Vol 38 No 8
January 12, 2006
News & Notes
Out and About
February 2, 2006
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Churchill Falls contract scrutinized
Examining an infamous deal
By Deborah Inkpen
“The 1969 power contract between Hydro-Quebec and the Churchill Falls (Labrador) Corporation (CFLCo), has been a matter of considerable resentment in Newfoundland and Labrador.” So opens a new report by Dr. James Feehan, Economics, and Dr. Melvin Baker, university archivist and historian. The deal has long been debated and discussed in both provinces and, since the mid 1970s, the Government of Newfoundland and Labrador has challenged the contract in a number of ways.
The authors focused on one aspect of the contract: its renewal clause. According to that clause, when the term of the contract ends in 2016 the contract with Hydro-Quebec must be automatically renewed for a further 25 years at a fixed price of $2 a megawatt hour, which is even lower than the current price. The paper points out that despite the onerous terms of the renewal clause very little has been known about the circumstances that led to it. By drawing on original documents from the time, the paper pieces those circumstances together and puts them in the context of the overall negotiations.
According to the study, a letter of intent signed between Hydro-Quebec and the CFLCo in 1966 gave Hydro-Quebec the option of renewing the contract under mutually agreeable terms regarding price and quantity based on fresh negotiations prior to its expiry in 2016. Throughout 1967 and into 1968, the two parties worked on a final contract based on that letter of intent. The renewal clause remained undisputed until March 1968. Then, Hydro-Quebec demanded a new renewal clause that provided for an automatic renewal of the contract, without negotiations, for another 25 years starting in 2016, as well as a guaranteed fixed price even lower than the original price paid before the renewal.
Drs. Feehan and Baker said that Hydro-Quebec’s demand to change the renewal clause coincided with severe financial pressures on CFLCo, which, on the basis of the letter of intent, had already spent heavily in order to have the project in place to meet Hydro-Quebec’s power requirements. CFLCo’s parent company, Brinco, had borrowed heavily to finance CFLCo’s construction program and was no longer in a position to provide more funds. Hydro-Quebec, as a part owner of CFLCo and with representation on CFLCo’s board of directors, was fully aware of CFLCo’s and Brinco’s financial situations. Without an agreement, CFLCo would soon run out of money, be unable to obtain more financing or pay its debts, and likely go bankrupt.
Thus, the demand to change the renewal provision came as a “do-or-die condition” for CFLCo. Within weeks, and after failed efforts to obtain a compromise, CFLCo capitulated. By the end of April 1968, negotiations were effectively over. (However, board approvals, legal framing and the raising of long term financing meant that the signing would not occur until May 1969.)
Also, Hydro-Quebec, even in the context of 1968, anticipated that new renewal clause would be extremely advantageous to it.
The paper concludes “It is inconceivable that any party to a transaction would knowingly and willingly agree to sell its services some 50 to 75 years in the future at a price fixed below the current price, except if either forced to do so or offered commensurate compensation. In this case, the latter did not happen.”