Churchill powers Quebec profits

Hydro-Quebec earnings would drop 75 per cent without Labrador energy, study finds; Montreal Economic Institute attributes $2-billion-plus annual impact to project

Rob Antle rantle@thetelegram.com
Published on February 6, 2009
Bare rock shows the size and scope of what Churchill Falls looked like before the hydro-electric dam and facility was built. - Transcontinental Media file photo

Hydro-Quebec would see recent annual profits slashed by 75 per cent - more than $2 billion - if it had to go without cheap electricity obtained from Churchill Falls.

That's according to a research paper published this week by the Montreal Economic Institute, a Quebec-based think-tank.

According to the study, Hydro-Quebec currently obtains 31.8 terawatt hours (TWh) of electricity from Churchill Falls.

Study author Claude Garcia calculated the impact of Churchill Falls power on Hydro-Quebec operations in 2007, assuming the controversial Labrador power deal had ended on Dec. 31, 2006.

Hydro-Quebec would see recent annual profits slashed by 75 per cent - more than $2 billion - if it had to go without cheap electricity obtained from Churchill Falls.

That's according to a research paper published this week by the Montreal Economic Institute, a Quebec-based think-tank.

According to the study, Hydro-Quebec currently obtains 31.8 terawatt hours (TWh) of electricity from Churchill Falls.

Study author Claude Garcia calculated the impact of Churchill Falls power on Hydro-Quebec operations in 2007, assuming the controversial Labrador power deal had ended on Dec. 31, 2006.

"Profit of $2.882 billion in 2007 would have been reduced to $709 million," Garcia concluded in the report.

The sharp drop results from the end of lucrative export sales and the cost of importing replacement electricity.

"Hydro-Quebec would have had to find supplies on the market to replace the missing electricity," the study noted.

"It would have been possible to recover 17.5 TWh by reducing exports to zero, meaning the loss of export sales."

Assuming it had no access to Labrador power, Hydro Quebec would have lost nearly $1.5 billion from a resulting lack of export sales alone, the study found.

The additional expense to import power would have cost Hydro Quebec another $773 million.

"If an end to the Churchill Falls agreement in 2007 were to be simulated, it could be concluded that the return on Hydro-Quebec's activities on Quebec territory in 2007 would have been 3.6 per cent, which is below the 5.4 per cent cost of Hydro-Quebec's borrowings in 2007," the study reported.

Labrador power has a significant impact on the Quebec utility's operations, Garcia claimed.

"If Hydro-Quebec has a return on equity of 14.5 per cent today, it owes this essentially to the Churchill Falls agreement, to its exceptional hydroelectric resources and to the fact that it is not taxed on its net profit."

The Churchill agreement renews in 2016, and will ultimately expire in 2041.

The research paper argues in favour of the privatization of Hydro Quebec, citing inefficient operations and high cost structures, among other factors.

The author is a member of the board of directors of several corporations and former president of the Canadian operations of Standard Life. Garcia has also completed doctoral studies at the London School of Economics. He could not be reached for comment before deadline Thursday.

The original Churchill Falls deal, signed in the late 1960s, has been a sore point for Newfoundland and Labrador for decades.

The provincial government has claimed that Quebec reaped 95 per cent of net revenues from Churchill Falls - $19 billion of a total $20 billion - up to the end of 2006.

rantle@thetelegram.com