The 1969 Contract
One of the Smallwood government’s central ambitions was to develop the natural resources of Newfoundland and Labrador. In 1952 Smallwood approached some leading British bankers and industrialists, and the following year the British Newfoundland Corporation (BRINCO) was created. The Corporation received extensive land and water rights in the province, among them the hydro-electric potential of the upper reaches of the Hamilton River, which was re-named the Churchill River in 1965.
1958 Water Rights
In 1958, BRINCO created the Hamilton Falls Power Company (HFPCo), which was in turn later re-named the Churchill Falls (Labrador) Corporation (CFLCo), as a federally incorporated subsidiary. Water rights to the Hamilton Falls were transferred to HFPCo and, at BRINCO’s invitation, the Shawinigan Engineering Company bought a 20 percent interest.
Challenges with the Project
As observed by Feehan and Baker (2005), developing the Hamilton (later Churchill) Falls was a challenge. It was a huge project in a remote location, 200 kilometres from the Québec border, and much further away from major population centres where the power would be consumed. Moreover, the location dictated that the power would have to be sold in or to Québec, or would have to be transmitted across Québec territory.
This was problematic for two reasons. The interior Labrador boundary had been established in 1927 by the Judicial Committee of the Privy Council. The decision had been unpopular and much resented in Québec, and the boundary remained a sensitive issue in the 1960s. Secondly, Québec would not allow Labrador hydro power to be transmitted across its territory to markets in Ontario or the United States. Though provincial governments were not allowed under the British North America Act to impede each others’ trade, during the 1960s the Québec government opposed the creation of a national power grid, arguing that electrical generation and transmission were within provincial jurisdiction.
Talks between BRINCO and Hydro-Québec had begun in the mid-1950s, but there was little movement until the early 1960s, when new federal legislation allowed the negotiation of long-term contracts for the export of surplus power. Then in 1962 the Québec government decided to nationalise all privately-owned electricity generating companies in the province. As a direct result, Shawinigan Engineering’s 20 percent stake in HFPCo became the property of Hydro-Québec.
Brinco/HFPCo raised its concern that this might create a conflict of interest in any negotiations between Hydro-Québec and HFPCo. Also, Smallwood was outraged that the Québec government would nationalize Shawingan’s interest in this project. Eventually, Brinco developed a compromise under which the provincial government would take an ownership position in HFPCo as well. Talks continued between Brinco/HFPCo and Hydro-Québec. They broke down in 1964 on the issue of price, at which point the Québec government suggested to Smallwood that he nationalize BRINCO.
Instead, he explored the possibility of transmitting Churchill Falls power to the Maritimes and New England by the so-called Anglo-Saxon route. This envisaged a transmission line running to a point on the south Labrador coast, down the west coast of Newfoundland, and connecting with undersea cables to the mainland. This option was judged too expensive and thus uneconomic. Smallwood then considered asking the federal government to declare the Churchill Falls project to be in the national interest and to override the Québec government’s objections to a power corridor. In his book Brinco: The Story of Churchill Falls, Philip Smith records that in September 1967 Smallwood threatened to send the letter if Brinco could not come to terms with Hydro-Québec, but Brinco/CFLCo officials convinced Smallwood to wait as a Letter of Intent agreement with Hydro-Québec was eminent. Hoping for a deal, BRINCO did not want the project to become embroiled in a major federal-provincial crisis; and the federal government saw a potential threat to national unity.
Letter of Intent
The Letter of Intent between Hydro-Québec and CFLCo was signed in October 1966. It provided for a much longer contract than previously envisaged – the longer of 44 years from first power or 40 years from final completion – and for a low-price price regime over that period. On the other hand, Hydro-Québec agreed to take on some of the risks associated with construction cost overruns as potential financing difficulties.
Construction work began at the site as negotiations continued towards a final contract based on the Letter of Intent. These talks were lengthy and complicated. The ongoing expenses of maintaining the construction program to meet Hydro-Québec’s anticipated energy needs eventually led to serious financial difficulties for CFLCo and its parent, Brinco. During this time, CFLCo agreed to significant concessions sought by Hydro-Québec in regards to the contract as well as the plans for project’s financing and ownership. By July 1968, when contract terms had been agreed, Hydro-Québec was assured of a 32.4 per cent ownership position in CFLCo, with the possibility of more if CFLCo could not raise a target level of financing in the coming months.
Signed in 1969, the contract provided for the sale to Hydro-Québec of approximately 31 billion kilowatt hours per year for a term of 40 years. During those 40 years the price would be approximately 3 mills (3 tenths of a cent) per kilowatt-hour for the first 5 years and then decline in stages until it becomes approximately 2.5 mills for the last 15 years. Thereafter, with the expiry of the contract’s term, the contract provided for automatic renewal of the contract for a further 25 years at a lower price of 2 mills. Feehan and Baker (2005) point out that this renewal provision was radically different from the renewal clause that had been in the Letter of Intent, which had provided for negotiation and mutual agreement on the terms of any renewal. Those authors find that Hydro-Québec made its demand for the new renewal clause when CFLCo’s financial situation was very tight and only weeks before the substantial terms of the contract were agreed.
In the early 1970s Newfoundland, based on the lease of water rights, demanded more recall power to meet anticipated growth in electricity demand on the Island. Following the escalation of energy prices during the 1970s, in 1980 the Newfoundland government passed legislation to recall the water rights from CFLCo. Both efforts were the subject of litigation and Newfoundland lost on both counts. Various attempts to re-negotiate the contract’s terms have failed and the contract remains a matter of considerable resentment in Newfoundland and Labrador.