 65 years."

The Court then goes on to qualify what Hydro-Quebec is not entitled to:

"It is against this background that the Power Contract between CFLCo and Hydro-Quebec was signed on May 15, 1969. It is a lengthy and detailed document. Under the contract CFLCo agreed to supply and Hydro-Quebec agreed to purchase virtually all of the power produced at Churchill Falls for a term of forty years, which was renewable at the option of Hydro-Quebec for a further term of twenty-five years. The price to be paid for the electricity was to be based on the final capital cost of the project. Provision was made for CFLCo to retain a fixed amount of power for use within Labrador by its subsidiary Twin Falls Power Corporation. In addition CFLCo could recall on three years’ minimum notice up to 300 megawatts (MW) to meet the needs of the Province of Newfoundland."

The Supreme Court of Canada, the highest Court of the land, unanimously agreed that Hydro-Quebec had the right to all the power produced at the Upper Churchill until 2041 (65 years) except 300 MW of recall the province could request, and the 225 MW for Twinco. Given that the issue was decided in 1984, the question remains: How can Danny Williams as Premier, and then Kathy Dunderdale as his successor, possibly think our province can take any of the power from the Upper Churchill dam other than the 525 MW already committed to by recall and Twinco?

It is a hard question to ignore, yet our media in the province has done just that - completely ignored it. The provincial CBC has been particularly negligent given it's role as a public broadcaster paid for by the public. While the CBC as a corporation is a strong advocate, normally, of the public interest, CBC Newfoundland and Labrador seems bedeviled by personality and spin. But I digress. Bottom line is, other than the radio shows, this fundamental issue is being completely ignored, and the media is not holding these politicians, and Nalcor, to account on our behalf.

The Williams/Dunderdale approach does beg one very specific question: Is the intent of the Lower Churchill project to undermine the province, and specifically CFLCo, with the end result being a deliberate bankruptcy of CFLCo, resulting in it's privatization and/or sale? I ask this question for several reasons. First off, it's not as if privatization of CFLCo is something new. Former Premier Clyde Wells, along with his Chief of Staff Ed Hollett (now a blogger writing under "Sir Robert Bond Papers"), attempted to privatize CFLCo in the 1990's, but had to back off after huge public opposition - then headed by Sue Kelland-Dwyer (now blogging under "Sue's Blog"). 

This approach would be almost too far fetched to consider if it weren't for a few facts. One is Danny Williams. He is a lawyer. It's quite obvious to even the untrained eye that this water management agreement is not constitutional - let alone a lawyer of some experience. Secondly, the province has an entire legal department, just in case William's dropped the ball. What remains far fetched is that somehow between them the obvious flaws of their deal were not apparent. 

There is also the 1998 Shareholder's Agreement, drawn up by then Liberal Premier Brian Tobin and Dean MacDonald, which essentially gave Hydro-Quebec a veto over CFLCo's business operations, and equal rights to any shares of CFLCo if/when they become available. 

Then there is this little tidbit from the 2008 New Dawn Agreement, signed with the Innu of Labrador, to authorize building the dam. In particular, an entire section of which details how a sale of CFLCo shares would affect the Innu Nation's income:

"  2. (c) In the event that the parent company of CFLCo (Nalcor) sells any of its common shares, the Innu Nation shall be entitled to receive three percent (3%) of the proceeds received from the sale of its common shares. If a sale takes place prior to September 1, 2041, the total proceeds shall be reduced by the present value of the expected free cash flow from the common dividends from the date of sale up to and including August 31, 2041.

       (d) If CFLCo issues a new class of shares with the purpose of diluting the value of the dividends on common shares referred to in section 2(b), above, the Innu Nation's share of common dividends is to be calculated as if the new class of shares had not been issued."

It begs the question: What exactly did the Williams' government, and its then Minister of Natural Resources, and now Premier, Dunderdale, have in mind with these provisions. They are clearly forward looking and anticipate a sale of CFLCo shares. Is this in anticipation that CFLCo may have to be sold? Is it in anticipation of the bankruptcy of CFLCo as detailed in the Department of Natural Resources Report of 2012? These are questions right now without answers. You either have to believe Williams and company were so foolish as to stumble into catastrophe, or you have to think it was planned to be so. One friend of Danny Williams said to me once: "People like you and I plan on where we are going to go for lunch today. Williams plans where he will be having lunch two years from now." If that's the case, it leans to the answer being a deliberate, planned catastrophe. If it's planned then there has to be a reason.