Thursday, December 20, 2007

 

New Newfoundland & Labrador Federal Party Formed

New Newfoundland & Labrador Federal Party Formed


St. John's - Elections Canada has recently confirmed that the Newfoundland

and Labrador First Party, led by former PC Cabinet Minster Tom Hickey, is

eligible to be registered as a Federal Party. With the completion of some

ongoing paperwork, and the nomination of one or more candidates for the

impending federal election, the party will meet all the criteria for full
registration.

The NL First Party (www.nlfirst.ca) will be fielding a full slate for the
next federal election.

The party is pleased to welcome applications from anyone who would like to

represent Newfoundland and Labrador interests first in Canada's

next Parliament. Interested persons can contact the party by e-mail at

info@nlf.ca or call Tom @ 709-726-5327.

Tom is more than willing to discuss with any perspective candidate or

voter the party's commitment to presenting a united front to the Federal

Government and the people of Canada on issues of extreme importance to

Newfoundland and Labrador's future.

Only the Newfoundland and Labrador First Party can obtain a Fair Deal

from Ottawa. We cannot count on any of the old lined federal parties.

In the next federal election voters can now cast their vote for Newfoundland
and

Labrador First and rather than Anybody But Conservative.

- 30 -

Wayne Bennett
Director of Communications
NL First Party
wayne_bennett@nf.sympatico.ca
709-686-5356(R)
709-639-5350(C)

Labels: , , , , ,


Thursday, December 13, 2007

 

Origins of an impending crisis

The Origins of a Coming Crisis:
Renewal of the Churchill Falls Contract*

By

James P. Feehan Ph.D
Professor of Economics
Memorial University

and


Melvin Baker Ph.D
University Archivist and Historian
Memorial University


December 13, 2005


* This paper extends our working paper, Feehan and Baker (2005). That paper was presented to a seminar of the
Political Economy Research Group at the University of Western Ontario. The authors are grateful to seminar
participants for their comments. In addition, thanks are due to Peter Neary for his encouragement and advice and
to David Vardy for his helpful suggestions. Any errors are solely the responsibility of the authors.

I. INTRODUCTION
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. The contract itself concerns the development and subsequent sale of electricity from the
Churchill Falls hydro site, one of the world’s largest. The contract provides that almost all of the
power be sold to Hydro-Quebec on a very long-term basis at an extremely low and declining
price.

Since the mid-1970s the government of Newfoundland and Labrador has challenged this
contract in a number of ways. It launched legal actions; it has made appeals to Canadian public
opinion; it has made requests to the Quebec authorities to renegotiate the contract; and it called
on the federal government to assist in finding a resolution. None of these tactics has been
successful. As a result, the relationship between the two provinces remains difficult. In
Newfoundland and Labrador tension and suspicion linger and, on occasion, break to the forefront
of public concern. For instance, in 2002 a potential agreement between Hydro-Quebec and
Newfoundland and Labrador Hydro involving another site on the Churchill River failed. In part,
this was due to public criticism that there should be no agreement with Hydro-Quebec unless the
dispute over the 1969 contract was resolved. Based on its research and public hearings, the
report of the provincial Royal Commission on Renewing and Strengthening Our Place in Canada
(2003; pp.122-125) concluded that the outcome of the contract was inequitable.

Still, Canadians generally and Quebecers in particular are no doubt weary of these ongoing
complaints. It has been over 35 years since the contract was signed. To date, all attempts
by the Newfoundland and Labrador government to have the contract renegotiated have been
unsuccessful. In the 1980s, two litigations - one to gain access to a larger portion of the energy
and the other to test the validity of nullifying the contract by legislative cancellation of the lease
for the water rights - failed in the Supreme Court of Canada. Many may ask if it is not time to
move on rather than dwell on the past?

A major obstacle to “moving on” is the contract’s renewal clause, which takes effect in
2016. That renewal clause has received practically no public attention and has not been an issue
in past litigation. The 44-year term of the contract runs from 1972 to 2016. However, the
contract provides for automatic renewal at the expiry date for a further 25-year period with the
terms predetermined. As such, it amounts to a contract “piggy-backed”onto a contract. During
the renewal period the price is preset at 2 mills per kilowatt hour. A mill is one-tenth of a cent, so
2 mills is 0.2 cents. Even in the late 1960s, a price of 2 mills was extraordinarily low and not
achievable from any new energy source then available to Hydro-Quebec. To put this price more
in perspective, in 2004 the average wholesale price of electricity in Ontario was 52.2 mills per
kilowatt hour and in 2003 Hydro-Quebec received an average of approximately 84.9 mills for its
electricity exports from Quebec.1 A price of electricity of 2 mills in 2017 with that price fixed
until close to the end of 2041 is barely distinguishable from being free. Even in 1969 that price

1 For wholesale electricity prices in Ontario see the web site of the Independent Electricity System
Operator, http://www.ieso.ca/imoweb/media/md_prices.asp. For Hydro-Quebec the figure is based on data on

p.107 of its 2003 annual report.
Page 1 of 50


would have been considered extremely low and not achievable from any undeveloped alternative
then available in Quebec. Since the amount of electricity involved is approximately 30 million
megawatt hours annually, the potential gap between the value of the power and the amount paid
to CFLCo was already roughly $1 billion a year by 2004 and rising. If current trends in energy
prices continue, that annual gap is likely to be in the billions of dollars by 2017.

There is little doubt that before the expiry date of the contract’s term this renewal
provision will become a source of serious conflict between the two provincial governments. It
could jeopardize attempts to develop other hydro-electric sites along the Churchill River, sites
which could be crucially important to central Canada’s electricity needs.

Of course the existence of this provision is no news to the parties. But how did such an
extraordinarily onerous condition get into the contract in the first place? One might have thought
that this question would have been thoroughly investigated by now. That has not happened. In his
nearly 400-page tome on Churchill Falls, Smith (1975; p.288) offers no meaningful insight,
devoting only a single sentence to renewal. The Economic Council of Canada (1980; p.121)
appeared to be puzzled by the renewal provision, noting that it was not required by the financiers
and that it was added to the contract at a very late stage. Even in articles in the special 100-page
issue of Forces (1982) devoted to Hydro-Quebec’s perspectives on the 1969 contract, there is
barely mention of renewal.2 How anyone would agree to, or ask for, a renewal clause like this is
an enigma.

This paper represents the results of the first systematic investigation of that mysterious
clause. To carry out this task, the renewal provision cannot be examined in isolation. It is
necessary to put it in context by giving due consideration to the process that led to the contract
and related arrangements. This paper provides that background and, in addition, presents hitherto
unknown or uncited archival documentation that gives new and revealing facts regarding the
origins of the renewal clause. Those new findings may well raise substantive questions of
business ethics and law.

The paper is organized as follows. Section II gives important background and then
reviews the early discussions and the interrelated commercial and political challenges that had to
be overcome for the two parties to come to agreement on a comprehensive Letter of Intent.
Then, Section III turns to the contract negotiations and the events that specifically led to the
renewal clause in its present form and provides insight as to how CFLCo became burdened with
this onerous condition. Section IV deals with the implications for the three key parties: Hydro-
Quebec as the buyer, CFLCo as the seller, and Newfoundland as the resource owner. Crucially,
those implications are assessed based on the circumstances of the late 1960s and not with respect
to current and anticipated future electricity prices. Section V contains a very brief overview of
the events following the end of negotiations and up to recent years. Section VI concludes.

2

There are only brief references to it. See Forces (1982; p.41 and p.99) for references in English;
corresponding references are also provided in French elsewhere in the same document. None provides any insight
into the renewal clause’s origins.

Page 2 of 50


II. EARLY PROPOSALS TO LETTER OF INTENT
This section provides some of the essential background. It also reviews the early stages of
negotiations, which culminated with the signing of a Letter of Intent in 1966.

II.1 The Origins of CFLCo
In 1952, in a quest for investors to develop Newfoundland’s natural resources, the then
premier, Joseph Smallwood, approached leading British bankers and industrialists. That
development strategy reflected the limited technical expertise and financial capital then available
within the province. The outcome of Smallwood’s efforts was the formation in 1953 of the
British Newfoundland Corporation, Brinco. It received extensive land and water rights on the
island of Newfoundland and in the Labrador region of the province. One of Brinco’s most
significant assets was the hydro-electricity potential of the waterfalls on the upper reaches of the
Hamilton River, later renamed the Churchill River in 1965.

In 1958 Brinco established a federally incorporated subsidiary, the Hamilton Falls Power
Company (HFPCo), which would be renamed CFLCo in 1965. At Brinco’s invitation, the
Quebec-based Shawinigan Engineering Company took up a 20% interest in HFPCo with the right
to maintain that ownership position if the corporation were to expand. Brinco retained the
remaining 80%. Shawinigan’s expertise in hydro-electric development and its prior working
relationship with Brinco were the bases for this partnership. The water rights to the Hamilton
Falls were transferred from Brinco to HFPCo, and that corporate entity became the development
mechanism.

II.2 The Political Impediments
Developing the Hamilton Falls would involve considerable challenges. Its magnitude and
its distance from major markets - approximately 180 kilometres due east from the Quebec border
and several hundred kilometres further from there to large population centres - presented
substantial engineering and financial complexities. These technical problems were compounded
by two major political factors. Both involved Quebec. That was because the potential market for
electricity was either in Quebec or had to be accessed by passing through Quebec.

The first political problem had to do with a boundary dispute that had been settled decades
prior to Newfoundland becoming a part of Canada in 1949. It concerned the location of the
inland boundary on the Labrador Peninsula; Canada’s and Newfoundland’s claims overlapped.
The government of Canada, on the request of and with the participation of Quebec, and the
government of Newfoundland brought this question to the Judicial Committee of the Privy
Council in London. In 1927 the Judicial Committee issued its determination as to where the
boundary lay.3 That ruling ended the dispute between Canada and Newfoundland. Despite this

3 Interestingly, in its ruling, the Judicial Committee observed “...throughout a long series of years, and
until the present dispute arose, all the maps issued in Canada either supported or were consistent with the claim
now put forward by Newfoundland...” That was one of the facts among those considered by the Committee.

Page 3 of 50


resolution, the boundary remained a politically sensitive topic in Quebec.

The second political obstacle was related to the first in so far as it involved territory. At
times, HFPCo explored the option of selling to consumers outside of Quebec, potential customers
being Ontario, and especially the U.S. northeast. To do so would entail transmission of electricity
through Quebec either using its electricity grid or by building a dedicated power corridor through
that province. Under the Canadian constitution, embodied at the time in the British North
America Act of 1867 and its subsequent amendments, provincial governments could not interfere
with or impede another province’s trade. Still, Quebec governments were opposed to any attempt
to tranship power over their territory without their approval. The political circumstances in
Quebec since the late 1950s were such that the federal government was not anxious to be put in a
position in which it would have to confront Quebec over this matter; for more on this see
Churchill (1999).

Both these territorial issues proved troublesome as discussions, talks and negotiations
were to take place between Hydro-Quebec and HFPCo during the 1960s. As well documented by
Smith (1975), occasionally, they would flare up at the political level, with accusations and
counter-accusations between Premier Smallwood and the various Quebec premiers. It is fair to
say that both Brinco/HFPCo and Hydro-Quebec officials generally sought to avoid these issues
but the political spats did at times impede progress in commercial negotiations.

II.3 Early Discussions
Brinco had first approached Quebec about the potential development of the Hamilton Falls
in the mid-1950s but any talks had been sporadic. However, as Smith (1975; pp.121-125)
reports, by early 1961, Brinco officials were convinced that Quebec would be facing a severe
power shortage by 1969 and that power from Hamilton Falls could be supplied to Quebec at a
price lower than any alternative site available in Quebec. So in March 1961, HFPCo offered 1
million horsepower available from October 1965 under a 25-year contract at a price of 3.5 mills
per kilowatt hour at the power plant with an option for another 1 million horsepower at 2.6 mills.
While the price was comparable, Hydro-Quebec opted for a preferred site in Quebec.

New possibilities for a commercial agreement arose in September 1962. The federal
government announced in its Throne Speech that it would allow long-term contracts for the
export of surplus power to expedite the development of major power projects in Canada. This
was important because huge projects, such as the Hamilton Falls, required long-term “take or
pay”contracts to support their financing. Take-or-pay means that the buyer is obliged to pay for
the contracted quantity even if at times it did not use or take delivery of all of it. Allowing long-
term export opened up the possibility of such arrangements with buyers in the United States.
Either HFPCo might be able to export power across Quebec or it might sell the power to Hydro-
Quebec, which could export any portion of it that was in excess of Quebec consumers’ demand.
Similarly, Hydro-Quebec now would be in a position where, if it did commit to purchase, on a
take-or-pay basis, a large quantity of power from HFPCo and found itself with excess power, then
it had the possibility of selling that excess in the United States. At the time, some U.S. utilities,
notably Consolidated Edison, were expressing interest in importing power.

The prospects for building on the impetus provided by the new federal policy, however,
became severely complicated following the December 29, 1962 announcement that the Quebec

Page 4 of 50


government would nationalize the privately owned portion of the electricity industry in that
province. While non-electrical subsidiaries of these businesses were allowed to remain in private
hands, the Quebec government insisted that Shawinigan Engineering transfer its 20% holding in
HFPCo to Shawinigan Water and Power, its parent company and one slated for nationalization.
Thus, nationalization would encompass those holdings in HFPCo. According to Fullerton (1982,
p.46) it was Quebec Premier Jean Lesage himself that wanted this specific transaction carried out.

Premier Smallwood was outraged at Quebec’s intentions. In mid-January of 1963, an
official of Brinco, David Morgan-Grenville met with Premier Smallwood to discuss this issue.
According to Morgan-Grenville’s notes, Smallwood was upset over Quebec’s reluctance to allow
Brinco to discuss with Hydro-Quebec how Hamilton power could be transmitted through that
province.4 Those notes also record that Smallwood reiterated his own threat to nationalize
Shawinigan Engineering’s 20% interest in HFPCo if “Mr. Lesage persisted in being difficult or
showed signs of planning to use these shares as a weapon to obstruct a Hamilton development.”

II.4 The 1963 Proposal
Despite the political animosity ignited over the Quebec government’s plan to nationalize
Shawinigan’s interest in HFPCo, Brinco was encouraged by a meeting held on January 29, 1963
between Brinco’s chairman and chief executive officer H. Greville Smith and Premier Lesage.
Premier Lesage informed Greville Smith of his great interest in Hamilton Falls and of his
willingness to delay development of the Outardes River if Hamilton power were made available
and would be cheaper.5

To inject more vigour into the search for a deal, Brinco appointed Robert Winters of Rio
Algom Mines, and already on Brinco’s Board of Directors, as its new chairman and chief
executive officer in July 1963. Rio Algom itself was a Canadian subsidiary of the Rio Tinto
Corporation, a major shareholder in Brinco. Winters was on good terms with both Premier
Lesage and Hydro-Quebec’s president Jean-Claude Lessard; both Winters and Lesage had been
fellow members of parliament, and Lessard had been a senior federal government official at the
same time. Winters also had many contacts in Canadian financial and political circles, including
Prime Minister Lester Pearson. Additionally, Rio Algom assumed management of Brinco and
took a minority ownership interest in HFPCo.

Winters concerned himself with two key tasks - making progress on commercial
negotiations and reducing the political friction.

As for a commercial agreement, Hydro-Quebec had already expressed interest and at a
meeting held on August 13, Lessard repeated his opinion that there must be an agreement in
principle requiring HFPCo to proceed and that it was necessary to be assured of power from

4 Morgan-Grenville’s notes; CFLCo archives.

5 This prospect was reinforced in April 1963; in a letter dated April 7, 1964 to Premier Lesage, Robert
Winters, Greville Smith’s successor, recalled that “In April 1963 Hydro-Quebec expressed serious interest in
obtaining power from the Hamilton Falls and indicated to us that the first generators would have to be in service by
1968.”

Page 5 of 50


Hamilton Falls in 1968 or Hydro-Quebec would have to start planning immediately for alternative
sources.6

Brinco quickly developed a 22-clause draft proposal. That draft, dated August 16, left
open the issue of price, specifying it as simply x mills per kilowatt hour, and it similarly included a
clause for recapture, or recall, of some power for Newfoundland use but left the amount open.
Still, other key issues were addressed in basic format. In particular, the proposal envisioned a 30year
term beginning in June 1968, the time at which Hydro-Quebec would begin taking power.
Also, there was a brief renewal provision, which stated:

Both HFPCo and Hydro-Quebec shall have the right to renew the
proposed contract for a further term of (25?) years from its expiry date, upon
terms and conditions then to be agreed.

Thus, from the very beginning of what can be considered the first full-fledged negotiations
between HFPCo and Hydro-Quebec there was a renewal clause.

Based on meetings with Hydro-Quebec during the remainder of August, Brinco refined its
proposal. Brinco officials presented it to Yvon De Guise, a senior official of Hydro-Quebec, at a
meeting held on September 3. It was very similar to the August draft. It also left price
unspecified. It stated HFPCo would develop the Hamilton Falls site and that energy production
would be up to 34 million megawatt hours per year. Most of the electricity, approximately 32
million megawatt hours, would be sold to Hydro-Quebec on a take-or-pay basis. A significant
portion of the remainder constituted what would become know as the Twinco block, and which
was replacement power for the diversion of water to the new development from a smaller nearby
site that had been developed a few years earlier by the Twin Falls Corporation, a subsidiary of
HFPCo. Provision was made for possible recall of some of the 32 million megawatt hours for
future Newfoundland needs. As for the term of the contract, it would be “approximately 30
years” from the date of the first availability of electrical energy. The renewal clause was slightly
clarified and read:

Both HFPCo and Hydro-Quebec shall have the right to renew the
proposed power contract for a further term of, say, 25 years from its expiry
date, upon such terms and conditions as to quantity and price as may then be
mutually agreed.

After receipt of the Brinco draft proposal, Hydro-Quebec prepared a redraft, dated
September 5, 1963. The renewal clause was unchanged. On September 6, 1963, De Guise and
Morgan-Grenville met to discuss this redraft. At the time, De Guise raised the matter of the term
of the contract. According to Morgan-Grenville’s notes of this meeting:

YdeG said that HQ were now thinking in terms of a 50 year power

6 th

“Notes of conversations on August 13 , 1963 between Premier Lesage, Mr. Lessard and Mr. Winters.”
That five-page document, dated August 14, 1963, was written by Winters.

Page 6 of 50


contract. He did not express this as a firm proposal but rather as a

suggestion which might be further considered. He agreed that a contract of

that length would require an escalation clause which he thought might

specify a price ceiling expressed as a percentage of the original price.

Over the next few weeks discussions continued and the proposal evolved into a more
substantial document, dated October 7, entitled “Basis for Proposed Agreement between
Hamilton Falls Power Corporation Limited and the Quebec Hydro Electric Commission.” That
document kept the wording of the renewal clause in place except that the renewal period was put
at 20 years rather than 25 as previously.

In addition to the ongoing discussions, another thing that augured well for an agreement
was the prospect that Hamilton Falls power would be less costly than the alternatives. In an
internal letter, dated December 2, 1963, to Hydro-Quebec president Jean-Claude Lessard, De
Guise reported that the electricity from the best alternative sites would cost approximately 3.1
mills while he put HFPCo at 2.6 mills. This implied that there was room for a deal.

II.5 Political Reconciliation
Winters’ second key task on taking charge of HFPCo was to facilitate a reconciliation of
the two premiers. One of the sensitive issues was the Quebec take-over of Shawinigan
Engineering’s 20% interest. This had greatly angered Smallwood and, to Winters’ thinking,
introduced a conflict of interest. On the latter point, Winters recorded that, in a meeting with
Jean-Claude Lessard on July 2, 1963,

.... I suggested to Mr. Lessard that he might wish to seek legal advice as to

whether or not there is likely to be a substantial conflict of interest with him

being at the same time a representative of the buyer and the seller of power.7

On August 13, he met with Premier Lesage and Lessard. They discussed shareholding
interests as well as aspects of the potential development. Winters reminded them of Smallwood’s
reaction to Quebec’s nationalization of Shawinigan’s HFPCo shares and pointed out the possible
conflict of interest if Hydro-Quebec were to be on the Board of HFPCo while negotiating with it
for the purchase of electricity. He even offered to buy back the Shawinigan shares at a very
attractive price. Lesage responded that his legal and financial experts all advised that Hydro-
Quebec retain its interest in HFPCo. Winters then outlined other options, such as allowing
Newfoundland to be an equity participant. Lesage asked him to formalize his suggestions in
writing, which he did. In a letter dated August 14, 1963 Winters repeated his concern about “a
serious conflict of interest developing when Hydro-Quebec is party to negotiations for both
selling and buying the same power” and he repeated his offer for Brinco to buy back the shares at

7 See the memorandum accompanying the letter, dated July 5, 1963, from Robert Winters to A.W.
Southam.

Page 7 of 50


a price of up to $20 each, which represented a substantial premium.8 His letter also outlined
shareholding possibilities that would incorporate Newfoundland participation if Hydro-Quebec
were to retain an ownership position in HFPCo.

On October 29, 1963 Winters visited Premier Lesage and their discussions again included
shareholding in HFPCo. Lesage told Winters of a cabinet directive that Hydro-Quebec retain its
20% shareholding position and that it hold that position should any new shares be issued. Winters
reminded Lesage that he had, in prior discussions, agreed to move down to a 15% position and he
told him that Premier Smallwood was pressing for Hydro-Quebec to go down to 10% and
Newfoundland to take up 10%. Lesage agreed to abide by his 15% commitment but would not
agree to any further reduction.9 In addition, and with Lesage’s agreement, Brinco’s
commitment under its arrangements with Newfoundland to pay an 8% rental on its pre-tax income
was extended to all of HFPCo’s income, not just Brinco’s share of it.10 In return, Brinco would
compensate Hydro-Quebec by transferring some additional HFPCo shares to Hydro-Quebec;
similar compensation would be given to Rio Algom. Fortunately for Winters, these arrangements
were sufficient to satisfy both premiers. By the end of 1963 all had been agreed. The ownership
structure of CFLCo would be:11

Brinco 68.3%;
Hydro-Quebec 16.3%;
Rio-Algom 10.4%;
Newfoundland 5.0%;


and, despite Winters’ concerns over conflict of interest, Hydro-Quebec got its seat on the HFPCo
Board. Jean-Claude Lessard took the position on January 22, 1964. And, in June of the same
year, following Newfoundland’s acquisition of its 5%, George Hobbs of the Newfoundland and
Labrador Power Commission also became a Director.

Thus, by the end of 1963 substantial progress had been made. The ownership positions in
HFPCo had been resolved and commercial talks were well underway. HFPCo itself was making

8 Smith (1975; p.152) states that Shawinigan Engineering was required by the Quebec government to give
up its 20% holding for $2,275,000, which implies a price of $10.11 per share. Thus, Winters was offering nearly a
100% premium.

9 According to Winter’s record of the meeting, the discussions also dealt with other matters such as price,
which Winters indicated he was hopeful of delivering power to Hydro-Quebec at about 3 mills. Lesage also
pointed out that a decision between Hamilton Falls or the Outardes in Quebec would have to be made soon.
Winters responded that they were proceeding as if the agreement were in place, with engineering plans and
specifications being developed. Other issues included possible arrangements with Consolidated Edison and,
ominously, the boundary.

10 See the letter from Winters to Lesage, dated December 3, 1963 regarding this rental arrangement.

11 This allocation would not be realized until Rio Algom took up its option to buy shares allocated to it.
According to Brinco’s Annual Report for 1966 (p.8) Rio Algom did so in February 1967.

Page 8 of 50


expenditure commitments for 1964, in anticipation of an agreement in the near future, to
accommodate Hydro Quebec’s anticipated need for power by 1968.

II. 6. Negotiations Break Down
As talks continued into 1964 more drafts of the “Basis” document were prepared. All
were similar in format and all retained a renewal clause based on the notion of future mutual
agreement. The March 30, 1964 draft’s renewal clause, which was unchanged from the October
draft, was:

Both HFPCo and Hydro-Quebec shall have the right to renew the
proposed power contract for a further term of, say, 20 years from its expiry
date, upon such term and conditions as to quantity and price as may then be
mutually agreed.

The March 30th draft also provided for a 35-year term rather than 30 as in the original proposal
and the October 7th one, and it envisaged first power in 1969. It continued to recognize that
Hydro-Quebec anticipated that it would re-sell some of the power to Consolidated Edison. As for
price, it indicated 2.4 mills for the bulk of the power. To facilitate financing it also contained a
provision under which Hydro-Quebec’s payments would not be less than the amount needed by
HFPCo to service its debt.

By this time, however, price became a major stumbling block. In a letter to Robert
Winters dated April 10, 1964, Hydro-Quebec’s Lessard suggested a price of 2.0 mills. Lessard
offered that Hydro-Quebec could provide a loan to HFPCo and buy more shares in HFPCo if this
offer adversely affected HFPCo’s financing arrangements. This was unacceptable to HFPCo.
Winters pointed out, in a response letter dated April 13, that all his previous suggestions
regarding price were in the area of 3 mills.

In May a committee was struck by Hydro-Quebec to consider the issues and negotiate
with HFPCo officials and their financial advisors. In its report, submitted June 8, 1964, that
committee confirmed its preference for public ownership by a joint Quebec-Newfoundland
government corporation.12 The committee noted that the shareholders did not want to sell and
also acknowledged Quebec’s inability to expropriate the shares of the company since it was
federally incorporated with its head office in Newfoundland, nor expropriate its assets, which
were also in Newfoundland. Abandoning that tact, the committee’s approach reflected a
philosophy that power from Hamilton Falls should be priced, not only below the cost of
alternative power to Quebec, but such that profit should not exceed that of a publicly regulated
private utility. The committee’s estimate of cost was lower than HFPCo’s and the committee
viewed 6.5% on “rate base”, i.e., on the capital investment, as the appropriate rate of return. The
committee recognized that Brinco had compensated Hydro-Quebec as a shareholder for the
Newfoundland 8% rental but argued that there should also be compensation to Quebec as a

12 This group had previously been established and had submitted a report on February 11, 1964 that had
explored the possibility of converting HFPCo into a public corporation to be owned by Newfoundland and Quebec.

Page 9 of 50


purchaser of electricity since the price would embody the rental. Hence, they argued that Hydro-
Quebec should have more shares in HFPCo at a low price.13 The committee concluded that a
price of 2.4 mills was appropriate. Among other things it also recommended were: that Hydro-
Quebec negotiate to increase its holdings in HFPCo to 25% buying those additional shares at only
$10; that there be more Hydro-Quebec representation on the HFPCo Board of Directors; that the
contract term be 35 years from first power; that the contract require HFPCo to maintain an office
in Quebec so HFPCo would be liable for its provincial corporate income tax; and that any
agreement ensure maximum Quebec benefits from the construction of the project. The
committee’s report did not touch on the topic of renewal.

On June 29, Winters met with Premier Lesage. Winters’ record of the meeting indicates
that the conditions put forward were too onerous. He also pointed out that at 2.65 mills or less
the retained earnings over the life of the contract would show deficits. Lesage suggested that the
Quebec government might be able to assist by undertaking to guarantee any cost over-run. With
further discussion, and the advice of HFPCo’s financial advisor William Mulholland, of the New
York financial firm of Morgan Stanley, who joined the meeting, some compromise options were
explored. They included:


HFPCo studying how much they could lower the price in return for Quebec government
guaranteeing cost-overruns; and

allowing Hydro-Quebec ownership to increase to 20% but with Newfoundland being
offered a proportionate increase in ownership and at $30 a share for both provinces.
In addition to Lesage’s offer that Quebec guarantee any borrowings needed to finance an
over-run, Winters also sought more undertakings:


a price escalation scheme that allowed the price to change with project cost;

an adjustment in price if the rate of return went below 6.5%; and

Quebec guarantees for HFPCo bank loans taken between the signing of a letter of intent
and the signing of a definitive power contract.
The meeting ended with Lesage indicating that a decision might be made at a cabinet meeting
scheduled for July 8. Again, renewal was not a matter of debate.

This sort of quid-pro-quo arrangement, namely a low-price regime in return for
undertakings to protect HFPCo from losses and to ensure that HFPCo would be able to raise
sufficient funds to complete the project, would turn out to be a key characteristic of a Letter of

13 In effect, its position was that all potential gains, as represented by the cost advantage over alternatives
available to Hydro-Quebec, should go to the purchaser of the power and none to either the developer, HFPCo, or
the resource-owner, Newfoundland.

Page 10 of 50


Intent. That Letter of Intent would, however, take some time to reach.

On July 8, in the Quebec Legislature, Premier Lesage announced that it was impossible to
arrive at an agreement at the time. Following this breakdown, HFPCo considered the options of
either transmitting power through Quebec or via the so-called Anglo-Saxon route. Smallwood
was in favour of the latter. That route involved transmission of electricity from Churchill Falls to
the south coast of Labrador, connecting to the island of Newfoundland by subsea cables and
continuing from there with more subsea cable links to Nova Scotia for integration with the
Maritimes and New England electrical grids. HFPCo concluded that this was uneconomic; the

U.S. price was likely to be about 5 mills but the cost of transmission through this lengthier route
plus the cost of energy generation were very likely to exceed that amount.14 As for passing
through Quebec, Premier Lesage made it clear that he would never agree to it.15
II.7 A New Start
By early 1965, Winters was considering his options, although Hydro-Quebec and HFPCo
were still in contact with one another. At this stage, it also appears that Winters had accepted
that the scope for profit would be limited; he wrote Premier Smallwood on January 5 and pointed
out that selling power to Hydro-Quebec “at 2.75 mills, the return to HFPCo and hence to the
Brinco shareholders is not too exciting a prospect.” Indeed, calculations carried out by Brinco
indicated that 2.75 mills would yield a percentage return on rate base of 6.8% and that a price of

3.15 mills would be needed to obtain a return of 7.5%.16
One way of improving the commercial outcome was to seek tax relief. Thus, Winters, in a
letter to Smallwood, dated February 3, 1965, raised the possibility of having the federal
government eliminate its corporation tax on privately owned electricity generators. In the same
letter, he also indicated that he would be exploring the possibility of taking the power through
Quebec rather than selling it there.

Regarding a return to formal negotiations on a sale agreement to Hydro-Quebec, on April
24, Winters and Lesage met to review their positions. According to his record of this meeting,
Winters reminded Lesage of his previous price offer and the Quebec undertakings on which that
offer was based. Also, ways to mitigate HFPCo’s price were discussed, namely: elimination of
federal corporate tax and Newfoundland provincial taxes, the use of direct-current transmission,
and a longer repayment period for bonds, which had been put at 25 years.17 They also discussed

14 See “Review of pertinent considerations on alternatives for the development of Hamilton Falls Power,”
dated January 21, 1965 and prepared by Donald McParland.

15

See “Memorandum of a Meeting between Premier Lesage and Messrs Bourget and Monast at the Prime
Minister’s Office, on Thursday, 27th of August, 1964.”

16 These calculations are presented in tables prepared in April 1964; CFLCo archives.

17 See the letter from Winters to Smallwood, dated January 18, 1965, which included a tabulation of the
estimated returns to Newfoundland. The figures were based on the bonds being repaid over 25 years.

Page 11 of 50


rapprochement with Smallwood.18

A May 1, 1965 letter to Hydro-Quebec from Winters re-ignited the negotiations. It
contained two proposals. If Hydro-Quebec did not want to purchase the power, Proposal “A”
entailed the construction of a direct-current transmission line across Quebec to markets elsewhere
in Canada and in the United States. Alternatively, Proposal “B” offered a sale agreement to
Hydro-Quebec. If the previously discussed undertakings were still available, then he proposed a
40-year contract at an average price of 2.55 mills and committed to pass along any savings arising
from any change in federal corporate income tax. Winters also wrote that, as they had previously
discussed, he envisaged a formula to adjust the price in relation to actual final cost. More
elaboration followed in another letter from Winters, dated May 11, which indicated that, under a
sale agreement with Hydro-Quebec, the price could go as low as 2.3 mills. Before the end of the
month, Hydro-Quebec and HFPCo were working on a draft Letter of Intent.

At the same time Winters continued his efforts to reconcile the two premiers. This was
not easy. Lesage had made public statements that Quebec government approval of an agreement
between HFPCo and Hydro-Quebec would be dependent on a change in the boundary. This
angered Smallwood as did the shift in negotiations away from Proposal A to Proposal B.
Smallwood wrote a scathing letter, dated May 15, to Winters to express his anger on both points.
In subsequent conversations Winter attempted to allay Smallwood’s concerns. He also wrote a
conciliatory letter, dated May 19, in which he suggested that if Smallwood were to agree to
giving access to Hydro-Quebec to headwaters of certain rivers in southern Labrador but which
flowed into Quebec, it would obviate any need for attempting any change in the boundary.
Winters’ letter also stated that he had told Premier Lesage that any matter related to the border
would have to be dealt with directly between the two premiers and was beyond his scope. The
letter then assured Smallwood that he would not ask him to agree to anything that was unfair and
unreasonable, that he was convinced an agreement could be reached with Hydro-Quebec and that
the development depended to a great degree on Smallwood and Lesage soon reaching a “measure
of mutuality.” These reassurances seem to cool the political sensitivities as negotiations
continued.

On June 7, Premier Smallwood wrote the Prime Minister confirming that an understanding
had been reached among Newfoundland, Quebec, HFPCo and Hydro-Quebec regarding
development of the Churchill Falls. His letter requested that, in order to allow the project to
proceed without delay, the federal government eliminate the federal corporation tax on private
producers and distributors of electricity. To meet this request, in July the federal government
announced that rather than 50% of federal corporate tax from utilities being rebated to provincial
governments, the Public Utilities Income Tax Transfer Act (PUITTA) would be amended so that
95% would be returned. Newfoundland could then, as agreed, turn over half of this enlarged
rebate to HFPCo, which would in turn pass it on to Hydro-Quebec through the price. In short, the

18 Winters had even engaged Prime Minister Lester Pearson in his efforts to secure a deal and to bring the
two premiers into harmony; he wrote the Prime Minister a letter dated April 28 in this regard.

Page 12 of 50


federal government gave up revenue to the ultimate benefit of Hydro-Quebec.19

On June 8, 1965 Hydro-Quebec sent a draft Letter of Intent, dated May 31, to Brinco.
This draft, which anticipated first power in 1970, was quite similar to the “Basis” documents that
had been discussed in late 1963 and early 1964. However, it did incorporate a much longer term,
namely 44 years from first power, rather than the 30 or 35 years of previous discussions and 4
years more than Winters’ most recent concessionary offer of 40 years. However, the document
also reflected some of the undertakings that Winters had sought, namely, an adjustment in price if
capital costs turned out to differ significantly from a specified estimate, and a provision for
Hydro-Quebec to provide loan guarantees if the capital cost exceeded the estimate. There was
also a renewal clause, which stated:

Hydro-Quebec shall have the right to renew the proposed power contract for

a further term of years from its expiry date, upon such terms and conditions

as to quantity and price as may then be mutually agreed. It will also be given

right of first refusal prior to any contract that HFPCo may then be willing to

sign with a third party other than Newfoundland.

The significant addition to the renewal clause was Hydro-Quebec’s right of first refusal but,
crucially, the clause retained the commitment for future negotiations on mutually agreeable
quantities and prices. Nevertheless, this provision was now substantially weakened indirectly.
The extension of the contract’s term to 44 years from the availability of first power was
significantly longer than the 30-35 years contemplated in earlier negotiations. Renewal was thus
pushed much further into the future.

II.8 Agreement
Work on the Letter of Intent continued over the summer. At the July 29, 1965 meeting of
the HFPCo Board of Directors, Winters reported that substantial agreement had been reached on
all major points of principle. In reviewing the latest draft of the Letter, dated July 12 and which
now called for power by March 1971, he listed 14 points that remained to be negotiated but
indicated that the parties were close to agreement. None of the 14 points involved renewal.

Despite the momentum of the negotiations during the summer of 1965, another year of
negotiations passed before there was an agreement on the Letter of Intent. There appears to have
been no major disagreements and several drafts of the Letter of Intent were discussed throughout
the process. Technical studies by Hydro-Quebec into October of 1966 and the resignation of
Winters in December of 1965 to re-enter federal politics were among the possible explanations for
the delays. Henry Borden, who had been Chairman of the Board of Brinco, succeeded Winters as
president and chief executive officer of Brinco, while Donald McParland took the presidency of

19 In addition to the PUITTA arrangements, in 1968 the federal government exempted the interest
payments made to non-resident holders of CFLCo’s first-mortgage bonds from the withholding tax. That assisted
CFLCo in successfully selling the bonds and doing so at a lower interest rate. One of Hydro-Quebec’s
undertakings was to absorb CFLCo’s cost of interest above a specified rate. Thus, on the margin, any reduction in
the interest rate would translate into savings for Hydro-Quebec.

Page 13 of 50


HFPCo itself. It was also in 1965 that the Hamilton River was, on Smallwood’s initiative,
renamed the Churchill, and consequently HFPCo adopted its new name CFLCo.

On June 6, 1966 Hydro-Quebec commissioners approved an agreed Letter of Intent
subject to approval of the government of Quebec. However, in the same month, the Union
Nationale defeated Lesage’s Liberals in a provincial election. On July 6, Lessard wrote to the
new premier, Daniel Johnson, asking for Cabinet approval for this Letter of Intent. On July 22, he
wrote to Johnson again, this time pointing out the advantages of the Letter of Intent: it would
allow Hydro-Quebec to reduce its capital borrowing requirements, it provided Hydro-Quebec
with a lower cost of energy than the available alternatives in Quebec including nuclear energy; and
the Churchill Falls development would make extensive use of Quebec manpower. Lessard’s letter
ended with a recommendation that the Letter be signed as soon as possible. Nevertheless, the
new premier decided to review the matter and further negotiations followed.

The additional delay added to Smallwood’s impatience with the slow progress. He
obtained cabinet approval to approach the federal government to request that the project be
designated in the national interest.20 With that authorization in place, he drafted a letter, dated
September 29, 1966, to the Prime Minister which requested the federal government to invoke
Section 92 (10.c) of the British North America Act and build a transmission line to electricity
grids in eastern Canada. Smallwood then met with Brinco officials and showed them the letter.
After receiving assurances from the Brinco people that a deal was at hand, Smallwood set
October 7 as the deadline; with no agreement by then, the letter would be sent.21

Consistent with the assurances given to Smallwood, by September a new draft Letter of
Intent had been formulated. Robert Boyd, then Hydro-Quebec’s general manager, in a letter
dated Sept 22, 1966 to Hydro-Quebec’s commissioners, strongly endorsed the modified Letter of
Intent. He highlighted several points of advantage, notably the cost being lower than any other
source that Hydro-Quebec could undertake including nuclear energy. Boyd’s letter went on to say

the purchase of energy from Churchill Falls would act as a life raft which

would allow Hydro-Québec to safely navigate the rough waters of system

growth which lie ahead.

It concluded “I must insist on these points, which I consider to be of the utmost importance for
the good of Hydro-Québec and the province.” On October 3, Hydro-Quebec then approved the
revised Letter and recommended it to Premier Johnson. On October 6, it received government
approval and on October 13, Donald McParland and C. T. Manning for CFLCo and Jean-Claude
Lessard and Jean-Paul Gignac for Hydro-Quebec signed the agreement.

Also, Quebec’s Premier Johnson announced the establishment of a commission to study

20 See Executive Council of Newfoundland, Order-in-Council 661-‘66, dated September 13, 1966.

21 Smith (1975; pp.246-247).

Page 14 of 50


and report on the boundary question, effectively decoupling it from the power contract talks.22
And on the Newfoundland side, in light of the agreement, Smallwood did not send his letter to the
Prime Minister.

The agreed Letter of Intent now put the term at either 44 years from first power or 40
years from completion of the last generating unit, whichever was longer. As for the renewal
clause, it now read:

Hydro-Quebec shall have the right to renew the definitive power contract for

a further term of years from its expiry date, upon such terms and conditions

as to quantity and price as may then be mutually agreed. It will also be given

the right of first refusal prior to any contract that CFLCo may then be

willing to sign with a third party for power consumption within Quebec.

This wording was consistent with all the prior drafts, including the one that Hydro-Quebec had
already endorsed in June.

The Letter of Intent represented a compromise between the approaches of the two
negotiating parties and reflected the basic quid pro quo marking the discussions between Winters
and Lesage in April and May of 1965. On the one side, Hydro-Quebec would be obtaining a very
large amount of power, approximately 32 million megawatt hours annually, at a very attractive
price regime; the price would be approximately 2.6 mills during construction and, thereafter, fall
in stages until it was slightly less than 2.3 mills for the last 15 years of the term of the contract.
These prices were tied to the capital cost so if the facility cost less than anticipated in the
agreement, then the savings would be passed on to Hydro-Quebec through a downward
adjustment in price. Thus, the pricing was consistent with the philosophy of Lesage’s advisory
committee of 1964 that profitability be limited along the lines of publicly regulated private
utilities. Moreover, CFLCo had made the enormous concession of agreeing to a much longer
contract term; a minimum of 44 years from first power as opposed to 35 years.

On the other hand, CFLCo did receive elements of the undertakings that had been
discussed in 1965, and which were intended to assist it in raising sufficient funds to complete the
project and to ensure that it could remain solvent during the term of the contract. CFLCo did not
receive the guarantee of a price increase if its rate of return fell below 6.5% as had been discussed
between Lesage and Winters, but the Letter of Intent provided for adjustments by which the price
would change if the capital cost turned out to be higher than estimated or if the interest costs for
the project were higher than then contemplated. The exchange rate risk - most of the financing
would be borrowed in the U.S. - would be shared. Also, there was an undertaking that Hydro-
Quebec would either guarantee, or provide, a loan up to $109 million if there was a capital cost
over-run and CFLCo could not otherwise obtain the necessary funds to complete the project. A
similar provision had been in the June draft but had included both the Quebec government and
Hydro-Quebec. Now it would be solely the latter. A condition was added that gave Hydro-
Quebec the right to veto any CFLCo dividends if this assistance was ever triggered; this

22 The commission’s report concluded that there was no judicial basis for challenging the boundary; see
Dorion (1971, Vol. 3, 3.2, p.12).

Page 15 of 50


arrangement as it evolved would eventually be known as the completion guarantee.

The Letter retained the basic “take-or-payment” provision and the associated commitment
by Hydro-Quebec to make monthly minimum payments sufficient to cover debt service and fixed
costs. Another provision, which had been added to the new Letter as a result of Johnson’s reexamination,
gave Hydro-Quebec the right to complete the project, and obligated CFLCo to
cooperate in this, should it become apparent that CFLCo would not be able to complete it itself.
This right-to-complete reflected Hydro-Quebec’s desire to ensure that first power would be
available when needed. When the CFLCo Board met on September 30 to consider this and the
other changes to the Letter, it was recognised that this right-to-complete would not give Hydro-
Quebec the right to take over the asset and that rather than being detrimental to CFLCo, might
even be beneficial to it.

In short, the quid pro quo was a long-term low-price regime by CFLCo in exchange for
Hydro-Quebec’s undertakings to take or share various risks. At the same time, both parties
recognized that it was in their mutual interest that the project be completed.

III. CONTRACT NEGOTIATIONS
With the comprehensiveness of the Letter of Intent, it might have seemed that the
translation of it into a definitive power contract would have been a straightforward task. CFLCo
initially appeared to believe that to be the case but, as this section describes it, the path to the final
contract was lengthy.

III. 1. Early Stages
Following the signing of the Letter of Intent on October 13, CFLCo immediately went
into action. According to its Annual Report (p.6) for 1966, within thirty days construction crews
had returned to the site and were at work. Even before the end of October, legal advisors to
CFLCo had prepared an outline of the proposed power contract. That outline was a
comprehensive document based on the Letter of Intent. It discussed the likely contents of each
clause and, at times, suggested wording and/or who to consult. As far as the renewal clause was
concerned, the only difference was the insertion of a suggestion that a one-year notice be given by
Hydro-Quebec should it decide to renew.

By March 1967, CFLCo envisaged a schedule that would lead to a power contract by
October 31 of that year.23 For CFLCo the key negotiator was its president and chief executive
officer, Donald McParland who had succeeded Winters. Typically during the negotiations,
McParland was accompanied by Eric Lambert, vice-president (finance), C. T. Manning, vice-
president (legal), and John Tennant, a lawyer with the Montreal law firm of Cate, Ogilvy, Bishop,
Cope, Porteous & Hansard. Hydro-Quebec’s negotiators included Robert Boyd and Yvon de

23 See John Tennant’s “Memorandum of CFLCo Meeting of March 10, 1967.”
Page 16 of 50


Guise, as well as other members of senior management and legal advisors.24 At a later stage, law
partners Jean-Paul Cardinal and Marcel Lajeunesse, acting as representatives of the government
of Quebec, were also included in the discussions.25

III.2 Brinco’s Financial Challenges
To meet Hydro-Quebec’s requirement for first power, which was now 1972, CFLCo had
undertaken a substantial expenditure program for 1967. While no disagreements had developed,
the pace of negotiations was such that by the spring of 1967 CFLCo was anticipating that
reaching an agreement on the power contract would take longer than initially expected.
Therefore, major financing for the project would not be in place until June 1968; the success of
the financing plan depended on an agreement on a definitive contract. CFLCo would have to find
enough new funds to last until then. According to Smith (1975; p.266) by April, its financial
advisor, William Mulholland of Morgan Stanley, expressed concern over the pace of spending and
suggested that either spending commitments be curtailed or funds be raised by means other than
more bank loans.

By June 1967, a document entitled “Interim Financing: The Problems and a Suggested
Solution” had been developed by CFLCo’s Eric Lambert. It recorded that as of March 31, 1967,
CFLCo had already spent $20.5 million on the project, which was then anticipated to cost
between $750 and $800 million. CFLCo had a $10 million line of credit with the Bank of
Montreal to cover anticipated expenditures from April to June 1967. To cover July 1967 to June
1968, it needed an additional $45 million. It was determined that the only feasible option was to
raise $37.5 million in a new share issue in CFLCo, which would be sold in September. A $5
million extension of the line of credit with the Bank of Montreal would be sought to cover
expenditures until that month. Lambert’s document anticipated that the $37.5 million would then
provide CFLCo with enough funds to repay the Bank and cover its requirements until January or
February 1968, after which time interim bank financing could be relied upon until June. It was
also envisaged that Brinco would not purchase any of these new shares. Its financial situation was
tight and it needed funds for other commitments. Therefore, the plan was that new CFLCo shares
be sold through a public offering. Assuming that the other three shareholders held their relative
positions, Brinco’s ownership in CFLCo therefore would fall to approximately 40%. Thereafter it
would maintain that position when a second issue of shares, planned as part of the overall
financing package, was forthcoming in June.

On September 15, 1967, shareholders of Brinco were advised of the planned public share
issue of CFLCo itself. The issue was abruptly cancelled in October. According to a letter issued
to its shareholders on October 31, 1967, Brinco informed them that despite the September 15th
advisement “Owing to market conditions, which could not then be foreseen, CFLCo will not

24 These negotiating teams handled the major contractual matters but there was a great deal of other
negotiations and talks involving other officials dealing with technical and engineering issues. These as well as
advice and input from financial advisors would feed into the negotiations as well.

25 Smith (1975; p.287) states that they entered the discussions at the request of Quebec premier Daniel
Johnson. By January or February of 1968, they were actively involved in negotiating meetings.

Page 17 of 50


proceed with the public issue.”

To save the situation, Brinco had to hurriedly seek the cooperation of the other three
shareholders to subscribe for these shares on a pro-rata basis. This meant that Brinco, reflecting
its 68.2% stake in CFLCo at the time, would have to take approximately $25.5 million of $37.5
million. To do so it had to obtain a $21 million line of credit with the Bank of Montreal for which
it had to pledge its shares in CFLCo and in Brinex, its mining subsidiary. Even then, it could not
maintain its position. It sold some of its CFLCo shares to the Newfoundland government.26 As a
result of these and related transactions, the direct ownership interests in CFLCo became:27

Brinco 63.3%;
Hydro-Quebec 16.3%;
Rio Algom 10.4%;
Newfoundland 10.0%.


Remarkably, Hydro-Quebec also owned a 2.04% interest in Brinco; thus giving it a further
indirect interest in CFLCo.28 Brinco was originally owned by a small number of investors but by
1965 was listed on the Montreal Stock Exchange and had a large number of shareholders by then.

Not only did its ownership position in CFLCo decline but, entirely contrary to plan,
Brinco was now saddled with an additional $21 million in bank debt. Brinco’s financial position
became such that in the following months Donald Gordon, its president and chief executive
officer, approached one of its founding shareholders, Rio Tinto-Zinc, for rescue; see Schull (1979;
p.260). As of June 1967, Rio Tinto-Zinc’s direct ownership of 4.16% of Brinco likely made it
one of the largest single shareholders; and this was reinforced by a further 6.04% owned by Rio
Algom.29

Over the coming months of 1968, while negotiations between CFLCo and Hydro-Quebec
edged forward, there were parallel complex and confidential financial discussions undertaken by
Brinco, Rio Tinto-Zinc and potential investors aimed at addressing Brinco’s precarious finances.

III.3 Negotiations Continue
Despite its much weakened financial situation, by the end of October 1967, Brinco did
have good reasons to be optimistic about CFLCo’s prospects. By this time it was apparent that

26 This also satisfied Smallwood’s objective that Hydro-Quebec not increase its position in CFLCo relative
to Newfoundland’s.

27 See the Brinco Annual Report 1967, p.4 and p.10, and “Churchill Falls (Labrador) Corporation
Limited: Equity Financing and Advances” October 20, 1967.

28

See “Interim Financing: The Problems and a Suggested Solution,” June 3, 1967, p.9.

29 See “Interim Financing: The Problems and a Suggested Solution,” June 3, 1967, p.9.

Page 18 of 50


Hydro-Quebec would need all the power from Churchill Falls so a re-sale agreement with
Consolidated Edison or other third parties was no longer required. With the October share issue,
sufficient funds had been injected to cover anticipated spending until the early months of 1968.
Also, given Hydro-Quebec’s desire for new power by 1972, there was less time available to
switch to alternative sources. More so, Hydro-Quebec’s willingness to participate in the share
issue would have been an indication of a preference for Churchill Falls power over the
alternatives.

Also, progress had been made on the contract and, despite the slow pace, no severe
difficulties had arisen. By early July, a Power Contract Format had been exchanged between the
two parties. Following a request from Hydro-Quebec in August, it was agreed that one more
generating unit would be installed, bringing the total to eleven. The resulting estimated additional
cost was put at $28 million at the time, which would of course increase funds required in the
major financing arrangements. On the renewal clause, both sides agreed that a longer notice
period of at least five years was desirable. This was not a contentious issue; for Hydro-Quebec it
would allow time to find an alternate source of power if there was no renewal and in CFLCo’s
case it would give more time to find an alternative market.30

By early September of 1967, CFLCo deemed it necessary to have a final agreement in the
near future and set October 15 as the target date for completion.31 A first draft contract, dated
September 19, had been exchanged. That was followed by an October 6th draft. As had been the
case since the 1963 proposal, both contained a renewal clause. That renewal clause remained
consistent with the original meaning of the 1963 proposal as well as the 1966 Letter of Intent and
all the discussions to date. The version in the October 6 draft was as follows:

Hydro-Quebec shall have the right to renew this Power Contract for
such further term and upon such terms and conditions as to quantity and
price as the parties may agree. Should Hydro-Quebec wish to renew this
Power Contract, it shall notify CFLCo in writing at least 10 years prior to the
expiry of the term hereof of its willingness to renew and the parties shall
thereupon negotiate and agree upon the term of such renewal as well as upon
the terms and conditions as to quantity and price applicable for such
renewal. If the parties agree on a further term of years as well as on the
terms and conditions as to quantity and price applicable to renewal, such
agreement shall be evidenced by a notice given by one party and accepted by
the other, setting out the further term and the terms and conditions as to
quantity and price mutually agreed upon and the receipt by one party of
such notice duly accepted by the other shall automatically renew the Power
Contract for the further term and upon such terms and conditions as to
quantity and price as determined in the said accepted notice.

Should Hydro-Quebec fail to give notice of its willingness to renew

30 C.T. Manning’s Record of meeting of Power Contract drafting committee of May 2, 1967, p.2.

31 See “Minutes of a Meeting held in the Board Room on September 5, 1967,” dated September 7, 1967.

Page 19 of 50


within the delay specified in the preceding paragraph or, Hydro-Quebec
having given such notice, should the parties fail to agree at least 8 years prior
to the expiry of the term hereof, on the further term or on the terms and
conditions as to quantity and price which would be applicable to the renewal,
CFLCo hereby undertakes and agrees that if it should, at any time during
the said period of eight (8) years prior to the expiry of the term hereof and
during a further period of six (6) months following the said expiry, receive
any “bona fide” offer from a third party for the purchase for consumption by
the offeror in the Province of Quebec of energy from the Plant, which CFLCo
is willing to accept, CFLCo shall, within a period of 90 days from the receipt
of said offer, give written notice to Hydro-Quebec of the amount of energy,
price and principal terms and conditions contemplated by said offer, and
enclose with such notice a copy of said offer, and Hydro-Quebec shall have
the right, by giving written notice to CFLCo within a period of 90 days from
the receipt of CFLCo’s said notice, to purchase the amount of energy
contemplated by said offer at the price and upon the terms and conditions
therein contained. In the event that Hydro-Quebec shall not exercise such
right, CFLCo may within but not after a period of 90 days from the earlier of
Hydro-Quebec notifying CFLCo that Hydro-Quebec does not propose to
exercise such right or the date of termination of the delay for the exercise of
such right, sell to the party making such “bona fide” offer the amount of
energy contemplated thereby for the price and upon the terms and
conditions therein provided. This right of first refusal in favour of Hydro-
Quebec shall apply to each and every such offer for energy from the Plant for
consumption by the offeror in the Province of Quebec received by CFLCo
within the aforesaid period of 8 years prior to and 6 months following the
expiry date of this Power Contract and shall survive the said expiry date.

Thus, the renewal clause had been substantially fleshed out compared to earlier versions

but the substance was not changed. The most notable addition was the specification of time

periods for notifications and for negotiations.
By late October, CFLCo considered time to be of the essence and was then aiming to

have the contract “completed by November 30, 1967 subject only to lenders’ requirements.”32

More drafts followed, including ones dated October 27, November 3 and November 13. Despite

CFLCo’s November 30th target, negotiations continued. However, in an internal memorandum

dated December 5, 1967, CFLCo’s McParland wrote “Progress to date suggests that the Power

Contract is moving into its final stages.”
During the next month, negotiations continued and more drafts were prepared, including

ones dated December 5, December 21 and December 31. In early January of 1968 it was agreed

at internal CFLCo meetings that “all efforts should be directed towards achieving a high measure

32 See Eric Lambert’s “Notes for Meeting to be held Tuesday, October 24, 1967” dated October 23, 1967.
Page 20 of 50


of agreement on the power contract by 31 January.”33 The strategy would be to work in
consultation with its legal and financial advisors in order, as CFLCo’s Eric Lambert wrote in an
internal memo on January 5, 1968, “to arrive at a Power Contract acceptable to CFLCo from
technical, commercial and financial standpoints and then to re-open detailed discussions with
Hydro-Quebec on it.” It appeared that the version of the contract that CFLCo was preparing
would also largely be acceptable to Hydro-Quebec. An agenda prepared by CFLCo’s Finance
Department for a January 12 meeting noted that “Using February 1, 1968, as a commencement
date, a timetable should be drawn up for the completion of the Bond Offering Memorandum, and
the finalization of its support material.” In part, CFLCo’s urgency also reflected its financial
situation. It had anticipated that the 1967 October share issue would provide enough funds until
the early months of 1968.

CFLCo’s efforts produced a draft dated January 15, 1968. Consistent with earlier
versions, it contained numerous clarifications and there were editing changes but the substance
was intact. The renewal clause also remained but, following a practice that started with the
December 21 draft, it was divided into two sections, one devoted to renewal itself and the other
to first-refusal. The renewal section was little changed. It now read:

Hydro-Quebec shall be entitled to renew this Power Contract for such
further term and upon such terms and conditions as to quantity and price as
the parties may agree. Should Hydro-Quebec wish to renew this Power
Contract it shall notify CFLCo in writing at least 10 years prior to the expiry
of the term hereof of its willingness to renew. The parties shall thereupon
negotiate the term of such renewal and the terms and conditions as to
quantity and price applicable to such renewal, including provisions, if any,
for further renewal. If the parties are able to agree to renewal at least eight
years prior to the expiry of the term hereof, a renewal agreement shall
thereupon be executed between them. If the parties fail to agree upon
renewal within the aforesaid time limit, Hydro-Quebec’s right to renew shall
thereupon lapse. Should Hydro-Quebec and CFLCo have terminated
negotiations for renewal of this Power Contract at any time after the giving
of the notice aforesaid and prior to that date which is eight years earlier than
the expiry of the term hereof, Hydro-Quebec’s right to renew shall lapse
upon cessation of negotiations.

This renewal section was followed by the first-refusal section, which reflected the essence of the
earlier provisions in that regard.

Two other important articles of the January 15th draft deserve mention because of their
relevance to subsequent developments. One was the article entitled “Completion Guarantee.” It
had it origins with the Quebec undertaking to guarantee or provide loans to CFLCo if the final
cost of the project exceeded an agreed estimate. Its lineage may be traced back to the offer by

33 See “CTM’s record of meetings relating to the Power Contract 3 and 4 January 1968.” CTM refers to

C. T. Manning.
Page 21 of 50


Premier Lesage to Winters at their June 29, 1965 meeting; and it was embodied in Clause 25 of
the Letter of Intent, which assigned the commitment to Hydro-Quebec, rather than the Quebec
government.34 Such loans or loan guarantees, if ever needed, would now be conditional on
CFLCo having first raised a minimum of $700 million in financing, rather than being conditional
on the cost exceeding $700 million as had been previously used as the benchmark.

The second important article of note was also a financial one. This article was entitled
“Debt Service Requirement and Expense Charges.” Its origins can be traced back to the take-orpay
provisions as discussed late in 1963 and early 1964; see, for example, Annex A to the Draft
Basis for Proposed Agreement between HFPCo and Hydro-Quebec, dated January 7, 1964. It
was also reflected in Clause 24.0 of the Letter of Intent, as well as Clause 5D of the draft of
October 6. It had now evolved to the point where if payments made to CFLCo, on a take-or-pay
basis, were not sufficient to cover its debt service and expense charges then Hydro-Quebec would
provide advances to cover the gap.

III. 4 The Events of February 1968
Following the January 15 draft, negotiations continued into February and an agreement
appeared near. In a note, dated February 12, 1968, CFLCo’s lawyer John Tennant summarized
the points that had been raised by Hydro-Quebec as well as by Morgan Stanley that still needed to
be addressed. Tennant’s notes did not suggest any of the matters under discussion involved sharp
disagreements or required substantial changes to the draft.

Also, when the CFLCo Board met on February 13 the sense of CFLCo was that the draft
contract was close to its final form. According to the minutes of that meeting, McParland
reported

A draft contract had been delivered to Hydro-Quebec and counsel for
the Government at the end of December, followed on January 15th by a draft
representing more fully the conditions relative to financing as presently
foreseen by the Company’s local and U.S. financial advisors. It was hoped
that discussion with Government representatives on this last draft would
take place shortly and that a mutually satisfactory contract could be
submitted for Board Approval in the near future.

Hydro-Quebec’s Jean-Claude Lessard attended this meeting in his capacity as a CFLCo Board
member. There is nothing in the minutes of the meeting to indicate any disagreement from him
regarding McParland’s optimistic predictions. Although, Lessard did inquire whether the January

34 st

This Completion Guarantee article first appeared in the December 21 draft. At earlier stages of the
negotiations, it had been intended that this guarantee not be embodied in the contract but dealt with separately; see
Annotation to the October 6, 1967 draft contract.

Page 22 of 50


th 35

15 draft represented CFLCo’s maximum conditions. That was an odd question given that it
came from a person who was also an officer of the party with which CFLCo was negotiating.

Later in the same meeting, the Board was informed that its cash position would be $14
million at the end of February, that accounts payable were running at $5 million monthly, and that
available funds would last until the end of May. The minutes of the meeting indicate that the
expectation was that with satisfactory progress on the contract, bridge funding from banks would
be readily available.

There is no indication from the minutes that this impending shortage of funds, nor the fact
that Mr. Lessard was being made aware of it, nor Mr. Lessard’s question regarding CFLCo’s
terms raised any concerns at the Board meeting. Yet, these circumstances are reminiscent of the
issue of potential conflict-of-interest raised by Robert Winters years earlier. It may have been that
any misgivings about a Hydro-Quebec official being on the CFLCo had dissipated. After all, the
Letter of Intent had been signed, there was a positive and cooperative relationship between
McParland and Hydro-Quebec officials, and there had been no serious disagreement in the
negotiations to date.36

On February 14, the day after the Board meeting, talks with Hydro-Quebec took place.
At that meeting Hydro-Quebec informed CFLCo that it had not yet come to grips with the
financial definitions and clauses and that it was preparing its own draft of the contract which it
would submit to CFLCo. That Hydro-Quebec draft, dated February 18, 1968, was submitted to
CFLCo’s McParland under a covering letter dated February 23 from Robert Boyd. That letter
stated that this draft was to serve as a basis for further discussion. Ominously, it also warned
CFLCo that more changes to the draft would be forthcoming from Hydro-Quebec.

In Hydro-Quebec’s February draft itself, there was an entirely new and substantial
element. It provided that new shares in CFLCo be attached to any loans advanced to CFLCo by
Hydro-Quebec under the Completion Guarantee article (Article V of this draft). If the article
were ever triggered, Hydro-Quebec, under this draft’s proposed section 5.4, would receive
debentures that were convertible into shares and, if the total amount advanced was more than
$110 million, would also receive bonus common shares in CFLCo at a rate of 1 per $500
advanced. The previously agreed quid pro quo had been a long-term and low-price regime in
exchange for assurances of such advances if they were needed, which would be repaid with
interest. Now, Hydro-Quebec was proposing to change the arrangement so that it would obtain a
larger ownership position as well. Also, this draft proposed a lower price for electricity made
available during the period between first power becoming available and the completion of the
project.

Still, in Hydro-Quebec’s February draft the wording of the renewal provision was little
changed from CFLCo’s January draft, and the substance remained as it had been since the
proposal of September 1963. The renewal section was now:

35

The Chair of the Board of Directors, Donald Gordon, responded that the January 15th draft represented
the conditions that CFLCo’s financial advisors felt investors would insist upon.

36 Smith (1975; pp.231-232) points out that when McParland took over negotiations, he quickly
established a strong rapport with Hydro-Quebec officials.

Page 23 of 50


Hydro-Quebec shall be entitled to renew this Power Contract for such
further term and upon such terms and conditions as to quantity and price as
the parties may agree. Should Hydro-Quebec wish to renew this Power
Contract it shall notify CFLCo in writing at least 10 years prior to the expiry
of the term hereof of its willingness to renew. The parties shall thereupon
negotiate the term of such renewal and the terms and condition as to
quantity and price applicable to such renewal, including provisions, if any,
for further renewal. If the parties are able to agree to renewal at least eight
years prior to the expiry of the term hereof, a renewal agreement shall
thereupon be executed between them. If the parties fail to agree upon
renewal within the aforesaid time limit, Hydro-Quebec’s right to renew shall
thereupon lapse.

However, that would soon change.

III. 5. A Price Formula for the Renewal Period
The first evidence of any possibility of a substantial change came on Monday, February 26,
1968. That evidence is two pages of handwritten notes from CFLCo’s files, which are
reproduced in Appendix I. These two pages were in C.T. Manning’s writing and his initials
appear at the top right-hand corner of the first page and the date of 26-2.68 appears on the top
left-hand corner of the same page. They record a working-through of the issues associated with
specifying a fixed price during the renewal period. They do not appear to be from a meeting
because other hand-written notes by him typically list the names of those in attendance, and there
are no references to other persons.

The notes start by identifying the problem, namely how could the contract be extended for
an additional 10 to 25 years at a fixed mill rate. It indicates that this would act to avoid criticism
from proponents of nuclear power.

Next, his notes turn to the Water Power Lease, i.e., the lease from Newfoundland under
which CFLCo had access to the Churchill Falls watershed. Under a 1967 statutory amendment to
the lease, the provincial government, having successfully lobbied the federal government to
increase the PUITTA rebate of federal corporate income taxes on private utilities, would turn
over the increased rebate to CFLCo.37 The purpose of this was to support the low-price regime
for Hydro-Quebec. The lease, as amended in 1967, provided for this rebate for the term of the
power contract, anticipated to be approximately 40 years. It explicitly excluded the rebate
continuing for any renewal period. Hence, Manning’s concern. Moreover, CFLCo was sheltered
from a number of provincial and municipal taxes as well as from any new such taxes, fees royalties
etc. and from increases in rates of applicable taxes.

On the top of the second page of his notes, Manning concludes that granting Hydro


37 More precisely, the 1967 Churchill Falls (Labrador) Corporation Limited (Lease) (Amendment) Act,
stipulated that 47.9% of all funds collected through federal taxes on CFLCo’s income and rebated to the provincial
government would then be turned over to CFLCo. This would occur for the term of the contract but not its renewal.

Page 24 of 50


Quebec an option to extend the term of the contract may be “the right out” provided that the
price is on a formula basis. That formula would have to build in compensation to CFLCo for the
loss of the PUITTA rebate and for covering the replacement cost of plant and equipment, and to
avoid prejudicing an agreed return on equity.

In the remaining notes, Manning turns to the issue of how to change the Power Contract’s
provisions to incorporate a fixed price for the renewal period. The notes indicate that the 40-year
term had been established on the basis of the reasonable foreseeable life of the plant without
having to undertake major capital replacements. To consider lengthening the contract, the notes
continue, there would have to be an engineering study to ascertain which components would last
and which would have to be replaced or substantially repaired. Based on that information, and
with a return-to-equity concept, Manning concludes it should be possible to project a flat mill rate
with escalation for the loss of the PUITTA rebate and for additional capital costs. He also raises
a concern about whether the risk would be too great to accept without an escalator for operating
costs. He then lists the 8% rental and the H.P. tax. The former is the 8% “rental” imposed by the
Newfoundland government under CFLCo’s lease, and which applied to CFLCo’s pre-income-tax
profits. The latter is the horsepower royalty of 50-cents per horsepower year. Presumably,
Manning was noting that these would also have to be incorporated into an formula-based price for
the extension period.

On the last line of his notes, Manning simply writes “Defeats purpose” although it is not
entirely clear what that is in reference to.

Manning’s notes constitute an attempt to think through what would be required if CFLCo
were to agree to a fixed price for the renewal period. His conclusion is that, rather than a fixed
price, there would have to be a formula for the price and that formula would have to incorporate:

• the cost of major capital replacements and repairs,
• the loss of the PUITTA rebate to CFLCo,
• the escalation in operating costs,
• the Lease’s rental and horsepower royalty, and
• an agreed return on equity.
The key element of this formula is the return on equity. The project’s economic rent may be
defined as the difference between the economic value of the electricity and the cost of producing
it, including the cost of equity. The three stakeholders - the buyer, the seller, and the resource
owner - would somehow have to share the rent. For the seller, its share of the rent would be
reflected in the rate of return on equity it could obtain for its shareholders.

As it turned out, such a formula did not become the basis for renewal. Hydro-Quebec
sought a concession that allowed for none of the above.

III. 6 A Do-or-Die Condition.
On Wednesday, February 28, just 2 days after Manning’s considerations, the negotiators
met to discuss Hydro-Quebec’s draft of February 18. According to Manning’s record of this
meeting, several sections of that draft were discussed and a number of points agreed. CFLCo
pointed out that elements of the Completion Guarantee Article, notably the provisions by which

Page 25 of 50


Hydro-Quebec would obtain shares if it were called on to make advances, were completely new
and required detailed analysis. It was agreed that CFLCo would draft riders representing the
points that were discussed and that they would meet again with Hydro-Quebec on Friday.
Manning’s record described the meeting as cordial and noted that the Quebec government
representatives “indicated a real desire in completing the contract as soon as possible.” Renewal
was not raised at the meeting.

On Friday, March 1, Hydro-Quebec’s Robert Boyd and his group met with CFLCo’s
McParland, Lambert, Tennant and Manning for further negotiations. Several issues were
discussed and it was at this time that a major change in the renewal provision was put on the table
by Hydro-Quebec. On this matter, Manning’s record is:

Mr. Boyd pointed out that an extension of the term to Hydro-Quebec
would have the same significance to them as the completion guarantee had to
CFLCo, and he thought that Hydro should be given an option to renew flat
at 2.2 mills per kilowatthour for 25 years or that an extension of the term for
25 years at this rate should be built-in to the contract. We explained the
problems which this created, particularly in relation to the tax rebate and the
consequent necessity for amendment to the existing statutory lease. This was
a political consideration. There were also practical considerations, such as
what escalation of wages we would be faced with 40 years after 1976 and
what replacements of plant would be required during such an extension,
notwithstanding the delicate political and practical considerations. We
indicated sympathy with Hydro’s request.

Despite the diplomatic tone of the last sentence, a more revealing remark was included in
Manning’s hand-written notes taken at this meeting. Those notes are reproduced in Appendix II.

Interestingly, these notes start with the “query” on renewing for a lesser amount of power
at a reduced rate. The notes also reflect the considerations listed in Manning’s February 26
analysis, such as the cost of replacement of capital, escalation of operating costs, and loss of the
PUITTA rebate. They also indicate that CFLCo was reluctant to open the issue with
Newfoundland; the “issue” appears to be the PUITTA rebate specifically. The most telling
element of his notes is the phrase:

A Do or Die Condition.

which is a clear and dramatic indication of his interpretation of Hydro-Quebec’s new position on
renewal.

This request to replace the renewal clause came at a time when CFLCo had about 12
weeks of funds left and further financing was dependent on a deal being at hand. Moreover, this
was an entirely new development. From the initial 1963 proposal and its subsequent drafts to the
drafts of the Letter of Intent, the Letter of Intent itself, and persistently through all the numerous
drafts of the power contract, including the one of February 1968, which Hydro-Quebec itself had
prepared, the substance of the renewal provisions had remained the same. Following the expiry of
the contract’s term - the length of which had been extended to a minimum of 44 years as part of

Page 26 of 50


the 1965 breakthrough in negotiations - there was to be mutual agreement on price and quantity
for the renewal and Hydro-Quebec would have a right of first refusal for sales for consumption in
Quebec. Throughout the years of negotiations and discussions there was no indication of any
desire of either party to substantially deviate from those agreed points. There is no record of any
difference of opinion on this matter up to March 1.

Boyd’s statement intimated a linkage between this change in the renewal and the
Completion Guarantee. However, a completion guarantee had been part of a long-agreed quid
pro quo. The parties had agreed that the contract would be extended from 35 years to 44 years
from first power under the low-price regime in exchange for Hydro-Quebec various undertakings.
Hydro-Quebec had only in the previous month requested that it be additionally compensated,
through more CFLCo shares, if it were ever to be called on for any advances under the
completion guarantee. Now, it was seeking a substantial new concession for which there would
be no reciprocation; it would apply even if the Completion Guarantee was never triggered.38
There were no allowances for the items laid out in Manning’s considerations of February 26.
This demand was a complete departure from the renewal provisions in the Letter of Intent. It was
on the basis of the Letter of Intent that CFLCo had launched its major construction program in
order to meet Hydro-Quebec’s schedule for first power. Those efforts had practically exhausted
CFLCo’s access to funds by the time this demand was advanced and, according to Manning’s
characterization, was put forth as a “do-or-die condition.”

III.7 CFLCo’s Compromise Proposal
Following this meeting, CFLCo continued to work toward finalizing both the contract and
a financing plan. On March 5, McParland wrote a memorandum to Boyd of Hydro-Quebec,
forwarding revised drafts of sections dealing with the Completion Guarantee and related items.
On March 6, there was another meeting between CFLCo and Hydro-Quebec and the Quebec
government representatives. According to Manning’s record of that meeting, a number of riders,
which had been submitted to Hydro-Quebec the previous day, were agreed. They also reviewed
a list of provisions that still needed to be settled. One of these was renewal. CFLCo
representatives stated that it was under advisement but progress was being made and that
CFLCo’s response would be coming as soon as possible.39 Later in the meeting, Jean-Paul
Cardinal, a lawyer acting as a representative of the Quebec government, suggested that the
principal points that were still open were the definition of the Final Capital Cost of the Plant, the
Completion Guarantee and Renewal. However, he offered no additional comment on renewal and
only made a brief remark as to what should be included in the definition of the Final Capital Cost.
Most of the remaining discussions related to the Completion Guarantee.

CFLCo’s response to the Hydro-Quebec new position on renewal was contained in an

38 The Economic Council of Canada (1980; p.121) also states that the renewal clause was not required for
financing the project. Indeed, the debt incurred to finance the development would be retired during the term of the
contract.

39

See “CTM’s record of meeting with Hydro-Quebec 6.3.68" p.2.

Page 27 of 50


internal memorandum, dated March 7, 1968, which listed 15 items that “appear to be required to
complete the contract.” The counteroffer on renewal, known as rider 34, was attached to that
memorandum. The key elements of rider 34 read:40

This Power Contract shall be renewed, on the basis stated in this

Section, for a further term of 25 years from the expiry date hereof.

Renewal of this Power Contract shall be evidenced by a new contract

which shall provide as follows and be in the form and terms approved of by

counsel for each of the parties respectively:


(a) sale and purchase of energy under such new contract shall be on a
continuous energy basis, whereby, up to the limit of the number of
kilowatthours per year which shall constitute, at the date of expiry hereof,
the Annual Energy Base, Hydro-Quebec shall pay for all energy made
available to it by CFLCo, whether or not taken;
(b) the price payable by Hydro-Quebec shall be payable in lawful
money of Canada and the rate per kilowatthour applicable shall be the
equivalent in Canadian dollars or 2.0 mills in U.S. funds;
This compromise proposal offered a fixed price of 2 mills in U.S. currency, which was
approximately equal to the 2.2 mills in Canadian funds at the time. That was a very low price,
even in 1968. However, the rider offered CFLCo some scope to protect itself. First, the renewal
terms were to be approved of by counsel. Secondly, a new contract would have to be drawn up
and signed. Thirdly, and most importantly, provision (a) states that Hydro-Quebec would buy, up
to a limit, all the electricity made available by CFLCo. That provision contained no lower bound
on the amount that CFLCo could choose to make available to Hydro-Quebec, only an upper limit,
namely the Annual Energy Base, which the draft contract put at 31.5 million megawatt hours.41
The implication of this wording is that if CFLCo could sell some, or even all, of its power to
another party then it would be able to do so. In short, while Hydro-Quebec would have a fixed
price of U.S. 2.0 mills for the 25-year period, CFLCo would at least retain the flexibility of
choosing what quantity of power to sell to Hydro-Quebec at that price. This attempt to
determine the amount of power to be sold to Hydro-Quebec at the reduced price was consistent
with the “query” in Manning’s handwritten notes of March 1; see Appendix II.

On March 11, the three parties met again. Most of the meeting dealt with matters related
to financing. McParland outlined CFLCo’s major financing plan for the project. Funds, totalling
up to $1 billion would come from a number of sources but, under this draft plan, the major source
would be through sale in the U.S. financial markets of First Mortgage Bonds (FMB) in the
amount of $550 million. CFLCo pressed Hydro-Quebec to lower the $700 million threshold, as

40 The rider also noted that the first refusal section would not be necessary.

41 The contract allowed for modest adjustment of this figure at 8 and later 4-year intervals.

Page 28 of 50


provided for in the draft contract’s Article V, as the amount that CFLCo would have to
successfully raise to qualify for the completion guarantee. CFLCo wanted it lowered to $600
million, arguing for a time-phased approach which would allow CFLCo in the initial instance to
raise a smaller amount of funds, $340 million, through FMB. Then, if need be, CFLCo could go
to the financial markets at a later date to raise any additional funds in a second round of FMB
sales. The CFLCo negotiators reasoned that this would put Hydro-Quebec in a position where it
would not have to put up any cash except if the second offering of FMBs could not be
successfully marketed and, even if that happened, it would not be until 1971 or 1972.
Apparently, CFLCo felt that such a time-phased offering would be easier to sell and would likely
have more reasonable terms. Nevertheless, Hydro-Quebec’s Boyd indicated that any reduction in
the $700 million threshold was unacceptable. At that point, Manning’s record reports that the
CFLCo side pointed out that profitability had been “stripped down to the underwear” and that
CFLCo “were in no position to give any further concessions.”

The meeting then turned to major concession that Hydro-Quebec was seeking on renewal.
CFLCo’s rider was tabled. The record of the ensuing discussion, which was between McParland
and Marcel Lajeunesse, one of the two lawyers representing the Quebec government, is as
follows:

Mr. McParland then dealt with the contract renewal and tabled a
proposed revision to clause 3.2 which became numbered as rider 34. He
pointed out that this suggestion had not received board approval; that
management was prepared to support it but that it was still fraught with
certain problems. Lajeunesse raised the question as to whether Hydro
wanted a firm renewal or an option to renew, and it was decided that this
should be considered by Hydro. McParland explained the reasons for the
pricing arrangement and our fear of the effects of devaluation. Lajeunesse
thought that it was probably preferable to append the renewal contract to
the Power Contract and have it executed concurrently with the signature of
the principal contract.

Thus, the CFLCo negotiators made the point that even its compromise proposal on renewal was
“fraught with certain problems” but management would support it.

Towards the conclusion of the meeting, the other Quebec government representative and
Lajeunesse’s law partner, Jean-Paul Cardinal, indicated that a report to the Quebec government
was past due and that he wished to see the contract finalized that week. The parties then ended
the meeting by agreeing on several actions to be taken, which, according to Manning’s notes of
the meeting, included a commitment by Hydro-Quebec to “indicate their agreement on riders 29
to 34 inclusive as soon as possible;” rider 34 being CFLCo’s compromise proposal for renewal. It
was also agreed that a clean version of the draft would be developed in which agreed sections
would be included, and those outstanding would be left blank.42

42

At least two incomplete versions appeared in March. One was in the form of the February 18th draft but
with “as revised to 2.3.68” handwritten on its cover page and many sections inked with handwritten changes. This

Page 29 of 50


On March 14, the parties representing Hydro-Quebec, CFLCo and the Quebec
government met again. At the beginning of the meeting, CFLCo suggested dealing with the
outstanding riders, namely riders 29 to 34, that it had submitted to Hydro-Quebec. However,
Lajeunesse responded that the Quebec side had not had enough opportunity to deal fully with that
material, and he suggested that the meeting deal with various aspects of Article V- Completion
Guarantee - and Article XII- Debt Service Requirement and Expenses Charges. The issues
revolved around whether, if they were to be needed, any advances from Hydro-Quebec would be
secured by general mortgage bonds rather than unsecured debentures. Then the meeting turned
to a number of Hydro-Quebec’s proposed riders to the February 18th draft. None appeared to be
particularly contentious, and consensus on how to proceed or agreements were made on each.
Interestingly, part way through the meeting, Jean-Paul Cardinal reiterated that it was important to
place a contract before the Quebec cabinet and he hoped to do so by Monday, March 18, just 4
days away. Presumably, this statement, plus the fact that neither the Hydro-Quebec nor Quebec
government representatives had raised any problem with CFLCo’s renewal proposal, would have
given CFLCo some sense that its renewal compromise proposal was largely agreeable.

At the end of the meeting, the two parties agreed that the principal matters remaining for
resolution were Articles V and XII. In that context, CFLCo indicated that they had sent the
Hydro-Quebec draft to their financial advisors and New York counsel. Also, CFLCo indicated
that meetings would be arranged early the next week (i.e., the week of March 18) “to examine the
objectives that Hydro were endeavouring to achieve and determine ways and means in which
these could be accommodated.” CFLCo invited Hydro-Quebec to have their counsel participate
in those meetings. The implication was that an agreement would not be possible by March 18, as
Cardinal had hoped, but it appears that the parties were moving rapidly towards one, and there
was still no sign that CFLCo’s rider on renewal was not acceptable.

Indeed, in the next few weeks, with CFLCo’s funds dwindling, events moved quickly both
in terms of the contract and the financial plan. Hydro-Quebec also became more extensively
involved in the latter.

III.8 The Financial Arrangements
The fundamentals of the financing plan were largely in place by April. Realization of that
plan depended on both a power contract agreement and meeting conditions put forth by Hydro-
Quebec. In a letter dated April 23, 1968 to CFLCo, Hydro-Quebec’s Robert Boyd laid out the
financial conditions required by Hydro-Quebec. These conditions were external to the power
contract but Hydro-Quebec’s recommendation to the Quebec government to authorize the
contract was conditional on them. The main elements may be summarized as follows.

version still retained the renewal clause calling for mutual agreement. The second version was the February 18
draft “As revised to March 12, 1968.” In it, the renewal and first-refusal sections were among those left blank.

Page 30 of 50


!
New Equity. Hydro-Quebec wanted to increase its ownership position in CFLCo.43 It
was agreed that $25 million in new CFLCo shares would be issued in order to fund work
later in the year. Existing shareholders would subscribe for them in batches over the
summer months. Hydro-Quebec would take $15 million of these shares so it could bring
its overall ownership in CFLCo up to 25.7%.
!
General Mortgage Bonds: As part of the financing plan, $100 million in general
mortgage bonds, with 10 bonus shares in CFLCo attached to each $1000 unit. CFLCo
would offer these bonds solely to the four shareholders in accordance with their respective
ownership positions, after Hydro-Quebec had moved to its 25.7% position. The other
three shareholders would have 30 days to subscribe for general mortgage bonds, after
which Hydro-Quebec would be obligated to subscribe for any other units that had been
declined as well as take its respective share. (Later in 1968, Hydro-Quebec would change
the conditions under which CFLCo would offer these bonds so as to give CFLCo the
option to require Hydro-Quebec to take them exclusively.)
!
CFLCo to raise $515 million: As a condition on the General Mortgage Bond
arrangements, CFLCo had to agree to first obtain commitments by September 1, 1968 of
at least $515 million from investors, of which at least $415 million would have to be for
First Mortgage Bonds.44 (This requirement was later included as a condition in Voting
Trust Agreement No.1, and the deadline moved forward to December 15, 1968.)
!
Special by-law 13: Hydro-Quebec required that the CFLCo Board of Directors approve a
new by-law. By-Law 13 would require approval by those holding at least 75% of CFLCo
shares for certain decisions to be made. For instance, without 75% approval, under this
by-law CFLCo could not engage in other projects, incur debt for purposes unrelated to the
project and its operation, increase the authorized share capital, or amend or repeal the bylaw
itself. With Hydro-Quebec to hold 25.7% before the end of the year, this would give
it a veto over such matters.
!
Voting Trust Agreement: An agreement was to be drawn up between Brinco and Hydro-
Quebec by which a sufficient number of Brinco’s CFLCo shares would be deposited with
a trust company so that those shares plus those of Hydro-Quebec would total 50.1%. If
CFLCo were to fail to pass or later rescind by-law 13, or if it were to violate other
specified conditions, such as being in default on debts, then the trust company would vote
those shares in accordance with Hydro-Quebec’s wishes. This would allow Hydro-
Quebec to replace the majority of the CFLCo Board of Directors with individuals of its

43 See Minutes of Joint Meeting of the Executive Committees of the Boards of Directors of Brinco and
CFLCo, April 10, 1968; p.2.

44 This requirement did not obviate the condition in the draft power contract that CFLCo raise at least
$700 million in financing as the threshold amount needed to qualify for the completion guarantee.

Page 31 of 50


choosing. The Voting Trust Agreement would also direct the trust company to sell the
deposited CFLCo shares to Hydro-Quebec, giving it majority ownership, if CFLCo failed
to meet certain financial conditions. (Later in 1968 this evolved into two agreements Voting
Trust Agreement No.1 and Voting Trust Agreement No. 2).

The implications of agreeing to these terms were far-reaching for CFLCo. It would have
to act to satisfy them before the end of 1968. If it succeeded then Hydro-Quebec’s ownership
position would increase to a minimum of 25.7% and Hydro-Quebec would obtain a significant
veto power under by-law 13. If CFLCo failed to meet these financial conditions in time then, via
the Voting Trust agreements, management control and majority ownership could pass to Hydro-
Quebec.

III.9 Contract Negotiations come to a De facto End
By early April the form of the contract was also reaching its final stages. It is also clear
that CFLCo’s rider 34 had been a fruitless effort. On April 10, 1968, when CFLCo would have
been close to exhausting its available funds, the executive committees of the CFLCo and Brinco
boards held a joint meeting.45 At that time, they considered the points on which Hydro-Quebec
was insisting. The minutes of the joint meeting indicate that CFLCo President, Donald
McParland, presented the Hydro-Quebec demands and, as a preface to doing so, indicated that
they “had been substantially reduced from those originally presented.”

One of the demands was in regard to renewal. According to the minutes

Hydro-Quebec wished to be able to project a lower mill rate than the
present draft of the contract permitted. Due to increased costs and escalation
the effect of the present term of 44 years from first delivery or 40 years from
completion indicated an average mill rate considerably in excess of that
contemplated in 1966. Accordingly, they had requested a 25 year extension
of the contract on a flat mill rate basis suggested at two mills per
kilowatthour. They wished this to be in the form of an option. This would
produce a gross revenue of $60-65 million per annum. There would be no
debt outstanding. Should CFLCo attempt to qualify the rate by the addition
of escalators or make any provision for its tax position, the purpose of the
extension would be defeated. Although the Churchil (sic) project was
marginally more attractive then (sic) nuclear power today, it was conceivable
that it would not be in 40 years’ time. It was obvious that a commitment on
the extension was preferable to an option and it also appeared desirable to
endeavour to have the mill rate expressed in either U.S. or Canadian funds at

45 CFLCo’s Executive Committee consisted of Donald McParland, Donald Gordon who was Chair, Henry
Borden, Sam Harris, E.L. de Rothschild, A.S. Torrey and Val Duncan. All seven were also members of Brinco’s
Executive Committee, which also included M.F. Nicholson, and Senator Maurice Bourget. All attended this joint
meeting, except for Duncan.

Page 32 of 50


the option of CFLCo in order to afford the greatest protection against serious

devaluation of the Canadian dollar.

This excerpt is revealing in a number of ways. First, it does not mention the attempted
compromise of rider 34, which suggests that the rider was ineffective and that the Executive
Committee may not have been informed about it. Secondly, none of the complications such as
higher costs, loss of tax concessions, and needed capital replacement, as anticipated by Manning’s
notes of February 26, was mentioned in these minutes of this joint meeting. All that is mentioned
is that any attempt to include escalators would defeat the purpose. Thirdly, the excerpt points out
that costs and therefore the mill rate would be higher for Hydro-Quebec than anticipated in 1966
but that was generally true for its alternative sites. Finally, if Hydro-Quebec believed that nuclear
power would render electricity very cheap in the 21st century then it would have been in its
interest to retain the original renewal clause. It could then either decide not to renew at all, if
nuclear energy could be had at a lower cost than CFLCo power.46

This presentation to the Executive Committees did not mention perhaps the most
important consideration, namely, without an agreement within weeks CFLCo would be unable to
pay its bills. Additionally, McParland’s prefacing statement that Hydro-Quebec had substantially
given ground on its original demands is not accurate in regard to renewal. According to
Manning’s notes of the meeting of March 1, Hydro-Quebec had sought an extension of the term
or an option to renew, for 25 years at 2.2 mills, not 2.0 mills.47

It appears that, having tried but failed to convince Hydro-Quebec to back away from its
new demands on renewal, CFLCo management turned to its Board’s Executive Committee to
give in. It may well have been CFLCo’s diminishing cash position rather than the rather weak
rationale recorded in the minutes that was more convincing.

The joint meeting concluded by endorsing the negotiating team’s positions on the key
points and authorizing them to conclude the negotiations. Those positions essentially involved
agreeing to the Hydro-Quebec demands but with efforts to negotiate modifications to CFLCo’s
interests where possible.

On April 15, McParland sent a draft contract, dated April 12, to Hydro-Quebec. That
draft was incomplete, containing only the sections that had been agreed to date and with
remaining sections left blank. Appended to it were 20 pages of riders and related materials for
discussion and incorporation; among items covered in those pages was Article XII but there was
nothing on Article V or the renewal section. However, penned in this draft in the area where the
renewal was to appear was a note “Awaiting HQ comment on CFLCo submission due April 16.”
Presumably, the response was to answer whether Hydro-Quebec would be agreeable to granting

46 If CFLCo believed that nuclear power would be extremely cheap in the future then it, not Hydro-
Quebec, would have had the incentive to ask that the renewal be changed to an extension, albeit one that provided
sufficient revenues.

47 Moreover, at the meeting of March 11, 1968, Manning’s notes, cited earlier in this paper, indicate that
it was agreed Hydro-Quebec would consider whether it wanted firm renewal or an option to renew.

Page 33 of 50


CFLCo the option of being paid 2.0 mills in U.S. rather than Canadian money.

The next complete draft was dated April 19, the first complete one since the February 18th
version. It included a number of concessions by CFLCo. This draft’s Article V, the completion
guarantee, provided that not only would CFLCo have to repay, with interest, Hydro-Quebec for
any advances made to it but it would have to issue and turn over 10 new shares to Hydro-Quebec
for each $1,000 advanced. This draft also extended the shares-for-advances principle to Article

XII.48 As for renewal, the terms were as follows:
This Power Contract shall be renewed on the basis stated in this
Section, for a further term of 25 years from the expiry date hereof.

The renewed Power Contract, on the basis of a sale and purchase of
continuous energy whereby a number of kilowatthours per year equal to that
which shall constitute, at the date of expiry hereof, the Annual Energy Base,
shall be made available by CFLCo to Hydro-Quebec and the latter shall pay
for it, whether taken or not, at a price of 2.0 mills per kilowatthour payable
monthly.

During the period of renewal the terms, clauses and conditions of such
renewal shall be those set forth in the present Section and Schedule III
hereof, which shall apply automatically without any further signature being
required. All or any Article or Section of this Power Contract as well as all
or any undertakings or promises, not specifically contained in the present
Section or in Schedule III shall have no force and effect and shall not be
binding upon the parties to the renewed Power Contract.

None of the elements of CFLCo’s attempted compromise, rider 34, had been
incorporated. This new renewal section compelled CFLCo to sell essentially all the power from
the plant at a price fixed at just 2 mills starting around the year 2017, approximately 50 years in
the future, and continuing for 25 years thereafter. There was no consideration of any of the
allowances that Manning had listed in his February 26 analysis. Even the final efforts to obtain an
option to have the price payable in either U.S. or Canadian currency failed. This apparently ended
the matter.

In a letter dated April 23, Robert Boyd of Hydro-Quebec sent drafts of the financial
arrangements as well as drafts of the Voting Trust and By-Law 13 to CFLCo. In that letter he
then stated that, conditional on CFLCo’s acceptance of those documents, Hydro-Quebec was
prepared to recommend the draft contract to the Quebec government for approval. Two more
drafts followed in April – including ones dated April 25 and April 29 - but largely included small

If CFLCo were to ever call on Hydro-Quebec under Article XII, the latter would receive either 5 shares
per $1000 advanced or 10 shares per $1000 in the event that the plant was destroyed or damaged to the point of
being inoperative. The advances would have to be repaid to Hydro-Quebec with interest.

Page 34 of 50


changes and clarifications with no more substantial concessions.49

Thus, before the end of April 1968, negotiations had effectively ended. CFLCo had made
several concessions and it had completely capitulated to Hydro-Quebec’s demands regarding
renewal.

On May 14, the Executive Committee of CFLCo and the Executive Committee of Brinco
held another joint meeting. It was reported that Hydro-Quebec’s agreement was contingent on
the various financial arrangements. Those present voted to authorize CFLCo to enter an
agreement substantially in the form of the April 29th draft and to agree to the related financial
conditions.50

On June 13, 1968 the Board of Directors of CFLCo met. This meeting occurred at a time
when CFLCo effectively had no money. Smith (1975; p.289) reports that CFLCo was sending
staff with signing authority out of the office in order to have an excuse not to pay bills.

The Board consisted of 14 members, including the 7 who were on the Executive
Committee. Information was provided to the Board members in summary form in a confidential
memorandum that was distributed at the meeting and which had to be returned at the end of the
meeting. Specifically, according to Minute 386 of this meeting,

To avoid reading at length the minutes of the Executive Committee
Meeting of April 10 and May 14, 1968 which had been held jointly with the
Brinco Executive Committee Meeting, a memorandum summarizing the
actions taken by the Executive Committee at these meetings was distributed
to the Directors present. In view of their confidential nature the Chairman
requested that each Director return his copy of the memorandum at the close
of the Meeting. The memorandum was then read by Mr. Manning to the
meeting.

The 8-page memorandum devoted 6 lines to renewal, informing the readers that it was to be in the
form of a firm commitment at a flat rate of 2 mills in Canadian dollars.

Board members in attendance, including Jean-Claude Lessard, unanimously approved all
the actions taken by the Executive Committee, as summarized in the memorandum. The Board
then specifically ratified and confirmed the Executive Committee’s decision taken at its May 14th
meeting to enter into a power contract substantially in the form of the draft of April 29. That
draft power contract itself was not presented at the meeting to the Board of Directors for their
consideration. Of course, some of the Directors did have access to the draft contract because

49

Section 15.1 of the April 29th draft provided that if CFLCo recalled power then Hydro-Quebec’s
contribution to interest costs would be proportionately reduced; this was a further concession to Hydro-Quebec
compared to the April 19th draft.

50 CFLCo’s Executive Committee consisted of seven members of its Board. According to its Annual
Report for 1968, they were Henry Borden, Val Duncan, Donald Gordon, Sam Harris, Donald McParland, Edmund
De Rothschild and Arthur Torrey. All seven were also members of Brinco’s Executive Committee along with
Quebec Senator Maurice Bourget and M. F. Nicholson, Brinco’s vice-president and general manager.

Page 35 of 50


they were members of the Executive Committee or in Lessard’s case an officer of Hydro-Quebec.
There were, however, five Directors present who were in neither category. One of the five was

R. D. Armstrong, President of Rio Algom, a corporate ally of Brinco. Three others were Quebec
based: A. S. Torrey a long-time financial advisor to Brinco; Paul Desmarais, Chairman of Power
Corporation; and Andre Monast, a Quebec City lawyer. The remaining Director was George
Hobbs, Chairman of the Newfoundland and Labrador Power Commission.51
In sum, the agreement on the draft contract was simply presented to the Board of
Directors as a fact accompli. They received only a memorandum summarizing the decisions
already taken and were asked to endorse them. The draft contract was not circulated at the
meeting and they were not permitted to keep that memorandum. Moreover, the meeting came at
a time when CFLCo had effectively exhausted all its available financial resources, making it
essential for there to be an agreement so that bank and equity funding could proceed.

IV. IMPLICATIONS OF THE RENEWAL CLAUSE
This section attempts to ascertain the implications of the 2-mill renewal clause and to do
so in the context of the times. That is to say, the approach herein is to assess how the key parties
would have evaluated the implications in 1968, not to look at the implications with the benefit of
hindsight. The three key parties were the Quebec side, namely Hydro-Quebec and the Quebec
government, CFLCo, and the province of Newfoundland. These are dealt with in turn, starting
with Quebec.

IV. 1 Quebec
In the first week of June, 1968 Hydro-Quebec adopted a resolution approving the draft
power contract subject to the approval of the Quebec government. By this time, a draft of the
contract dated May 20, 1968 had superceded the April 29 draft and was basically a cleaned-up
version of it.

In a letter dated June 6, 1968, Hydro-Quebec then made its formal recommendation to
Quebec Premier Daniel Johnson to accept the agreement. That letter, written by Jean-Claude
Lessard, presented a synopsis of the main considerations that justified its recommendation:

• investment expenditures by Hydro-Quebec would be reduced;
• annual operating costs would be lower when compared to the alternatives;
51 Hobbs had been on the Board since 1964. While he attended the September 30, 1966 meeting that
approved the Letter of Intent, he later wrote to Smallwood to express discomfort over it. In a letter dated October
10, 1966, he complained that he had not seen the proposed letter of intent other than for a “few glimpses.” He also
raised specific concerns, such as the reduction in the amount of power available for recall. Whether he raised any
concerns about the contract at the June 13, 1968 meeting or subsequently is unknown. Still, as with the Letter of
Intent, Board members, including Hobbs and the others who did not see the contract, voted unanimously for it.

Page 36 of 50



the cost of energy would be lower than the alternatives; there would be work for Quebec
manufactures and contractors, and

Hydro-Quebec would own a minimum of 25.7% of CFLCo.
Another of the main considerations listed in the letter was the renewal clause. In that
regard Lessard’s letter states:

The Letter of Intent between Hydro-Québec and CFLCo signed in
1966 called for a 40-year contract with the possibility of renewal at a rate to
be discussed before 2005.

In the attached agreement, Hydro-Québec has an automatic renewal
for a period of 25 years at a rate of 2.0 mills/kWh without escalation. This is
a considerable improvement over the Letter of Intent when it is noted that a
difference of 1.0 mill “kWh represents a saving of about $30,000,000 per
year.

Lessard’s letter concluded that the agreement was to “Hydro-Quebec’s greatest advantage” and
requested the government to authorize the signing of it and the related documents.

Several supporting documents were enclosed with Lessard’s letter, including the draft
power contract, the various financial arrangements, drafts of Special By-Law 13 and the voting
trust agreement, a document comparing the Letter of Intent with the draft contract, and a Hydro-
Quebec report entitled “Hydro-Quebec Construction Program”dated April 19, 1968.

The “Hydro-Quebec Construction Program” report compared three alternatives for adding
to its electricity capacity from 1968 to 1980. Those options were the “Churchill Falls program,”
the “thermal-nuclear program” and the “thermal program.” The two main criteria by which these
programs were ranked were: initial construction cost and annual cost. The latter included
interest, depreciation, operation and maintenance in addition to fuel for nuclear and thermal units
and the cost of purchased power. The Churchill Falls program was ranked first and the thermal-
nuclear program second. The Churchill Falls program itself covered 1968 to 1980 and was a mix
of the purchase of power from Churchill Falls beginning in 1972 and the building of additional
capacity in Quebec to become available beginning at various times from 1977 to 1980. For this
program, the annual cost of electricity for the years 1980 to 2015 was estimated at 5.35 mills but
the Churchill Falls’ component of this average was put at 4.70 mills, inclusive of transmission line
costs in Quebec. Thus, Hydro-Quebec’s analysis indicated that not only was Churchill Falls more
attractive than the alternative thermal-nuclear program, but it was also superior on an annual-cost
basis to the set of remaining components of the Churchill Falls program.

In addition, the Hydro-Quebec report identified the post-2015 gains associated with the
new renewal clause. It stated that:

The extension of this contract for another 25 years, at a price of 2.0
mills/kwh, not subject to cost escalation, offers benefits for Hydro-Québec.
In the first place, Hydro-Québec would not be obliged to plan for the

Page 37 of 50


construction of power stations in 2015 to replace Churchill Falls power. This
investment would be pushed forward to the end for the 25-year period,
around 2040. Secondly, for every 1 mill/kwh difference between the cost
price of energy from another source and the purchase price of 2.0 mills/kwh,
Hydro-Québec earns $29 000 000 per year for the 25 years, or $725 000 000.

The Construction Program report did not speculate on how large that mill difference
might be over the renewal period. However, a difference of just 8 mills would translate into
almost a quarter of a billion dollars per year to Hydro-Quebec’s advantage.

Another document, also enclosed with Lessard’s letter, was the one that compared the
draft contract agreement with the 1966 Letter of Intent. It echoed the conclusions of HydroQuebec’s
Construction Program report. This comparison document noted that the cost of the
project would be higher than anticipated in the Letter of Intent. In part this was due to the
addition of an eleventh turbine but also due to financial market conditions, which made it more
difficult for CFLCo to obtain funds, plus interest rates were higher. It also stated that potential
first-mortgage bondholders required that Hydro-Quebec’s advances/loan guarantees not be
limited to the $109 million provided for in the Letter of Intent. Nevertheless, it opined that:

In view of the fact that the costs of the project and of borrowing money have
increased since the date of the Letter of Intent, facts which are beyond the
control of either CFLCo or Hydro-Québec and as applicable to the CFLCo
project as to any other, we believe that the draft agreement and
accompanying documents as submitted contain assured advantages for
Hydro-Québec compared to what was provided by the Letter of Intent.

It then listed those advantages over the Letter of Intent. The renewal clause was identified as one
of them and it was noted that:

The rate of 2.0 mills is very low in itself and considering the way in
which the purchasing power of money has declined since the beginning of the
century, it is an extremely advantageous rate for Hydro-Québec, even at this
time.

In short, in 1968, based on its own assessment, Hydro-Quebec would have expected,
without any anticipation of the oil-price shocks and high inflation of the 1970s, that the gains to it
resulting from the new renewal clause would be hundreds of millions of dollars annually for the 25
years in question.

IV. 2 CFLCo
The implications of the new renewal clause for CFLCo, assessed from a 1968 perspective,
would have been unfavourable. Hydro-Quebec could be expected to take approximately 29 to 30
billion kilowatt hours annually during the renewal period; this amount anticipates that CFLCo will

Page 38 of 50


have recalled its allowed maximum of 2.4 billion kilowatt hours for use within the province. At a
price of 2 mills, Hydro-Quebec therefore would be paying CFLCo approximately $58 to $60
million annually during renewal. From this revenue, costs, including taxes and capital
replacements, would have to be paid. Assessed from the perspective of 1968, it would have been
very unlikely that this revenue would be sufficient to cover costs.

Plant operating costs and corporate expense alone would be considerable that far into the
future. CFLCo’s own forecasts in 1968 anticipated that in 1977, plant and corporate expense
would be $7.8 million and would escalate 3% annually.52 The table below illustrates that, using
that escalation rate, the cumulative effect over such a long period of time is quite substantial. It
would mean that during the renewal period these costs would average $37 million annually and
therefore would alone consume more than 60% of the $58 to $60 million that Hydro-Quebec
would pay to CFLCo. The table also illustrates the sensitivity of such projections to small
increases in the escalation rate. For example, if the escalation rate actually turned out to be 3.5%
then these costs would average $48 million annually during renewal. That would exhaust 80% of
the revenue. A rate of 4% or more would imply that these costs could actually exceed the
payments made by Hydro-Quebec.

Escalation Rate Average annual Plant and Corporate Expenses

from 1977 during the Renewal Period: 2017-2041

3.0% $37.0 million

3.5% $48.0 million

4.0% $62.2 million

In the context of the times, namely mid-1968, a 3% escalation rate for future costs appears to
have been the norm. However, the length of time into the future - approximately 50 to 75 years would
likely have reduced the comfort level associated with the use of any escalation rate,
especially in the circumstance where revenue would be largely fixed. Manning’s notes of
February 1968 (see Appendix I) well anticipated this uncertainty. His notes contained a remark to
the effect that CFLCo would have to consider whether or not the risk associated with rising
operating costs would be too great to accept without an escalator.

Even if operating costs escalated at 3%, there would still be other costs to consider.
Plant, equipment and other structures would tend to wear out and need replacement over time.
By the beginning of the renewal period, components of the powerhouse, reservoir, transmission
lines and other structures, other than those that may have been already replaced, would be
between 40 and 50 years old. With the further aging of the physical plant, there would be a
considerable likelihood that major components would have to be replaced during the renewal
period. Again, Manning’s notes anticipated this need; those notes indicated that for the 40 years
following completion, replacements of major components were not anticipated but that an
engineering study would be needed to consider replacements after 50 or 60 years. To illustrate,
allowing for 2.5% escalation in capital costs starting from 1976, a capital item would cost 3 times

52 CFLCo ledger sheets, dated July 22, 1968 have projections of Plant and Corporate Expenses based on
an escalation rate of 3%.

Page 39 of 50


more in 2021 than in 1976 and 2021 would be just five years into the renewal period. To the
extent that capital replacements were needed, CFLCo would have to devote its revenues to
financing them, either directly or by servicing debt incurred to pay for them.

Additional costs would also come into play. CFLCo, under its 99-year water-rights lease,
was obliged to pay a horsepower royalty to the Newfoundland government in the fixed amount of
approximately $2.6 million annually. Tax relief, in the form of exemptions from sales and fuel
taxes as well as from increases in other taxes and from new taxes, that had been provided by the
provincial government did not extend to the renewal period. Even if CFLCo managed to make
any profit during some years of the renewal period, the PUITTA rebate will have expired so those
profits would be subject to the full federal corporate income tax rate.

There was a further risk at play for the other shareholders in CFLCo. If, as provided for
under Articles V and XII, CFLCo ever had to seek advances from Hydro-Quebec then in addition
to having to repay Hydro-Quebec, it would have to provide new shares to Hydro-Quebec. That
would result in the dilution of any returns due to the other shareholders. The provisions for
advances were in the contract largely to assure bondholders that their investments were safe
rather than to be actually acted upon. Still, this was a risk that the other CFLCo shareholders had
to bear.

Other than for the Hydro-Quebec contract, CFLCo would have few other sources of
revenues. Earnings would come from sales of the Twinco block as well as from the modest
amount of power available from recall. However, the revenue from the Twinco block was not
actually new revenue. If the Churchill Falls development had not taken place then the water for
the Twinco generating station would not have been diverted and that facility would have
generated its own revenue. The only truly additional revenue would be from any sale of recall
power. The maximum amount that could be recalled by CFLCo was approximately 2.3 million
megawatt hours per year, which would leave Hydro-Quebec with approximately 29 to 30 million
megawatt hours. The sale of that relatively small amount would bring revenue to CFLCo but,
unless sold at a substantially higher price than 2 mills, would only marginally improve the overall
outlook. And, if sold at a higher price would serve largely to subsidize the contract with Hydro-
Quebec.

Considering rates of cost escalation as anticipated in the 1968 context, the very likely need
for major capital replacements after 2016 and the loss of tax advantages, the shareholders of
CFLCo would have had little basis on which to expect any positive return during the renewal
period. In acquiescing to Hydro-Quebec’s do-or-die condition, CFLCo’s management would
have understood that during the 25-year-renewal CFLCo shareholders would likely suffer losses
or, at best, barely cover costs. Two mills was, in 1968, likely the lowest conceivable price at
which CFLCo could be expected to cover costs during the renewal period.

For certain, without a future amendment to the 2-mill 25-year renewal clause, CFLCo
would have no prospect whatsoever to share in any increase in the market value of its product.
The fact that, following its failed attempt to obtain less onerous renewal terms, CFLCo accepted
the new renewal clause attests to CFLCo’s and Brinco’s assessment of the credibility of HydroQuebec’s
ultimatum of March 1, 1968. It had come at a time when CFLCo was close to
exhausting its cash and when Brinco was in no position to help. Brinco itself was in the midst of a
financial crisis brought on by having to borrow over $20 million from the Bank of Montreal to

Page 40 of 50


support the CFLCo share issue of October 1967. Without an agreement on the contract, CFLCo
would have no options left other than the “die” one.

IV. 3 Newfoundland
The implications of the renewal condition for Newfoundland, as resource owner, were
largely the same as those for CFLCo. The main mechanism by which Newfoundland was to share
in the economic rent from the project was through an 8% rental on CFLCo’s pre-tax profit. With
little or no prospect for significant profit during the renewal period, that 8% would yield little or
no revenue. By the same reasoning, the provincial corporation income tax would yield little or no
revenue. After the beginning of renewal, the provincial government would stand to retain all the
PUITTA rebate but, without CFLCo earning any profit, that also would be of little or no value.
The only revenue of which Newfoundland could be relatively certain was the horsepower royalty
revenue. It had been established in the statutory water power lease with CFLCo. It was a fixed
amount of approximately $2.6 million per year and unrelated to revenues or profitability; rather, it
was based on the amount of power generated.

Thus, it was most unlikely that Newfoundland’s royalty and tax revenue from Churchill
Falls would be more than a few million dollars per year during the renewal period. That compares
dramatically with Hydro-Quebec’s anticipation of earning between $29 and $30 million per year
for each mill difference between the cost of alternative sources and 2 mills.

As with the Letter of Intent, the Newfoundland government was not party to the contract
negotiations. It was via a telephone call from CFLCo’s board chairman, Donald Gordon, that
Premier Smallwood first learned that the renewal clause had been replaced. Gordon, who was also
Brinco’s president and chief executive officer, called on July 12, two days after the Quebec
government authorized Hydro-Quebec to proceed with finalization of the deal. July 12 was also
the same day that Hydro-Quebec issued its press release announcing the decision to proceed with
the project; that six-paragraph release devoted one paragraph to renewal. Gordon kept a record
of his telephone conversation with Smallwood, who is referred to using the initials, J.S. That
record is as follows:53

I called at exactly 10.00 a.m.

I said I was calling to confirm that the Order-in-Council authorizing

Hydro Quebec to execute the power contract had been received and that

Hydro Quebec was making a press release this morning. I gave him a

summary of it.

I also read Mr. McParland’s statement to the Press.

J.S. expressed his gratification and congratulations. He asked about
the actual signing of the Contract and I repeated that this would be
forthcoming as soon as financing had been arranged and told him the Bond
Memorandum was actively in hand through Morgan Stanley. I said I could
53 See “Notes of Telephone Conversation with J.R. Smallwood, Premier of Newfoundland on 12 July
1968.”

Page 41 of 50


not give any firm date until we have the report by Morgan Stanley but I
estimated this might be around end of September. I asked J.S. not to use this
date and he said he quite understood.

I said there was one special point mentioned in the Hydro Quebec
announcement, namely the extension of the Power Contract for 25 years at a
fixed price of two mills. His first reaction was that this looked like pretty
cheap power. I reminded him that the Letter of Intent gave Hydro Quebec
the right to renew and that all things considered we felt it to be a good deal to
have the terms settled now. Moreover, by the end of the forty year contract
the property should be debt free and its operating costs at minimal levels.
Hydro Quebec had asked for an option to renew at the price mentioned but
we had negotiated for a firm commitment as being in our best interests. J.S.
said this was a matter of judgment and he had no further comment. He
seemed quite relaxed.

This record is revealing. Gordon started by telling Smallwood that there was an
agreement and that the CFLCo and Hydro-Quebec press releases were in the process of being
made public. It was only after Smallwood expressed his congratulations on the deal that Gordon
raised the issue of the renewal, and indeed it was the only issue he raised.

When told of the renewal, Smallwood’s remark about the renewal price of 2 mills
constituting “pretty cheap power” shows that he had an appreciation of the implications.
Gordon’s response to Smallwood that the Letter of Intent gave Hydro-Quebec the right to renew
was highly misleading. The Letter’s renewal clause provided for negotiations for mutually
satisfactory terms on price, quantity, and other conditions. That renewal clause had been public
knowledge since the October 1966 press release announcing the agreement on the Letter of
Intent. Its substance had been retained in all the drafts up to March 1968.

Also, Gordon’s remark to Smallwood that by the end of the 40-year contract costs would
be minimal and the project debt free was either dishonest or misinformed. Manning’s notes of
February 1968, as in Appendix I, had anticipated the need for an escalator for operating costs and
for adjustments for major capital replacements as well as other considerations. CFLCo’s own
cost projections at the time used a 3% escalation rate and had placed annual operating costs at the
beginning of the renewal period at more than $25 million.54 And as pointed out above, a 3%
escalation rate implies an average annual operating cost of $37 million during the renewal period.

Gordon’s final observation on the telephone conversation, namely that Smallwood
“seemed quite relaxed,” is open to interpretation.

The news of the deal and the new renewal clause had been presented to Smallwood as a
fait accompli. The press releases were being made public. In the preceding weeks, Smallwood
had agreed that Newfoundland subscribe for 10% of the forthcoming $25 million share issue in
CFLCo, and had arranged budget funding for it at the end of June. Over the preceding two years,
legislation had been passed or amended by his government that made needed adjustments in

54 See ledger sheets, dated July 22, 1968, from CFLCo files.
Page 42 of 50


CFLCo’s Lease, that gave relief to CFLCo from provincial sales taxes, and that provided for the
transfer of the half the PUITTA rebate to the province on to CFLCo so it could offer a lower
price to Hydro-Quebec.55 Earlier Smallwood himself had successfully appealed to the federal
government to increase the PUITTA rebate to enable this transfer to take place. As far back as
the 1950s it had been appeals by Smallwood to British Prime Minister Winston Churchill, the
Rothschild merchant bankers and other leading British industrialists and financiers that led to the
formation of Brinco.

The telephone call from Gordon extended the do-or-die condition that CFLCo had faced
to Smallwood.

Thus, it appears that Smallwood had an inkling of the implications of renewal but did not
pursue the matter; apparently, neither did any other provincial politician or policy-maker.56

V. PROJECT COMPLETION AND THEREAFTER
Following the July 1968 announcement of the agreement, CFLCo’s main tasks were to
continue work to meet Hydro-Quebec’s schedule and to arrange commitments for the major
financing. Under Voting Trust Agreement No. 1, which was signed on July 15, CFLCo had to
raise at least $515 million before year’s end or control of the project and possibly majority
ownership would pass to Hydro-Quebec.

In the interim and for most of the rest of the year, CFLCo would be financed by the funds
raised in the $25 million share issue that was initiated in July and was limited to the existing
shareholders.57 Brinco would take up only about $5 million in those shares, and even to do that it
had to borrow the funds from the Bank of Montreal. A reluctant bank was agreeable to do so
only when Brinco produced a letter from Rio-Tinto Zinc that a rescue plan for Brinco was in the
works.58

55 The Churchill Falls (Labrador) Corporation Limited (Lease) (Amendment) Act, 1966-67, exempted
CFLCo, as well as its contractors and subcontractors, from the provincial retail sales tax and gasoline tax, in so far
as the purchases were related to the development of electricity. The amendment also provided that 47.9% of all tax
collected by the federal government and rebated to the provincial government be turned over to CFLCo for the life
of the contract, i.e., the PUITTA rebate. In addition, the legislation provided that CFLCo would be exempt from
any increase in existing provincial taxes and exempt from any new taxes, royalties, dues etc. during the term of the
contract.

56

Under a covering letter dated May 10, 1969, CFLCo’s C. T. Manning sent a copy of the contract to the
provincial Minister of Justice in St. John’s. This appears to have been the first time the provincial government was
given a copy.

57 In a letter dated July 2, 1968, Hydro-Quebec’s Jean-Claude Lessard informed CFLCo not to deposit its
cheque for new CFLCo shares unless CFLCo advised it of its enactment of by-law 13 and its acceptance of the
voting trust arrangements by July 15.

58 See letter, dated July 5, 1968, from G. Arnold Hart, Chairman and Chief Executive Officer of the Bank
of Montreal, to Donald Gordon.

Page 43 of 50


In August of 1968, Rio-Tinto Zinc put that rescue plan into place. First, it purchased
shares in Brinco directly. Then there was a public offering of new Brinco shares in November,
which Rio-Tinto supported by taking any shares that were not subscribed for. These new funds
were sufficient to permit Brinco to repay its debt to the Bank of Montreal and to buy out Rio
Algom’s interest in CFLCo. According to Brinco’s Annual Report for 1968, Brinco was then in a
position where it held almost 5 million shares in CFLCo for which it had paid $49.7 million over
the years.

Later in the year Hydro-Quebec purchased all the general mortgage bonds issued by
CFLCo. Those bonds were for a total of $100 million at an annual interest rate of 7.5%, and
would be paid off by December 15, 2007. In addition, they included one million bonus shares in
CFLCo.

The effect of these transactions for CFLCo, by the summer of 1969, was an ownership
structure as follows:

Brinco 57.0%
Hydro-Quebec 34.2%
Newfoundland 8.8%.


The remaining elements of CFLCo’s financing plan, namely, commitments for all the first-
mortgage bonds and a loan agreement with a consortium of Canadian banks, were successfully in
place by the fall of 1968. The loan agreement was for short-term funds. The first mortgage
bonds, for $50 million and US$500 million, would constitute long-term debt, and were scheduled
to be repaid by December 15, 2007. Having completed the financing and ratified by-law 13,
CFLCo fulfilled the conditions of Voting Trust No. 1, and so it was terminated in October.59

The contract continued to be re-drafted during the latter half of 1968 and into the early
months of 1969 but the changes were largely technical and legalistic. Finally, on May 12, 1969 at
Hydro-Quebec’s offices in Montreal the contract was signed by the two parties to it. Jean-Claude
Lessard, who had approved the contract as a CFLCo Board member, and Yvon De Guise, signed
for Hydro-Quebec. Signing for CFLCo were Donald McParland and Eric Lambert. Several
related agreements involving financing were signed the following days.

The project was successfully financed, and the completion guarantee never invoked.60 The
plant was fully completed in 1976. In the interim, there had been a change in ownership. After

59 In sequence it was followed by Voting Trust Agreement No.2, which also gave Hydro-Quebec the right
to replace the majority of directors on CFLCo’s Board and to take majority ownership in CFLCo under specified
circumstances.

60 However, as provided for in the contract, Hydro-Quebec did absorb the increase in interest rates at
which CFLCo had to borrow. It also made payments as part of the arrangement to share exchange-rate risk on

U.S. dollar debt incurred by CFLCo to complete the project. Recall that these commitments had been agreed in the
Letter of Intent and were in consideration of the concessions to offered by Robert Winters in 1965.
Page 44 of 50


holding office since Newfoundland became part of Canada, the Smallwood government had been
defeated. The new provincial government, for reasons unrelated to the contract, embarked on a
different approach to hydro-electric development.61 After threatening expropriation of Brinco, it
reached an agreement in 1974 to purchase all of Brinco’s shares in CFLCo, for which it paid $130
million, as well as Brinco’s water rights to the lower Churchill River, for which it paid $30
million. This meant that the provincial government, through its Newfoundland and Labrador
Hydro Corporation, then held 65.8% of CFLCo and Hydro-Quebec continued to hold its 34.2%
stake. Shortly thereafter, CFLCo’s offices were moved from Montreal to St. John’s and CFLCo
attained the status of a crown corporation.

With the OPEC oil price shocks of the 1970s and the general rise in inflation during that
time, the low-price contract meant substantial gains for Hydro-Quebec. On the other hand, the
long-term outlook for CFLCo’s profitability was compromised. Since then attempts led by the
provincial government to renegotiate the contract were made but were to no avail. Court
challenges also failed in the 1980s.

In the 1990s, CFLCo and Hydro-Quebec entered into additional commercial
arrangements. These were winter-availability contracts. By scheduling additional electricity to
Hydro-Quebec during the winter months, CFLCo’s earnings would increase and of course Hydro-
Quebec would benefit as well. Relative to the amount of power sold to Hydro-Quebec under the
1969 contract, that extra revenue was less than 1 mill per kilowatt hour in 2004.

In Newfoundland and Labrador bitterness and resentment over the 1969 contract have not
subsided.

VI. SUMMARY AND CONCLUSION
Despite much public controversy over the Churchill Falls contract, until now little has
been known about that contract’s renewal clause. However, as 2016 approaches, and as energy
prices continue on an upward trend, it seems certain to become a flashpoint.

This paper is the first systematic explanation of the renewal clause. The findings regarding
the circumstances leading to it may well raise substantive questions of business ethics and law.

From the beginning of negotiations in 1963, the renewal clause provided for future
negotiations between the parties for another sale agreement following the contract’s expiry. After
three years of negotiations, the 1966 Letter of Intent, signed by both parties, embodied that type
of renewal clause; namely, there could be a renewal of the contract if both parties negotiated a
mutually acceptable agreement on price and other terms. During the subsequent negotiations for a
definitive contract, that renewal arrangement was retained and fleshed out in all drafts of the
contract up to March 1968.

In April of 1968 there was a polar change. A new renewal clause, as demanded by Hydro


61 Among other things, the new provincial government was concerned that Brinco was an obstacle to
developing hydro-electric sites on the lower Churchill River and it was unwilling to give the same tax concessions
that had been put in place for the Churchill Falls development. Also, buying Brinco’s shares in CFLCo resulted in
the latter becoming exempt from federal corporate income tax so the PUITTA rebate ceased to apply. For more on
the purchase of Brinco’s water rights and interests in CFLCo, see Smith (1975) and Crosbie (1997).

Page 45 of 50


Quebec, was adopted. It required that practically all the power be sold to Hydro-Quebec at a
fixed price of only 2 mills for 25 years after the expiry of the contract’s term. That price was
significantly lower than the cost of any then available source. Without the benefit of hindsight,
but in a 1968 context, these new terms for renewal were entirely one-sided. Even with the low-
inflation expectations of the times, 2 mills was probably the lowest conceivable price at which
CFLCo’s future costs could be covered. Therefore, all the economic rent would be HydroQuebec’s.
In 1968, Hydro-Quebec’s own estimates implied that the resulting gains to it would be
hundreds of millions of dollars annually. Whether the rent turned out to be higher or lower,
Hydro-Quebec would always be assured of all of it. None could accrue to CFLCo or to the
resource-owner. Yet, both had conceded much to make the low-price contract a reality.

The Smallwood regime, representing the resource owner, had given much support to the
project’s economics, such as tax concessions and protection against new taxes and tax increases
during the term of the contract. Smallwood had lobbied the federal government to enrich the
PUITTA rebate so the increase could be turned over to CFLCo. These concessions were
ultimately to the benefit of Hydro-Quebec as they allowed CFLCo to lower its price. They were
put in place during the time when renewal was based on the notion of future mutual agreement.
Similarly, all the provincial government’s equity contributions were provided either before the
change in renewal or before Smallwood was told about it. Despite these benefits provided to it
arising from Smallwood’s actions, Hydro-Quebec demanded a change in the renewal clause which
would ensure that future provincial governments would receive practically no benefits during the
renewal period.

As for CFLCo, its former president, Robert Winters, had acceded to Hydro-Quebec
having an ownership stake in CFLCo as well as a position on its Board. Also, he had broken the
impasse in negotiations in 1965 by offering a low-price, cost-based, contract for a lengthier term
of 44 years in return for certain Hydro-Quebec undertakings. That led to the Letter of Intent of
1966. It was on the basis of that signed agreement that CFLCo undertook an expenditure
program designed to meet Hydro-Quebec’s schedule for power requirements. Also, all the
complete drafts of the contract until April 1968 contained a renewal clause consistent with the
Letter of Intent’s. Its replacement with a completely different and exploitive provision came
when CFLCo’s funds were nearly completely exhausted and it needed an agreement on the
contract to survive; a fact that Hydro-Quebec’s president knew by virtue of his position on the
CFLCo Board. As Manning’s notes of March 1, 1968 indicate, CFLCo understood HydroQuebec’s
demand for a 2-mill renewal to be a “do or die”condition and understood its
implications. CFLCo attempted to obtain less onerous renewal terms but that effort was
ineffective. It had to accept a price, beginning in the fall of 2016, that Robert Winters had
rejected in 1964 and which was, according to Hydro-Quebec’s own analysis, “extremely
advantageous” for it even in 1968. Two mills was almost 20% cheaper than the 2.4 mills HydroQuebec’s
own advisory committee had recommended in its June 1964 report and that price was
for their suggested term of 35 years, not for any subsequent period.

It is inconceivable that any party to a transaction would knowingly and willingly agree to
sell its services some fifty to seventy-five 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.

Page 46 of 50


REFERENCES

British Newfoundland Corporation, Annual Report, various years.
Churchill Falls (Labrador) Corporation, Annual Report, various years.
Churchill, Jason L., "Pragmatic Federalism: The Politics behind the 1969 Churchill Falls


Contract," Newfoundland Studies, 15/2 (Fall 1999), pp. 215-46.
Crosbie, John C., No Holds Barred: My Life in Politics, (Toronto: McClelland & Stewart, 1997).
Dorion, Henri, Rapport de la Commission d’Etude sur l’Integrité du Territoire du Québec,


(Québec, 1971).

Economic Council of Canada, Newfoundland: From Dependency to Self-Reliance, (Ottawa:
Supply and Services Canada, 1980).
Feehan, James P. and Melvin Baker, “The Renewal Clause in the Churchill Falls Contract:


The Origins of a Coming Crisis,” Papers in Political Economy, Paper No.96, (Political Economy


Research Group, University of Western Ontario, 2005)
Fullerton, Douglas, "Quebec, Labrador and Newfoundland," Forces: Revue de documentation
économiques, sociale et culturelle, (No. 57-58, 1981-1982), pp. 44-51.


Hydro-Quebec, Annual Report 2003: The Power of Change.

Royal Commission on Renewing and Strengthening Our Place in Canada, Main Report, (St.
John’s: Office of the Queen’s Printer, 2003).
Schull, Joseph, The Great Scot: a biography of Donald Gordon, (Montreal: McGill-Queen's


University Press, 1979).
Smith, Philip, Brinco: The Story of Churchill Falls, (Toronto: McClelland & Stewart, 1975).
Statutes of Newfoundland, 1966-67 to 1969, various volumes (St. John’s: Queen’s Printer).


Page 47 of 50


APPENDIX I

Reproduction of C.T. Manning’s Handwritten Notes of February 26, 1968

Correspondence (1.)
CTM
Renewal
CFLCo/HQ - Power Contract
26-2.68

Problem : -How can the term of the Power Contract be
extended either directly or by option to HQ
by an additional 10 to 25 years or a
fixed mill rate?

-
The function of such an arrangement to permit HQ
to average out a power price that would render the
arrangement so attractive as to avoid criticism from
proponents of the long term advantages of nuclear
power.
S
The position in Nfld.

The Water Power Lease

Term & Renewal - Lease is for a term of 99 years from 16 May ‘61 (Clause 1 of
Part I)

- Lease is subject to Renewal for a further 99 year term.
(Part III Clause 2)
Public Utilities Act - Sec. 4 of 1966-67 Act exempts the supply of power
developed under lease to HQ from Public Utilities Act.

Power Contract Clause 2 A(1)(b) - Def. Of Power Contract:

-1st contract executed with HQ.
- Excludes any renewal of the contract - or the
renewal of the term prescribed therein
- “And the said term is expected to be about 40 years”
Term of Tax Rebate Arrangement 2A (2) “during the term of the Power Contract”

Conclusion (1) if the term is to be significantly longer or shorter
than 40 years the lease should be amended
to delete above quoted phrase the 40 years.


(2) if the extension is to be by option to extend the term then
the lease as presently worded would probably not convey
any tax rebate benefit in respect of the additional term.
Page 48 of 50


(2.)

Observation -
it may be that the option approach is the right one
provided the price during the extension period is
on a formula basis so that (a) if the rebate arrangement
cannot be continued the loss to CFLCo is paid for by
HQ and (b) replacements of plant and equipment
forming part of the project are fully amortized over the
extension time without prejudicing an agreed return
to the equity.

#

The Draft Contract Provisions

- 40 year term established on basis of the reasonable
foreseeable life of the plant without major capital replacements.
- if this is to be lengthened then there should be
an engineering study made of what components
have a life expectancy of 50 - or 60 years as may be agreed and
what components would have to be replaced or
substantially repaired.
- with this data and a return to equity concept,
it should be possible to project a flat mill rate on
todays costs
---> with escalator for loss of rebate and additional
capital costs. - We would also have to consider
an escalator in operating costs and whether or not
this risk would be too great to accept without
an escalator.

- Effect of 8% rental. - on mill rate
- H.P. Tax Defeats
purpose

Notes:

1. All items in italics correspond to the hand-written notes and symbols.
2. Bolded italicized words are ones for which the handwriting was not clear enough to determine accurately. Thus,
they are best guesses.
Page 49 of 50


APPENDIX II

Reproduction of C.T. Manning’s Handwritten Notes of March 1, 1968

===

Extension -[Query Renew for a lesser amount of Power at
a reduced Rate ]
We can see desirability of a fixed price .

- Practical & Political considerations
Practical
-? operating cots - Escalation
rates of wages What will it be in 2012 (?)

- Replacements in 40 years
- Life of components
have to be taken into account.
- Tax rebate arrangements - end in 40 years
- Boyd thinks it should be in the contract - we are reluctant
to open with Nfld. - very tricky
This is a very material matter.
This to Hydro is like the Completion
Guarantee to CFLCo.
- A do or die condition -
DJM We are sympathetic.


===

Notes:

1. “DJM” refers to Donald J. McParland.
2. Bolded italicized words are ones for which the handwriting was not clear enough to determine accurately. Thus,
they are best guesses.
Page 50 of 50

Labels: , , , , , , , , ,


This page is powered by Blogger. Isn't yours?

Subscribe to Posts [Atom]