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UNCLAS SECTION 01 OF 03 HALIFAX 000070 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG PGOV CA
SUBJECT: ENERGY: MOVING LABRADOR'S LOWER CHURCHILL PROJECT TO 
REALITY 
 
HALIFAX 00000070  001.2 OF 003 
 
 
¶1.  SUMMARY:  Suitors have lined up for a chance to be part of 
the long-anticipated project to develop the hydroelectric 
resource of the Lower Churchill River in Newfoundland-Labrador. 
A tough but calculated business plan by Premier Danny Williams, 
coupled with new market dynamics, has economists and even the 
Premier's staunchest political foes predicting that it looks 
good for the multi-billion dollar project to proceed.  Estimated 
output from the facility could be enough to supply 1.4 million 
households in eastern North America.  However, until the 
provincial government decides on a specific marketing and 
transmission plan, just what portion of the output will be 
available for export to the United States will remain unknown. 
END SUMMARY 
 
¶2.  Danny Williams, the high profile premier of 
Newfoundland-Labrador, is once again at the forefront of another 
mega energy project: this time the decades-old dream of 
harnessing the hydroelectric potential of Labrador's Lower 
Churchill River (LCR).  Since his election as Premier in 2003 
Williams has developed a reputation as a bare-knuckled fighter 
for his province's economic well-being.  His zealous policy of 
controlling development of his province's resources while 
maximizing economic returns has seen him take on Ottawa and win 
big on oil and gas royalties.  However, his strong-arm tactics 
frustrated major oil companies in their negotiations with the 
Premier on a development deal for the province's fourth offshore 
project, Hebron, with the result that they walked away. Whether 
the Premier went too far in pushing the industry in the Hebron 
case remains to be seen.  However, when it comes to the LCR 
project, the Premier's hard-nosed business tactics are not 
dissuading some high level contenders from wanting to want to 
work with him in moving the LCR project from a dream to a 
reality. 
 
Project Specifics 
----------------- 
 
¶3. To quote the Newfoundland-Labrador government's promotional 
literature, the Lower Churchill River is a significant untapped 
long-term source of clean, renewable energy available for the 
North American electricity market.  Located 140 miles from the 
existing 5,428-megawatt generating facility at Churchill Falls, 
Labrador, the proposed project includes two potential sites.  A 
2,000 megawatt project at Gull Island has the potential to 
produce an average 11.9 terawatt-hours of energy annually.  An 
824-megawatt project at Muskrat Falls has the potential to 
produce an average 4.8 terawatt-hours per year.  Combined, the 
projects have the potential to produce sufficient energy to 
supply up to 1.4 million households annually. 
 
¶4. The cost of the project will depend on whether the Gull 
Island and Muskrat Falls sites are developed at the same time 
(the province's preference) and how each site is configured. 
Because of the varying development options, analysts are looking 
at a broad range of total costs, falling anywhere from $6 to $9 
billion.  Assuming the project goes ahead, the estimated 
start-up date would be 2015. 
 
Routing And Marketing Options: US Market Only One Option 
--------------------------------------------- ----------- 
 
¶5.  The provincial government is looking at two very different 
options for getting Lower Churchill's combined 2,800 megawatts 
of power to market.  Option number one is the so-called 
traditional route that would see LCR power wheeled through 
Quebec and then to energy markets in that province, Ontario and 
the United States.  Option number two is the Maritime route 
which would see the electricity moved across Labrador and then 
by underwater cable to Nova Scotia and New Brunswick and from 
there to the United States. Until those marketing options are 
settled, it is unclear just how much LCR power will be available 
for export to the United States. 
 
Getting the Project Moving: Past and Current Attempts 
--------------------------------------------- ---------- 
 
¶6.  The dream to see a second hydro project in Labrador has been 
around for over 30 years and the province's history books show 
several failed attempts to get the project off the ground. 
Recent attempts include those proposed by Premier Williams' 
immediate predecessors, Liberal Premiers Roger Grimes (2002) and 
Brian Tobin (1998).  As analysts have concluded, these previous 
deals were doomed to fail, principally, because they were too 
wrapped up in politics.  The general perception in the minds of 
the Newfoundland-Labrador electorate was that the premiers were 
too quick to sell off a valuable energy resource to the only 
suitor, Hydro-Quebec (HQ).  Also, HQ was portrayed as a bully, 
holding Newfoundland-Labrador ransom because it controlled the 
transmission lines that the LCR project would need.  To add to 
 
HALIFAX 00000070  002.2 OF 003 
 
 
the contentious atmosphere, the ghost of the existing Churchill 
Falls contract haunted any negotiations on the LCR project. 
Signed in the 1960s the Churchill Falls contract allows HQ to 
purchase the output from the 5,428-megawatt facility at cheap 
rates with no escalator clauses.  Several Newfoundland-Labrador 
premiers have tried to reopen the contract to no avail, which 
led them to insist on onerous conditions in a future LCR 
contract as a means of compensation for Churchill Falls. 
 
¶7.  Enter Danny Williams in 2003 who with his successful 
business background was quick to take a fresh look at the LCF 
project.  The result was a whole new strategy featuring a 
pragmatic, business approach, not politics or emotions.  The 
first notable change with the Williams' game plan was that the 
ghost of Churchill Falls would no longer have any influence.  As 
Williams told Newfoundlanders and Labradoreans, "just get it 
over it." Also different this time is the premier's decision to 
have the provincially-owned utility, Newfoundland-Labrador 
Hydro, not politicians, on the frontlines of the process. 
Furthermore, the premier made another business decision by 
calling in some high-priced help, hiring independent industry 
consultants to advise the new LCR team. 
 
¶8.  By far the most radical difference from previous attempts to 
get the project kick-started was the Premier's move to dispel 
the notion that LCR could only be developed by the direct 
participation of HQ.  Instead, the Premier embarked on an 
ambitious plan to see just who else might be interested in 
getting the project moving.  What followed was his release of a 
competitive, five-phase strategy aimed at finding the best 
entity to develop the project, with no preference to any one 
group that might have had a past interest in the project, i.e., 
HQ.  Phase one of the strategy was letting the world know about 
LCR and inviting expressions of interest. Phase two is the 
assessment of the different proposals.  Phase three, the 
negotiation of commercial principles with the selected entity; 
and phase four, detailed commercial negotiations. 
 
Where we are now - Assessing the Proposals 
------------------------------------------ 
 
¶9. In January 2005 the government launched Phase one by sending 
out individual invitations to private companies and government 
jurisdictions and by running ads in global business newspapers 
and magazines.  By March 31, 2005, 25 interested parties 
responded.  From that list, the LCR team found three development 
proposals to their liking and three financing options.  The 
review team is currently crunching the numbers and finishing the 
risk analysis for each.  Speculation is there will be a final 
cut by the last half of 2006. 
 
Who Made the Cut? 
---------------- 
 
¶10. The three development proponents under consideration are: 
 
a) Hydro Quebec/Ontario Energy Financing Company/SNC-Lavalin. 
Hydro Quebec is owned by the government of Quebec; Ontario 
Energy Financing Company is one of the five components 
established by the restructuring of the former Ontario Hydro; 
and SNC-Lavalin is a privately owned engineering and 
construction company. 
 
b) TransCanada Corporation, a publicly traded North American 
energy company, headquartered in Calgary. 
 
c) The Tshiaskueshish Group, a consortium comprised of 
Australian, Canadian and First Nation business interests in 
Labrador. 
 
The three financial proponents are: 
 
a) Cheung Kong Infrastructure Holdings Limited, a Hong Kong 
diversified infrastructure company. 
 
b) Borealis Infrastructure Management Inc. a subsidiary of the 
Ontario Municipal Employees Retirement System, one of Canada's 
largest pension plans. 
 
c) Altius, a Newfoundland and Labrador based royalty and mineral 
exploration investment company focused on resource development 
in Newfoundland and Labrador. 
 
The Other Contender - The Newfoundland-Labrador Government 
--------------------------------------------- ------------- 
 
¶11. Consistent with his government's policy of maintaining 
control over the province's resources and maximizing economic 
returns, the Premier also has another option, going it alone. 
 
HALIFAX 00000070  003.2 OF 003 
 
 
The Premier's thinking is if the 25 interested parties who bid 
on the project believe they can develop it, there is no reason 
why the Newfoundland-Labrador government cannot do the same. 
With the money from the new offshore royalty agreement, the 
Premier believes this cash provides the province with the 
required leverage in dealing with any potential developers or 
financial partners in a Newfoundland-Labrador led project.  To 
let all the parties know that the Williams government is serious 
in its intent to be an equal contender, it formally applied to 
Hydro Quebec's transmission division for approval to wheel the 
LCR power through its transmission system.  The province has 
already made a refundable deposit of $17 million, which presents 
an estimate of one-month tariff for using HQ infrastructure 
through its Open Access Transmission Tariff.  At present, HQ is 
studying the application, but will have to come up with a 
response at some point. 
 
Comment:  Is It Really LCR's Day In The Sun? 
-------------------------------------------- 
 
¶12.  With a number of serious propositions on the table and a 
changed energy market which now favors new, clean power sources 
like the LCR, many economists, joined surprisingly enough by the 
Premier's political foes, believe it is time for LCR's day in 
the sun.  Moreover, the Premier's steadfast business approach 
should mean that the province can get the most realistic and 
cost-effective development plan possible.  While finding an 
interested party now appears likely, there are still several 
hurdles to overcome before the project can move ahead.  The 
premier has been very forthright in discussing what these are: 
environmental and aboriginal issues and equally important, 
national political considerations.  A specific issue will be to 
determine just what role the new Harper government may play in 
the project. 
 
¶13.  Considering the Premier's record of never shying away from 
a battle, he will be looking to Ottawa for such things as loan 
guarantees or other forms of financial involvement.  However, 
just how interested the Conservative government in Ottawa will 
be in helping to finance a project where the bulk of the power 
might leave the country, remains to be seen.  While these 
considerations will be complicating factors further down the 
road, for now the Premier and his LCR team are focused on the 
immediate task of reviewing the different proposals.  Once that 
is completed, then the next battle starts:  Premier Williams 
going head to head with a would-be developer in the commercial 
negotiations of Phase three.  Given his tenaciousness as a 
negotiator, our money is on Williams to take every possible 
nickel off the table.  END COMMENT 
HILL