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### Viewing cable 06HALIFAX70, ENERGY: MOVING LABRADOR'S LOWER CHURCHILL PROJECT TO

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06HALIFAX70 | 2006-04-07 15:03 | 2011-04-28 00:12 | UNCLASSIFIED | Consulate Halifax

`

    VZCZCXRO6201
    RR RUEHGA RUEHQU RUEHVC
    DE RUEHHA #0070/01 0971503
    ZNR UUUUU ZZH
    R 071503Z APR 06
    FM AMCONSUL HALIFAX
    TO RUEHC/SECSTATE WASHDC 0976
    RUEHOT/AMEMBASSY OTTAWA 0353
    INFO RUEHHA/AMCONSUL HALIFAX 1039
    RUCNCAN/ALL CANADIAN POSTS COLLECTIVE
    RHMFIUU/DEPT OF ENERGY WASHINGTON DC
    RUCPDOC/USDOC WASHDC 0010

` `

    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

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